Sunday, May 18, 2014

Inventory theft

Inventory may theft may occur to your audit client. As audit, you may or may not detect this event, if it is not revealed by your audit client. To illustrate, your audit client maybe using one of the inventory system:

a> Perpetual inventory system

By using this system, the audit client track every single inventory movement - its in and out - there would be a account created (i.e. inventory differences) to record the the discrepancies noted between actual physical count while carrying out the stock count. Generally, the stock conut is carried out on a monthly or quarterly basis. If the auditor noticed a higher than usual inventory difference, we should ask management to share with us the reason on the rationale for significant inventory differences.

b> Periodic inventory system

More often than not, there is no inventory difference account created to track the difference between the stock quantity per book against physical account. This is because the inventory theft, if any would have been recorded in cost of sales. As auditor, we may be able to identify large inventory difference that would have an impact on the gross margin of the company. However, inventory theft loss as a percentage of cost of sales might not be significant -it is not easy for management nor auditor to detect this.

As auditor, we should understand from management what is the process implemented by management to prevent inventory theft and what is the controls in place to detect this. This is important as safeguaring the Company's asset is important. 

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