Module 5 – Ch.
8: Inventory
cycle
1
,Study Material
Lecture slides
Text Book: Auditing Fundamentals in a South African Context – Chapter
8
Question Bank: Auditing Fundamentals in a South African Context:
Graded Questions
2
, The inventory cycle relates to an entity’s
function of managing and safeguarding its
inventory.
If manufacturing entity : to control the
Production process and movement of
The nature inventory
and Failure to safeguard inventory by a trading
purpose of entity may lead to theft of and damage to
the cycle inventory and will put significant strain on
the entity’s cash flow, which may lead to
eventual bankruptcy.
3
, The inventory balance has a material effect
on both the Statement of Comprehensive
Income and the Statement of Financial
Position of entities selling goods.
◦ E.g. Inventory is usually a major component in
the calculation of cost of sales, gross profit and
net profit.
The nature It is important that only inventory that exists
and and to which the entity has the rights are
purpose of recorded, that all inventory items are
recorded and that inventory is recorded at
the cycle the appropriate amounts, otherwise the
financial statements will reflect an incorrect
picture of the financial performance and
financial position of the entity (assertions).
Focus is on financial internal controls that will
ensure that inventory is safeguarded, costed
and accounted for correctly.
4
8: Inventory
cycle
1
,Study Material
Lecture slides
Text Book: Auditing Fundamentals in a South African Context – Chapter
8
Question Bank: Auditing Fundamentals in a South African Context:
Graded Questions
2
, The inventory cycle relates to an entity’s
function of managing and safeguarding its
inventory.
If manufacturing entity : to control the
Production process and movement of
The nature inventory
and Failure to safeguard inventory by a trading
purpose of entity may lead to theft of and damage to
the cycle inventory and will put significant strain on
the entity’s cash flow, which may lead to
eventual bankruptcy.
3
, The inventory balance has a material effect
on both the Statement of Comprehensive
Income and the Statement of Financial
Position of entities selling goods.
◦ E.g. Inventory is usually a major component in
the calculation of cost of sales, gross profit and
net profit.
The nature It is important that only inventory that exists
and and to which the entity has the rights are
purpose of recorded, that all inventory items are
recorded and that inventory is recorded at
the cycle the appropriate amounts, otherwise the
financial statements will reflect an incorrect
picture of the financial performance and
financial position of the entity (assertions).
Focus is on financial internal controls that will
ensure that inventory is safeguarded, costed
and accounted for correctly.
4
