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ACC311 GDB Fall 2019 Solution & Discussion Last Date: 17-01-2020
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Topic for Discussion: “Testing the Inventory System”
ABC Chemicals – located in KTL industrial area, is one of the pioneer paint manufacturing companies in the country. Currently, it is facing liquidity issue to finance its production to increase the capacity. However, the company has plenty of inventory in its store which can be hypothecated with the bank to generate liquidity. Company’s director finance received a financial plan from his manager and approached to XYZ Bank for hypothecation against existing inventory. After negotiation, the bank agreed to provide term finance equal to 70 paisa per rupee on a markup of paisa 30 per thousand per day. However, the bank demanded a certificate on the inventory valuation by an independent auditor. ABC Chemicals with the approval of the bank has nominated you as an independent auditor.
Discuss at least four relevant “Control Objectives” which will be verified by you during this audit in order to test the inventory system of ABC Chemicals.
ACC311- GDB SOLUTION 2020
• Control objective tested by auditors.
1. auditor should inspect whether inventory abc chemicals should be accurately, correctly, timely recorded in the books of ABC chemical and should be authorized
2. auditor should inspect the revel vent supporting document of inventory purchased. Also check inventory ledger card.
3. Auditor should observe whether proper security system is used to protect the inventory such as cctv cameras, locked wherehouse.
• 4. auditor should review whether principle of IAS 2
should be properly followed such as inventory should be valued at lower of cost and NRV. •
5. auditor should reconciled the physical balance of
inventory with book balance of ABC chemical. •
6. auditor should check that procedures are performed
by ABC chemical for identification of obsolete or slow moving inventory. Auditor should check aging analysis of inventory to check obsolescence of inventory