Inventory Observation The Manufacturing Firm

Inventory Observation
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Inventory Observation
In the manufacturing firm, inventory is recorded as an asset. Therefore, it is essential for the firm to go through audits. This can be done annually or at regular intervals during the fiscal year. It is important for the auditor to conduct several audit procedures before indicating that the valuation of the stated assets is reasonable considering the large size of some of the inventories. Before the on-site inventory observation, there are some audit procedures, which the auditor needs to execute first. The first audit procedure is to carry out the analytical procedures. These procedures involve comparing the gross margin figures in the statements to those reported in the previous years (Hooks, 2011). The second procedure is a comparison of the year's inventory turnover ratio to the past years.
The preliminary review of the client's inventory indicates that there is a significant risk of material misstatements. There is also the substantial risk in fraud considering that inventory with expiration dates dating back to two years are still in the store with the hope that they will be sold someday. The employees in the storeroom do not seem to be committed to their work considering that they pause the counting of stock to receive new items. They also do not add the stock they have received to the count of the inventory they are making. Moreover, as they proceeded with the count, they stop to load a truck with inventory for shipment. This clearly shows that the inventory records of the manufacturing firms are either inaccurate or cannot be entirely relied upon to provide an accurate record or estimate of the inventory that is in the business at the time. The errors observed during the physical count indicate that the firm has weak internal controls as far as receiving, recording, and shipping inventory is concerned.
It is essential for the inventory management systems in the manufacturing firm to be set such that new inventory is recorded. The systems also need to register all the items that leave the store. This ensures that the inventory records are accurate and up to date. The inventory manager should also be in a position to ensure that all the inventory that has passed its expiration has been recorded and moved from the store. There are some case...