Chapter 12 – page 31
12–7. What are the purposes of the auditors’ observation of the taking of the physical inventory?
Response
Auditors observe physical inventory procurement to achieve sufficient evidence supporting the availability or presence of such inventory. Also, information pertinent to possession rights and exact valuation to the inventory is achieved. Making physical inventory observation is critical in meeting the needed fieldwork standards that necessitate the auditors to obtain sufficient and competent matter that would lead to an adequate basis for financial statements' opinion. After making inventory procurement, the auditors look for sufficient evidence to check the effectiveness of the inventory procurement system (Whittington & Pany, 2018). They also ascertain the confidence levels that can be placed upon the inventory representations and the records to the quantity of the same physical inventory.
Delegate your assignment to our experts and they will do the rest.
The auditors ensure that the owner of the physical inventory indeed exists. The auditors' role is to evaluate the inventory's existence by ensuring the quantity of physical inventory being assessed is done through precise and reasonable methods. The physical inventory condition must be considered usable, saleable, and sound which is most critical purpose of the auditors’ observation. In the long-run, the auditors need accurate financial statements as opposed to any forms of discrepancies. The purpose of observing physical accounts, in this case, is to compare the physical inventory and the stock entered in the financial books of accounts. The auditor checks whether the company in question owns the physical inventory and that the entire inventory is included in the balance sheet. Accurate financial statement ascertainment would mean that the auditor had collected enough and reliable inventory information. The auditor's observation also helps make essential comparisons for the inventory tags to be reviewed for both quality and accuracy. The quality of the inventory is also crucial for valuation purposes. Observing physical inventory addresses the completeness and occurrence assertions as well.
References
Whittington, R., & Pany, K. (2018). Principles of auditing and other assurance services.
