Auditing Inventory and Payments Accounts

The inventory account is one of the most susceptible to financial statement misstatements, next to cash accounts. That’s why auditors need to fully understand the processes and controls of a company to minimize exposure to risk. Acquiring and paying for inventory usually includes a few steps such as: making an order, approving the order, receiving the order, obtaining approval for payment, and finally paying for the goods. logistics company

The entire process in which management controls the flow of new materials into the company and back out into consumers is supply chain management. Auditors need to make themselves aware of the company’s system in order to determine where potential lack of control effectiveness can result. Indicators of misstatement and fraud include classifying expenses as assets, theft of inventory, significant expenses as compared to the industry or previous years’ expenses, and loans to officers that are forgiven in the future. Auditors can test accounts to determine where controls are lacking.

Some methods of control activities an auditor should be aware of are presented here. Using authorized vendor lists can minimize the potential for an employee creating fictitious invoices for non-existent companies. Matching vendor invoices with purchase orders and receiving reports can ensure that no two invoices are paid for twice, nor that payments were made for items not received. Restricting access to computer controls can prevent theft and embezzlement. Finally, use of automated systems can streamline operations and prevent employees from making mistakes in the process, whether intentional or by error.

If controls are found to be ineffective, auditors can test accounts using a variety of methods. These include cutoff tests, confirming receivables and liabilities with customers, and making sure expenses are recorded properly on the financial statements, and in the right periods. Direct observation is the best way for an auditor to detect ineffective controls, especially in the form of inadequate segregation of duties. Whatever the auditor decides to do based on the evidence presented before him, he must make sure that the assertions on the financial statements are marked by the 5 components of existence, completeness, valuation, disclosure, and rights/obligations. Only then can the auditor be sure that the inventory account is properly stated.