Tuesday, July 21, 2009

#81- Auditing FIFO Costing Method

We received a query from our loyal reader in respect of the auditing procedures on inventory costing method. Our reader specifically points to auditing procedures of First-in First-out ("FIFO") inventory method.

In FIFO inventory method, inventory acquired first acquired / purchased will be the first items sold. To illustrate with an example, Mobilephone retailer purchased one iPhone 3GS in Jun for a cost of US$500. Subseuquently, in end of June, the retailer acquired another iPhone 3GS for a total cost of US$550. What will be the COGS while the retailer sell one iPhone in July?

In FIFO method, it will be US$500. Items stocked first will be sold first.

Auditing Procedures:

In auditing FIFO valuation method, following procedures can be adopted:
- Obtain full stock listing as at balance sheet date, and select certain number of samples
- Obtain stock movement listing of respective sample, where we are able to see the stock-in and stock-out from time to time
- Obtain the stock-in costs for each purchase ( i.e. Jan: Purchase 10 items at US$10 each, Feb: Purchase 20 items at US12 each)
- Test compute the COGS for each deliveries to check that COGS amounts are recorded correctly.

To illustrate with the example above, when the retailer sold the iPhone in July. We can check to profit & loss statement in July, to verify that COGS reflects US$500. (i.e. first in first out basis).

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