Oleg Skorba, Ph.D, The Chair of Accounting and Audit of the State
Higher Educational Institution “Ukrainian Academy of Banking of The
National Bank of Ukraine”
ORGANIZATION OF THE AUDIT OF PRODUCTION SUPPLIES
Abstract The article is devoted to the organization and methodology of the
audit of production supplies of the entity.
Keywords Inventories, material assets, production supplies, audit of
production supplies.
1. Introduction The necessary condition for the production process of any
entity is the presence of production supplies in the required quantity and range.
The principles of stocks accounting and disclosures in the financial statements
are covered in Accounting Standard number 9 "Inventory". In accordance with the
provisions inventories are recognized as an asset if it is probable that the company
will receive future economic benefits associated with their use, and their cost can be
reliably determined.
With the purpose to ensure the effectiveness of accounting production supplies
are divided into appropriate classification groups.
Typically, the entity's volume of operations with inventories is large, and the
review process is rather time consuming.
2. Analysis of research and publications The question of inventory audit of
economic entities is the subject of the works of famous authors: R. Adams [1], E.
Arens [2] M. Belukha [3], B. Usacha [6], K. Utenkovoyi [7]. Research activities
involve both general and specific questions in directions of performance audit. As for
the existing universal audit experience, it is huge, but it cannot be used without
adaptation to the current economic conditions in Ukraine, this fact explains the choice
of direction and relevance of the research.
3. Formulation of the problem The purpose of research is to outline the
nature of the audit of an entity’s inventories.
4. Results In accordance with ISA 200 "Objective and basic principles of
auditing financial statements" auditor is to express an independent opinion as to the
correctness in the reporting of information on production supplies.
Basic principles of the inventory formation in accounting are highlighted in
Accounting Standard 9 "Inventories". Inventories - assets held for sale in the ordinary
course of business activity; are held in the process of production for sale of
manufacturing product; held for use in the manufacture of goods, works and services,
and management as well.
Inventories are recognized an asset if it is probable that the company will
receive future economic benefits associated with their use, and their cost can be
reliably measured.
For accounting purposes, inventories include:
 raw materials, basic and auxiliary materials, components and other tangible
assets intended for production, works, services, production and administrative needs;
 work in progress in the form of uncompleted processing and assembly of parts,
components, products and unfinished processes. Work in progress at companies that
perform work and provide services consists of the cost of meeting the unfinished
works (services), which now is not considered income;
 finished products that are made in the company, intended for sale and meet the
technical and quality specifications set by contract or other legal act;
 goods in the form of material assets purchased (received) and now held for the
purpose of subsequent sale;
 low value items used for up to one year or the normal operating cycle, if it is
longer than one year;
 young animals and fattening animals, products of agriculture and forestry.
The unit of accounting for inventories is their name or homogeneous group (type).
The purpose of the inventory audit is to obtain adequate and sufficient audit
evidence of compliance with accounting laws and regulatory requirements, and
information in the financial and tax reporting is accurate in all material respects.
According to the purpose, the main objectives of the inventory audit are to check
the following points:
 the reality of stocks;
 of property rights to stocks;
 accuracy of recognition and evaluation;
 accuracy and completeness of documentation of receipt, disposal and use of
reserves;
 reliability of analytical and synthetic accounting of inventories;
 ensuring quality stock holding in all areas of production;
 accuracy of the rules of use of inventory;
 adherence to rules and regulations of cost norms and availability norms of
inventory;
 the accuracy and reliability of the information presentation about stocks in the
financial statements.
During the audit of inventories the auditor operates in following directions:
 obtaining accounting documents of the customer;
 familiarization with the organization of the warehouse and accounting
inventories;
 review of primary documents from revenue reserves and its reflection in the
registers of analytical and synthetic accounting;
 control of the actual cost of inventory and evaluation;
 verification of inventories used in production, for other needs and reflection of
these transactions in the accounting;
 check transactions for the sale of stocks;
 review of the inventory stocks and of display of its results in the accounting;
 checking the measurement of inventories at the balance sheet date;
 validation of recording VAT on the acquisition and sale of stocks;
 review of the analytical, synthetic accounting, general ledger and financial
reporting for compliance and accuracy of information about inventories.
Accordingly the objects of the inventory audit are: groups of stocks,
quantitative and qualitative acceptance of stocks from suppliers, as well as internal
moving between divisions of the entity, financially responsible persons, warehouses
and manufacturing.
In accordance with strategy being developed according to ISA 300 "Planning"
in the preparatory phase the auditor evaluates the system of internal control of the
entity. Testing of the internal control system is presented in the table below [7].
Table 1
Test of internal control of production supplies
№
1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Contents
Yes
2
Does the storage of inventories comply with
established requirements
Are stocks that are in the warehouse and in use
fixed by those who are responsible for the
storage and their use
Are there contracts on the full material liability
of employees directly connected with the
storage, processing, selling (dispensing),
transportation or use of in the production process
of inventories transmitted to them
Are the records in terms of accountable persons
kept?
Is the access to electronical information on
stocks restricted?
Is the inventory of production supplies properly
conducted?
Is the result of inventory correctly reflected in
the accounting?
Are the unused portions of inventories
highlighted with the sign Z?
Did the reporting period include theft and
damage to inventories?
Was the natural attritition of inventories charged
off according to norms?
Were any stocks eliminated in the reporting
period?
3
Answer options
No
No
Information
4
5
Notes
6
12.
13.
14.
15.
16.
17.
18.
