## Audit of Inventories – Ownership and Completeness

The auditor must ensure:

1. Only inventories owned by the entity are included.

2. Inventories owned by the entity but held by third parties are included.

3. Inventories held by the entity on behalf of third parties (consignment) are excluded.

### Key Assertions

Existence: Physical stock agrees to records.
Rights and Obligations (Ownership): Entity has title to the inventory.
Completeness: All owned inventory, wherever located, is captured.

### Audit Procedures

Analytical Procedures

Compute inventory turnover ratio (COGS ÷ Average Inventory).
Perform vertical analysis (Inventory ÷ Total Assets).
Compare actual vs budget; trend analysis across years.

Cut-off Testing

Examine shipping documents (bills of lading, receiving reports, warehouse records) immediately before and after year-end.
Test for omitted transactions (completeness) and invalid transactions (existence).

Physical Verification

Examine non-financial information: weights, measurements, counts.
Verify clerical and arithmetical accuracy of inventory listings.
Reconcile physical counts with perpetual records and ledger control totals.

Third-Party Inventories

Reconcile inventories owned by the entity but held with third parties (transporters, warehouses, port authorities).
Confirm that goods received on consignment are segregated and excluded from the entity's inventory.

Worked example

### Example 1

Scenario (Zed Limited – Shoe Manufacturer): The auditor wants to ensure that inventory records include company-owned stock at third-party warehouses but exclude consignment stock received from suppliers.

Procedure:

1. Obtain a list of third-party locations holding company stock → request confirmations.

2. Perform purchase cut-off: check last 5 GRNs before year-end — if goods received, they must be in inventory and in creditors.

3. Perform sales cut-off: check last 5 dispatches before year-end — if goods dispatched, they must be removed from inventory.

4. Obtain a list of consignment stock received → confirm it is physically segregated and absent from inventory records.

5. Compute inventory turnover and compare to prior year/industry norms to flag unusual movements.

⚠️ Common exam mistakes

Forgetting to include company-owned stock lying with third parties (consignors, warehouses) — this is a completeness failure.
Including consignment stock received from suppliers — this is an existence/rights failure.
Treating cut-off testing as optional — it is essential for both purchase and sales cut-off.
Relying solely on physical count without reconciling to perpetual records and ledger totals.

Reference:

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Audit of Inventories – Ownership and Completeness Assertion

Worked example

⚠️ Common exam mistakes