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

№	Contents	Answer options			Notes
		Yes	No	No Information
1	2	3	4	5	6
1.	Does the storage of inventories comply with established requirements
2.	Are stocks that are in the warehouse and in use fixed by those who are responsible for the storage and their use
3.	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
4.	Are the records in terms of accountable persons kept?
5.	Is the access to electronical information on stocks restricted?
6.	Is the inventory of production supplies properly conducted?
7.	Is the result of inventory correctly reflected in the accounting?
8.	Are the unused portions of inventories highlighted with the sign Z?
9.	Did the reporting period include theft and damage to inventories?
10.	Was the natural attritition of inventories charged off according to norms?
11.	Were any stocks eliminated in the reporting period?
12.	Were extra wealth discovered in inventories accounted?
13.	Were illiquid and extra wealth discovered in inventories removed from the register?
14.	Are certain types of sudden inventory conducted?
15.	Is verification of data of accounting registers according to general ledger data conducted?
16.	Is the adjustment based on fixed limit-fence cards with documents on expenditure conducted?
17.	Are the facts of charging off from damage and destruction of stocks controlled?
18.	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

№	The list of audit procedures	Performer	Verification period	The period audited
1.	Comparison of residual inventory according to the general ledger of residues in the accounting records	O.Marchenko	05.01.2015	01.01.2014-31.12.2014
2.	Checking contracts on the full material liability	V. Markov	05.01.2015	01.01.2014-31.12.2014
3.	Verification of compliance of invoices and sales invoices to the logbook	O.Marchenko	08.01.2015	01.01.2014-31.12.2014
…
25.	The formulation of the audit findings	V. Markov	20.01.2015	01.01.2014-31.12.2014

The general algorithm of production supplies audit can be represented in Fig. 1.

Checking of correctness of assessment

Checking of warehouse accounting

Checking of storage facilities

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.

REFERENCES

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