Were extra wealth discovered in inventories
accounted?
Were illiquid and extra wealth discovered in
inventories removed from the register?
Are certain types of sudden inventory
conducted?
Is verification of data of accounting registers
according to general ledger data conducted?
Is the adjustment based on fixed limit-fence
cards with documents on expenditure conducted?
Are the facts of charging off from damage and
destruction of stocks controlled?
Is the precision in calculation of primary
documents controlled?
Having fulfilled an assessment of entity's internal control, the auditor goes to
audit planning resulting in a plan of audit (Table 2).
Table 2
Plan of production supplies audit
№
1.
2.
3.
The list of audit procedures
Verification
period
Comparison of residual inventory according O.Marchenko 05.01.2015
to the general ledger of residues in the
accounting records
Checking contracts on the full material V. Markov
05.01.2015
liability
Verification of compliance of invoices and O.Marchenko 08.01.2015
sales invoices to the logbook
…
25. The formulation of the audit findings
Performer
V. Markov
20.01.2015
The
period
audited
01.01.201431.12.2014
01.01.201431.12.2014
01.01.201431.12.2014
01.01.201431.12.2014
The general algorithm of production supplies audit can be represented in Fig. 1.
Checking of
storage facilities
Checking of
warehouse
accounting
Checking of
correctness of
assessment
Checking of
charging off
Checking of the
correctness of
posting
The study of
primary accounting
records
Checking of
synthetic
accounting
Checking data in
general ledger
Checking of the
business entity’s
reporting
Summarization of
audit results
Fig. 1. The algorithm of production supplies audit
The audit program of accounting operations of inventories should include study
of the preservation of property, valuation of costs and capitalization, correctness of
evaluation of purchased property, use of inventories in production, testing of
operations with low-value items (IBE).
In the process of verification it is determined whether all types of inventory
have developed standards, whether they are reviewed in case of changes in the
conditions of production and supply, who is responsible for the rationing of
inventories.
During the audit of inventory the availability and quality norms of material
reserve based on their needs for production according to established norms of costs,
delivery terms, calculated safety stock, if necessary, to minimization of inventory, are
analyzed. We analyze the quality norms of inventory, which, in particular, can be
made by calculation, using card-cutting or other methods.
In the process of audit it is necessary to find out:
 what original documentation is used in the enterprise, whether it corresponds to
the approved form;
 whether the order of processing warrants to obtain materials from the supplier
and transport organizations is stored in the enterprise; is there a system of control of
warrants’ storage, use and their charging off;
 whether the control over correctness and timeliness of receipt of goods on the
basis of profitable documents is monitored at stores and in accounting
department of the enterprise;
 whether separate lots of inventories that are used in the process of laboratory
testing are taken for temporary safekeeping;
 whether the order of inventory internal displacing processes is issued by
relevant documents in the enterprise;
 is there the order of the transaction on release of inventories based on contracts,
invoices, consignment notes, tax invoices in the enterprise;
 whether the measures to control the storage of wealth are taken. It is necessary
to determine whether the director of the company appointed financially responsible
persons responsible for storing valuables, whether the agreements on the full material
liability are contracted with them;
 whether there are conditions for financially responsible persons for storing
inventories, or is there the room to store inventory, cabinets, safes, etc.
 whether premises are equipped with fire alarm;
 whether there is a permanent commission for inspection of storage and
charging off of material inventories appointed by the order of the company manager;
 whether an inventory and spot checks on supplies storage are conducted, if
their results are dated; what measures are taken towards the guilty in case of shortage
of stock, in what condition weight devices are kept.
During this process the following things are investigated: completeness of stocks
posting on accounting data; their compliance with the quantity and quality according
to documents composited by material responsible persons and completeness of
posting inventories received without the accompanying documents. Fixing of liability
is tested according to contracts on the full liability concluded between management
of companies and individual employees; consumption rate of raw materials for
production and compliance. The soundness of adoption of standards and their
application is checked in fixed limit-fence cards and spending materials cards; IBE,
its use and integrity is checks as well. The evaluation of acquired IBE, the
cancellation of their value when transmitting in service, availability of monitoring
their use; original documentation of accounting for inventories, which was
investigated in terms of reliability of business operations reflected in it are checked;
accounting and reporting are checked as well. The reliability of data movement and
balances of inventories carried at them; notes to financial statements are studied. We
investigate information on inventory valuation methods; the carrying (accounting)
value of stocks from separate classification groups; the carrying (accounting) cost of
inventories carried at net realizable value; the carrying (accounting) value of
inventories transmitted for processing on commission in pledge; the increase in net
realizable value at which inventory valuation is conducted according to p. 28
Accounting Standard 9. The reasons that led to the emergence of negative
phenomena, the amounts of non-productive costs are studied, persons guilty of
causing damage are found; shortage of values and losses identified in the inventory,
their validity and responsible persons are detected. The study of other objects where
damage is verified is summarized, it is checked whether its size is confirmed by the
accounting data and other evidence collected, how correct the material liability of
individual employees and the amount of its compensation is established.
4. Conclusions Thus, inventories is a complex category, the central feature of
which for managerial aims is the understanding of inventory as the amount of money
invested in these assets. Financial results of the company are directly dependent on
effective inventory management. Therefore the auditor should evaluate the current
system of inventory management in the enterprise and make proper conclusions and
give recommendations for its optimization that will help to increase the economic
benefits of the enterprise. To ensure the efficiency increase of control on the level of
inventories the auditor should develop and suggest a system.
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