Substantive Tests of

Inventory and Cost of Goods

Sold
By Group 2
 Audit Objectives
Existence or Occurrence
• To determine whether inventories exist at year-
end and represent items held for sale in the
ordinary business.
 Audit Objectives
Completeness
• To determine whether all transactions related to
inventory are recorder in the proper accounting
period.
• To determine that inventory listings are
accurately complied and inventory quantities
include all items on hand and in transit.
 Audit Objectives
Rights and Obligations
• To determine whether the company has legal
title or ownership rights to inventory items and
inventories exclude items billed to customers or
owned by others.
 Audit Objectives
Valuation or Allocation
• To determine whether inventories are properly
stated with respect to
1. Cost determined by an acceptable method
consistently applied
2. Slow-moving, excess, defective, and obsolete
items identified and reduced to replacement
cost or net realizable value if lower than cost.
 Audit Objectives
Presentation and Disclosure
• To determine that the inventories and cost of
goods sold are presented and classified in the
financial statements in accordance with PAS/
PFRS.
 Existence or Occurrence
1. Obtain listings of inventory and reconcile to ledger.
2. Observe the taking of physical inventory and
conduct test counts.
a) Review the company’s plan for taking the physical
inventory.
b) Scrutinize the care with which client’s employees
are following the inventory plan.
c) See that all merchandise is tagged and no items are
double-tagged.
d) Determine that prenumbered inventory tags and
compilation sheets are properly controlled.
Existence or Occurrence
e) Make some test counts and trace quantities to
compilation sheets.
f) Be alert for empty containers and hollow squares
(empty spaces) that may exist when goods are
stocked in solid formations.
g) Watch for damaged and obsolete inventory.
h) Appraise the general condition of the inventory.
i) Determine the last receiving and shipping
documents used and determine that goods
received during the count are properly segregated.
j) Inquire about or observe existence of slow moving
items.
 Existence or Occurrence
3. Confirm inventories in public warehouses and
with consignees.
 Completeness
4. Obtain final inventory list from the client, test
its clerical accuracy and trace test counts.
5. Review the year-end cutoff of purchases and
sales transactions.
6. Test numerical sequence of inventory
purchase requisition.
7. Review entries to cost of goods sold.
8. Perform analytical review related to inventory
and cost of goods sold.
 Rights and Obligations
9. Make inquiries of management regarding
ownership and examine consignment
agreement.
 Valuation or Allocation
10.Evaluate the bases and methods of inventory
pricing.
11.Vouch and test inventory pricing.
12.Check inventory for quality and or
obsolescence.
Presentation and Disclosure
13.Determine the existence of pledged inventory
and examine purchases and sales
commitments.
14.Evaluate financial statement presentation of
inventories and cost of goods sold including
adequacy of disclosure.
Agriculture
PAS 41
Agricultural activity
• Is the management by an entity of the biological
transformation of biological assets for sale into
agricultural produce, or additional biological assets.

It covers a diverse range of activities, for example:

a. Raising livestock
b. Cultivating orchards and plantations
c. Forestry
d. Floriculture
e. Annual or perennial cropping
f. Aquaculture (including fish farming)
Common features exist within this diversity:
A. Capability to change
• Living animals and plants are capable of
biological transformation.

A. Management of change
• Management facilitates biological transformation
by enhancing, or at least stabilizing, conditions
necessary for the process to take place.

A. Measurement of change
• The change in quality brought about by biological
transformation or harvest is measured and
monitored as a routine management function.
PAS 41 shall be only applied to account for the
following when they relate to agricultural
activity:

• Biological assets except for bearer plants

• Agricultural produce at the point of harvest

• Government grants related to biological

assets measured at fair value less costs to
sell.
Biological transformation results in the
following types of outcomes:

a. Asset changes through

• Growth
• Degeneration
• Procreation

b. Production of agricultural produce such as

latex, tea leaf, wool, and milk.
 Recognition
An entity shall recognize a biological asset or
agricultural produce when, and only when:
• The entity controls the asset as a result of
past events;
• It is probable that future economic benefits
associated with the asset will flow to the
entity;
• The fair value or cost of the asset can be
measured reliably.
Measurement of Biological Assets
A biological asset shall be measured on
initial recognition and at the end of each
reporting period at its fair value less costs
to sell, except for the case where the fair
value cannot be measured reliably. In such a
case, that biological asset shall be
measured at its cost less any accumulated
depreciation and any accumulated
impairment losses. Once the fair value of
such a biological asset becomes reliably
measurable, an entity shall measure it at its
fair value less costs to sell.
Measurement of Agricultural Produce
• Agricultural produce harvested from an
entity’s biological assets shall be
measured at its fair value less costs to sell
at the point of harvest. Such measurement
is the cost at that date when applying PAS
2 or another applicable standard.