## Audit of Inventory: Test Counts, Completeness, Cut-off & Analytical Procedures

### Test Count Procedures (Auditor's Checklist)

Procedure	Detail
Observe employees following the count plan	Ensure appropriate supervision is in place
Check inventory tags	Tags must show correct quantities
Cut-off testing	Check last 5–10 GRNs and shipping/dispatch documents near year-end
Exclude third-party stock and damaged stock	These must not be mixed with entity's owned inventory
Account for all count sheets	Prevents fraudulent substitution of sheets after the count
Investigate differences (physical vs. book)	Every difference must be explained, not merely adjusted

---

### Completeness Assertion for Inventory

Include: All inventory owned by the entity.
Exclude: Third-party (consignment-in) inventory and goods held for others.

---

### Analytical Procedures

Procedure	How
COGS ÷ Average Inventory	Inventory turnover ratio — compare year-on-year
Inventory ÷ Total Assets	Vertical analysis — compare year-on-year
Budget vs. Actual	Compare budgeted inventory levels with actuals

Significant unexplained variations in any of the above are red flags requiring further investigation (e.g. slow-moving / obsolete stock requiring NRV write-down).

---

### Purchase & Sale Cut-off Tests

Purpose: Confirm transactions are in the correct accounting period.

Method:

1. Obtain the last 5–10 GRNs (purchases) and dispatch notes (sales) before year-end.

2. Trace to accounting records — verify correct period booking.

3. Obtain the first 5–10 GRNs and dispatch notes after year-end.

4. Confirm these are NOT recorded in the prior year.

```

Document date BEFORE year-end → must be in current year's books

Document date AFTER year-end → must NOT be in current year's books

```

Worked example

### Example 1

Cut-off test: Last GRN before year-end is No. 4850, dated 30 March — correctly recorded on 30 March. GRN No. 4851 is dated 1 April — the auditor verifies it was NOT included in the current year's purchases. Both are correct. If No. 4851 had been included in the current year, it would be a cut-off error requiring reversal.

### Example 2

Inventory turnover red flag: Year 1 turnover = 6×, Year 2 = 6×, Year 3 = 2×. A sudden drop suggests possible obsolete or slow-moving stock. The auditor investigates whether an NRV write-down is required under AS 2 / Ind AS 2.

### Example 3

Vertical analysis: Inventory as % of Total Assets — Year 1: 12%, Year 2: 13%, Year 3: 28%. A sharp jump prompts the auditor to enquire whether there is overstatement of inventory, slow-moving stock, or a genuine build-up ahead of a large order.

⚠️ Common exam mistakes

Performing cut-off testing only for purchases and forgetting sales cut-off — both affect inventory completeness and the income statement.
Not investigating physical-vs-book differences — differences must be explained and approved, not silently written off.
Failing to control count sheets — not accounting for all sheets allows fraudulent substitution to inflate inventory.
Skipping analytical procedures entirely and only listing observation and document-vouching steps.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Audit of Inventory – Test Counts, Completeness, Cut-off and Analytical Procedures

Worked example

⚠️ Common exam mistakes