Metrics (Inventory) and the Risk Assessment Suite, Part 2 (#27)

In this episode, we delve further into the risk assessment suite, and also describe the most useful metrics for inventory. Key points discussed relating to the risk assessment suite are:

  • It was created in response to high-profile audit failures.

  • It requires a more robust understanding of the client, its risk management practices, operating environment, strategy, and competitive factors.

  • The client will likely be required to complete a questionnaire pertaining to the preceding items.

  • There is a new focus on auditing the financial statement presentation and disclosures.

  • The auditor will need to ask more questions about a client’s internal controls.

  • It requires consideration of a client’s internal controls as part of an audit.

  • More attention must be paid to the risks of material misstatement of financial statements.

  • Link the audit program to an increased need to address the risks of material misstatement.

  • Work by the client to assist the auditor can reduce fees; it may also be possible to reschedule the audit to assist the auditor.

Key points discussed related to metrics for inventory are:

  • Inventory turnover is useful for seeing how much inventory is needed to support sales.

  • The proportion of old inventory on hand is needed to call attention to the need to eliminate inventory. The percentage of returnable inventory is a more specific variation.

  • Inventory accuracy is needed by the purchasing and picking staffs, and reflects inventory record accuracy.

  • Inventory availability is needed to see if there is a problem with delivering to customers on time.

  • The percentage of warehouse utilization is needed to plan for additional investments in warehouse space.

  • The cubic volume of warehouse space used is useful for adjusting the warehouse racking systems to accommodate more inventory.

Related Courses

Business Ratios Guidebook
How to Conduct an Audit Engagement
Inventory Management