Final answer:
Auditors perform substantive procedures to reconcile inventory listings with the company's general ledger, ensuring accuracy in financial records. The reconciliation process involves physical verification and review of documentation. This is crucial for accurate financial reporting and detecting discrepancies in the inventory records.
Step-by-step explanation:
When auditors are performing substantive procedures, they obtain listings of inventory, and will reconcile them to the company's general ledger.
This process helps ensure that the physical inventory is accurately represented in the company's financial records. Auditors will typically sample a selection of items from the inventory listing to verify their existence and condition, and they will also review documentation such as purchase orders and sales records to confirm the valuation and ownership of the inventory.
Importance of Inventory Reconciliation
Inventory reconciliation is a critical aspect of the audit as it can reveal discrepancies that may indicate issues such as theft, waste, or mismanagement. It also contributes to the accuracy of financial reporting, which is essential for stakeholders who rely on these reports for decision-making purposes.