Inventory Audit Case
XYZ Trading Corp. is a medium-sized company engaged in wholesale and retail of consumer
electronics such as kitchen appliances, blenders, Bluetooth speakers, and similar items. Its main
warehouse is located in Cagayan de Oro City, with a small showroom available for walk-in sales.
The company purchases inventory from both domestic and international suppliers. Sales
transactions can be on either cash or credit basis, and goods are released upon issuance of a sales
invoice.
A perpetual inventory system is in place, but many of the updates are done manually and are
often delayed. Physical inventory counts are carried out twice annually (mid-year and year-end).
Although purchasing, receiving, and recording are officially separate functions, the limited
number of staff results in inadequate segregation of duties. The warehouse supervisor oversees
warehouse operations, maintains some inventory records, and occasionally approves movement
documentation.
Inventory is classified as fast-moving, slow-moving, or defective/returned items. However,
monitoring efforts are largely concentrated on fast-moving inventory.
Your audit firm has been engaged to perform an interim audit of the financial statements for the
period ended June 30, 2025, focusing particularly on inventory. The following observations were
noted during the audit:
Inventory tags used during physical count are pre-numbered, and warehouse personnel
maintain a log of all issued and unused tags.
Some items labeled as “returned goods” are kept in a separate area without inventory tags
and are excluded from the inventory count sheets.
Physical counts are carried out by the same warehouse personnel who have custody and
daily control of inventory.
Receiving reports are compared to purchase orders before the inventory records are
updated.
The inventory subsidiary ledger is updated monthly; however, reconciliation with the
general ledger only occurs at year-end.
During the count, some boxes of small electronic parts were counted based solely on the
numbers written on the outside of the box, without opening them for verification.
A formal policy on segregation of duties exists for purchasing, receiving, and recording
functions.
Inventory is automatically recorded in the system upon creation of a purchase order—
even before the items are received.
Slow-moving and obsolete items are identified only once per year, based on an aging
report and condition check.
High-value items are stored in a locked cage which is, in theory, accessible only to the
warehouse supervisor. However, the audit team observed that the key is kept in an
unlocked drawer accessible to all warehouse staff.
