Table of Contents
Chapter 1 - Auditing Inventory1
| The Nature of Inventory | 1 |
| Auditor Objectives | 2 |
| Auditing Characteristics of Inventory | 2 |
| Inventory Process Flow | 3 |
| Inventory Costing | 4 |
| Inventory Fraud | 5 |
| Incorrect Receipt Fraud | 5 |
| Product Replacement Fraud | 5 |
| Diversion of Scrap Payments | 5 |
| Inventory Falsification | 5 |
| Accidental Errors | 6 |
| Inherent Risk Assessment | 7 |
| Material Misstatement Assessment | 7 |
| Substantive Procedures | 8 |
| Evaluate the Count Plan | 9 |
| Verify the Cutoff | 10 |
| Observe the Physical Count | 10 |
| Test the Count | 11 |
| Evaluate the Costing Methodology | 12 |
| Test Inventory Costing | 12 |
| Reconcile Inventory to General Ledger | 13 |
| Investigate Legal Encumbrances | 13 |
| Investigate Possible Impairments | 13 |
| Conduct Analytical Procedures | 13 |
| Gross Profit Method | 14 |
| Review Presentation | 15 |
| Auditing a Periodic Inventory System | 15 |
| Auditing a Perpetual Inventory System | 16 |
| Mixed Systems | 16 |
| Internal Controls Used by the Client | 16 |
| Activities for an Initial Audit | 21 |
| Review Questions | 22 |
Chapter 2 - The Physical Inventory Count23
| The Physical Inventory Count | 23 |
| Review Questions | 26 |
Chapter 3 - Inventory Valuation Adjustments27
| Determine the Applicable Measurement Rule | 27 |
| Lower of Cost and Net Realizable Value | 27 |
| Estimating Net Realizable Value | 28 |
| Level at Which the Test Is Applied | 29 |
| Indicators of a Required Write-Down | 29 |
| Traditional Lower of Cost or Market | 30 |
| Audit Procedures for Inventory Valuation | 31 |
| Changes in Estimates | 31 |
| Summary | 32 |
| Review Questions | 33 |
Chapter 4 - Inventory Cost Layering34
| Inventory Costing | 34 |
| The First in, First Out Method | 35 |
| The Last in, First Out Method | 36 |
| The Weighted Average Method | 37 |
| Review Questions | 40 |
Answers to Chapter Questions41
Glossary45
Index47
Course Details
Author: Steven M. Bragg, CPA
Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a Bachelor’s degree in Economics from the University of Maine. He has been a two-time president of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written more than 300 books and courses, including New Controller Guidebook, GAAP Guidebook, and Payroll Management.
Publication/Revision Date: 8/28/2026
Course Exam Questions (online): 14 (multiple-choice)
Program Delivery Method: NASBA QAS Self-Study
Available Formats of Course Text: PDF or PDF plus printed copy sent in the mail
Course Level, Prerequisites, and Advance Preparation Requirements
| License | Course Level | Prerequisites | Advance Preparation Requirements |
|---|
| CPA | Basic | None | None |
Sponsor ID Numbers
National Registry of CPE Sponsors ID: 107615
State CPA Board Sponsor ID Numbers (where applicable)
Florida Division of Certified Public Accounting: 0004761
Hawaii Board of Public Accountancy: 14003
New York State Board for Public Accountancy: 002146
Ohio Accountancy Board: CPE .51 PSR
Pennsylvania State Board of Accountancy: PX178025
Texas State Board of Public Accountancy: 009349
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Recall the classifications used for inventory.
- Specify the characteristics of the different types of inventory fraud.
- Describe the situations in which inventory errors can lead to material misstatements.
- Describe the substantive procedures used by an auditor to audit inventory.
- Recognize the items to be reviewed as part of an inventory test count.
- Specify the actions to be taken when testing inventory costs.
- Describe compilation testing.
- Identify the additional inventory audit steps used when a new client was not audited in the past year.
- Cite the circumstances under which a physical inventory count can be avoided.
- Recall the issues associated with a client using a separate count team to verify the counts made.
- Recall the details of the lower of cost or market rule.
- Specify the advantages of the various inventory costing methods.
