The Audit of Inventories in the Financial Statements

The auditing of the financial statements is a process through which it is proposed to verify the correctness of accounting entries made in the company and to certify the regularity of the financial statements.
The subject of the audit is, therefore, the company's financial statements, which must meet the requirement of clarity and, in accordance with the provisions of EU directives, must correctly represent the equity, economic and financial situation of the company.
Among the balance sheet items subject to audit, particularly in mercantile and industrial companies, inventories are particularly important.
The term "inventories" refers not only to raw, ancillary and consumable materials and goods purchased for resale, but also to what is produced within the company, i.e. work in progress, semi-finished and finished products and work in progress on orders or multi-annual orders.
These categories of assets represent a significant portion of the company's available capital and total assets.
In the course of the discussion of the review of inventories, it seemed appropriate to analyze not only the principles and procedures of review specifically provided for by the National Council of Accountants and Bookkeepers, but also to examine the problems that may arise during certification.
First of all, ordinary "inventories" and "contract work in progress" have been treated separately.
Both values, in fact, can be obtained in various ways and could lend themselves to arbitrary determinations by those drawing up the financial statements.
For inventories, which include raw, ancillary and consumable materials and goods for resale, as well as work in progress, semi-finished and finished products, two fundamental phases were considered for certification purposes: verification of the physical inventory and ascertainment of the correct valuation of inventories.
For the valuation of inventories, the issue of splitting, between two financial years, the economic results originating from the development of production cycles of which the inventories are an expression at the end of the administrative period was then raised. The economic results being generated, as a consequence, are, in fact, pertinent both to the financial year that is closing and to the following financial year.
In particular, the result relating to inventories is called gross margin in progress and is given, for production processes in progress, by the comparison between expected future revenues and the costs directly attributable to the product.
The possibility of adding the margin in the course of formation to the cost of production, mentioned above, seems to want to assimilate the inventories of materials, semi-finished and finished products to the inventories of "work in progress on order".
In fact, for the valuation of these inventories, the accounting principles and regulations on financial statements expressly provide that the accrued portion of gross margin in progress is taken into account.
Because of the difficulties involved in certifying this item in the financial statements, in dealing with the audit of work in progress it seemed appropriate, therefore, to define both the objectives of the audit of work in progress and the specific procedures relating to them, which could be the starting point for a probable auditing standard.
Finally, it is worth considering the case of an industrial or mercantile company, divided into several sections or factories and forming part of a corporate group, in which there are very frequent exchanges of goods, products and materials between departments, divisions and branches and between companies of the group. Since these exchanges may give rise to internal profits, i.e. attributable exclusively to a subsidiary or a group company but not intended to have any influence on the result for the year, it is necessary for the company to have adequate procedures for determining the amount of such profits.