How to test the existence of inventory?
For inventory that is in the company’s possession, the best way to test the existence assertion is to observe the company’s physical inventory observation.
Most companies perform physical inventory observations on the balance sheet date (i.e. December 31st), and the audit team should attend the physical inventory observation.
The audit team should also perform test counts by selecting items from the inventory listing and physically locating the item in the warehouse.
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What departments in the inventory cycle should be segregated?
There are four key departments that are involved in the inventory cycle that should be segregated. The four departments are the purchase requisition department, the purchasing department, the receiving/warehousing department, and the shipping department. The visual below outlines the flow of items through the inventory cycle and what each department is responsible for: