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Accounting Standard 2

Audit Checklist

By January 27, 2023June 26th, 2024No Comments



(Each item in the Audit Checklist to be answered by yes, no, or not applicable and supplemented with remarks)

  1. General
    1. Is the auditee engaged in a business that involves one or more of the following activities
      1. Undertaking construction contracts
      2. Undertaking service contracts that are directly related to construction activities
      3. Holding shares, debentures and other financial instruments held as stock in trade
      4. Holding inventories of livestock, agricultural or forest products, mineral oils, ores or gases
    2. Also, if the auditee is a service provider, have you ensured that the auditee has not applied AS 2 for valuing inventories of WIP
  2. Accounting Policy
    1. Has the auditee established its accounting policy on valuation of inventories
    2. Is it in conformity with the prescriptions under AS 2
    3. If yes, has it been incorporated in the Policy
    4. Is the policy (valuation method) being followed consistently (also see item 3)
    5. Has there been any change in the method of valuing inventories (please also refer to items b, c, d and e of item 1)
    6. Has the inventory valuation method (say from FIFO to WA) has changed?
    7. If yes, have the reasons for change been recorded
  3. Previous Audit Report
    1. Has there been any vital comment or observation in the previous audit report on matters relating to inventories
    2. If yes, has the issue been resolved satisfactorily
  4. Principles of valuation
    1. Do the test checks reveal that the auditee follows ‘lower of cost and market value’ as the basis of valuation of various components of inventories
    2. In case inventories include empties drums etc (containers in which inputs were purchased), is the value of such item material
    3. If yes, has it been ensured that these items are valued only at net realisable value
    4. Are major spares and stores included in inventory (this item pertains to AS 10)
  5. Evidences of valuation
    1. Have audit procedures essential to validate the procedures adopted by auditee been carried out
    2. Have appropriate evidences been obtained, including the following
      1. Inventory items and codes
      2. Cost sheets
      3. Inventory valuation statement as at valuation date
      4. Notes on methods of determining net realisable value
      5. Note on determination of normal capacity
  6. Costs
    1. Are the results of sample tests carried out, to verify the procedures of auditee in determining cost of the auditee determine costs of items, satisfactory
    2. Has the auditee determined the cost of items correctly, so as to ensure that cost does not include elements such as GST where the amount of tax paid is subsequently recoverable
    3. Similarly, trade discounts, rebates, etc. are deducted in determining cost of purchase
    4. Does the auditee export its products to its own branches outside India
    5. If yes, has it been ensured that the duty draw back element has been adjusted from the cost of goods held abroad
    6. Where borrowing cost element stands included in the cost of inventory, has it been verified that the inventory item is a qualifying asset, and the computations are as per AS 16
    7. Does the review of information in 5(b) reflect that inventories are valued at lower of cost and net realisable value?
    8. Is the cost determination for single identifiable item or a group of items
  7. Costs of conversion
    1. Has it been ensured that the auditee has determined the costs of conversion (where applicable) by including
      1. Direct labour costs
      2. Variable production overheads based on actual production
      3. Fixed production overheads based on normal capacity (the answer to be decided based on actual production levels, and excess overheads if any to be charged to P&L)
  8. Other costs that can be included
    1. Has it been verified that other costs included as costs of inventory by the auditee are only those incurred and directly attributable to bringing the inventory items to their present location and condition
  9. Costs not to be included
    1. Has it been verified that ‘Other costs’ under item 8 above do not include
      1. Costs attributable to abnormal waste of materials, labour, etc.
      2. Storage costs (if these are indispensable prior to further processing)
      3. Administration, selling and distribution expenses
      4. Are these costs under items (i) to (iii) properly charged to P&L?
  10. Cost formulae – Specific Identification method
    1. Is the auditee engaged in producing goods, or providing services on Specific order basis
    2. If yes, do you consider that the items ready for sale are not ordinarily interchangeable with other items
    3. If yes, has it been ensured that cost for such items been determined using only specific identification method
  11. Cost formulae – other methods
    1. Is the auditee adopting correctly either FIFO or Weighted Average cost method, for items not covered by item 10
    2. If yes, is the method adopted being consistently followed
    3. Is the auditee engaged in activity that bears the characteristics of retailing
    4. If no, proceed to Item 13 and if yes, see item 12 below
  12. Cost formulae – retail inventory method
    1. Has it been ensured that the auditee conducted a physical count of items on the valuation date (ensure supporting documentary evidence)
    2. Are the results of sample tests to verify the mark-downs (vis-à-vis the mark ups – that is selling price adjusted for profit margins) made by inventory satisfactory
    3. Are the results of comparison with past trends of mark-up/mark-down satisfactory
  13. Cost formulae – standard cost system
    1. Has the auditee established standard costs for items being valued
    2. Has the auditee reviewed the standard costs periodically and in the recent past
    3. Are the results of sample tests carried out, to verify application of standard cost method closely approximating to actuals, satisfactory
    4. Do the result of test check show any abnormal variations from actuals
    5. If yes, has the issue been satisfactorily resolved
  14. Cost allocation
    1. Obtain a list of bi-products and joint-products
    2. Where the value is not material, has the NRV of bi-products been adjusted (reduced) from cost
    3. Where there are joint-products, have the overheads been allocated on a rational and systematic basis (sales value, etc)


  15. Net Realisable Value
    1. Do the audit procedures carried out in the audit of inventories show that
      1. NRV for various items has been estimated at the valuation date
      2. The auditee has adopted methods in estimating NRV that are suited to the items under valuation
      3. NRV for ready-for-sale items has been computed by adjusting selling costs
      4. NRV for WIP has been computed by adjusting not only selling costs, but also estimated costs for completion to make the item ready for sale
      5. NRV for items covered by firm contracts has been computed on the basis of contracted price
      6. Where the firm contracts are onerous contracts, has a suitable provision been made (also see AS 29)
      7. NRV for consignment sales has been computed after adjusting selling commission if any payable
      8. NRV for items being sold either at different regions or through different channels has been computed on the basis of estimated realisation from that region, or through that channel
      9. If there are any items, or class of items, of inventory that bears a negative NRV, has a provision been made
      10. If no provision has been made under (ix) above, has the matter been appropriately resolved (and how?)
  16. Selection principle – Lower of Cost and NRV
    1. Do the audit procedures carried out in the audit of inventories show that
      1. The main principle of lower of Cost and NRV has been correctly applied by auditee
      2. Where the NRV for different items is lower than cost, has the auditee reduced the value of all items to NRV
    2. In case of materials and supplies, has the auditee ensured that
      1. A comparison of cost of materials and supplies has been made with the NRV of finished products
      2. If yes, materials and inputs have been valued at cost alone, in all cases where realisation from finished products covers cost
      3. If no, has the auditee valued the inputs by way of materials and supplies at replacement cost
  17. Disclosures
    1. Are the disclosures made by auditee in the area of valuation of inventories, adequate and comply with AS 2
    2. Do the disclosures include
      1. Accounting Policies adopted in the valuation of inventories
      2. Cost formulae used in measurement of value
      3. Carrying amount of the constituent elements of inventories, duly classified as Raw materials and components, work in progress, etc. as under:

1 Raw materials and components
2 Work in Progress
3 Finished Goods
4 Stock in trade (trading items)
5 Stores and Spares (other than major spares)
6 Loose Tools
7 Others (please specify)

      1. the amount of inventories recognised as an expense during the period (cost of sales)

      1. the amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 2.34

      1. the amount of any reversal of any write-down that is recognised as a reduction in the amount    of    inventories    recognised    as expense  in  the  period in  accordance  with paragraph 2.34

      1. the circumstances or events that led to the reversal  of  a  write  down  of inventories  in accordance with paragraph 2.34

      1. the carrying amount of inventories pledged as security for liabilities.

More Articles On Accounting Standard 2:

  • Know more about inventory valuation principles, including cost components like purchase and conversion, methods such as FIFO and Weighted Average Cost, and disclosure rules in Understanding Accounting Standard 2– Click here
  • Explore transparent accounting practices with leading entities’ inventory valuation methods, including Specific Identification, FIFO, and Weighted Average, in the Disclosure of Accounting Policies– Click here
  • Explore common queries regarding inventories, covering diverse scenarios such as accounting treatment for crude oil in pipelines, trading in cryptocurrency, holding shares or debentures as stock in trade, and more, in the FAQs– Click here
CA. S D Bala

Chartered Accountant, Author and Accounting Standard Expert