Learning ObjectivesLO4 Explain the importance of the completeness assertion for auditing the accounts payable liabilities, and the procedures used to search for unrecorded liabilities.LO5 Identify audit considerations for observing the physical inventory count.LO6 Explain the main auditing procedures used for property, plant, and equipment and intangible assets.

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Special Note:Physical Inventory Observation

The auditing procedures for inventory and related sales accounts frequently are extensive in an audit engagement.

A material error or irregularity in inventory has a pervasive effect on the financial statement.

Auditing standards require that the auditor observe the inventory taking and make test counts. They seldom take or count the entire inventory.

LO5

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Auditor’s Observation of InventoryFirst task is to review client’s inventory-taking instructions.

This is a test of controls. If count procedures are sound, auditor can rely

on count to produce good results.Auditor will also perform test counts.

Testing of counts will be a dual-direction test. The physical observation procedures are

designed to audit for existence, completeness, and valuation.

LO5

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Special Notes:Physical Inventory ObservationPhysical inventory not on year-end date:

The inventory on the count date is reconciled to the year-end inventory and auditing procedures are performed on inventory additions and issues for the intervening period.

Cycle inventory counting: Company does not take a complete count on a

single date, but rather in cycles or uses statistical counting plan. Accuracy of perpetual records must be determined.

LO5

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Special Notes: Physical Inventory Observation

Auditors not present at client’s inventory count:

The auditor must review the client’s plans for the completed count.

Some test counts of current inventory should be made and traced to current records to determine reliability of perpetual records.

LO5

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Special Note: Physical Inventory Observation

Inventories located off the client’s premises: Determine the amount and location of the

inventory off the client’s premises. If amounts are material and controls are not

strong, the auditor may wish to visit locations and conduct on-site test counts.

If amounts are not material and control risk is low, direct confirmation with the custodian may be sufficient competent evidence.

LO5

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Inventory Existence and CompletenessIn addition to the physical count of inventory, the auditor will also need to consider:

whether there are any consignment relationships in effect,

any goods in transit that are the property of the client, and

whether there are any goods on hand which have been sold but not yet delivered.

LO5

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