Goods in transit refer to goods that are physically in transit from one location to another but have not yet been received by the buyer. They are recorded as an asset on the balance sheet, as they are considered to be owned by the company but not yet received.
The accounting treatment for goods in transit varies depending on the shipping terms agreed between the buyer and the seller.
- FOB (Free on Board) shipping point: The goods are recorded as an asset on the buyer’s balance sheet when they leave the seller’s location.
- FOB (Free on Board) destination: The goods are recorded as an asset on the buyer’s balance sheet when they are received at the buyer’s location.
- Cost, Insurance, and Freight (CIF): The goods are recorded as an asset on the buyer’s balance sheet when they leave the seller’s location, along with the cost of insurance and freight.
- Carriage Paid To (CPT): The goods are recorded as an asset on the buyer’s balance sheet when they leave the seller’s location, along with the cost of transportation.
Audit Risks:
- Misrepresentation of shipping terms: The shipping terms may not match the actual shipping terms agreed between the buyer and the seller, leading to incorrect recognition of goods in transit as an asset.
- Misclassification of goods in transit: Goods in transit may be incorrectly classified as inventory or not recorded as an asset, leading to material misstatements in the financial statements.
- Uninsured or underinsured goods in transit: Goods in transit may be uninsured or underinsured, leading to material misstatements in the financial statements if a loss occurs.
- Misstatement of the value of goods in transit: The value of goods in transit may be misstated, leading to material misstatements in the financial statements.
- Misstatement of the quantity of goods in transit: The quantity of goods in transit may be misstated, leading to material misstatements in the financial statements.
- Misstatement of shipping costs: Shipping costs may be misstated, leading to material misstatements in the financial statements.
- Misstatement of shipping insurance: Shipping insurance may be misstated, leading to material misstatements in the financial statements.
- Misstatement of shipping terms: Shipping terms may be misstated, leading to material misstatements in the financial statements.
- Misstatement of shipping dates: Shipping dates may be misstated, leading to material misstatements in the financial statements.
- Misstatement of shipping destinations: Shipping destinations may be misstated, leading to material misstatements in the financial statements.
Audit Assertions
Audit assertions for goods in transit are the underlying assumptions made by management about the transactions and events related to goods in transit.
These assertions help auditors determine the types of audit evidence to collect and the extent of substantive testing required. The following are the key audit assertions for goods in transit:
- Existence: This assertion states that the goods in transit exist and are under the control of the entity. The auditor should obtain evidence of the physical existence of the goods, such as shipping documents, invoices, and receiving reports.
- Completeness: This assertion states that all goods in transit have been recorded in the entity’s financial records. The auditor should perform substantive testing, such as inspection of shipping documents and comparison to inventory records, to verify completeness.
- Valuation: This assertion states that goods in transit are valued appropriately and in accordance with accounting standards. The auditor should review the entity’s policies and procedures for valuing goods in transit and perform substantive testing, such as recalculating the value of goods in transit using supporting documentation.
- Rights and Obligations: This assertion states that the entity has the right to the goods in transit and the obligation to pay for them. The auditor should obtain evidence of the terms and conditions of any shipping contracts, as well as evidence of the entity’s payment obligations.
- Presentation and Disclosure: This assertion states that goods in transit are properly presented in the financial statements and disclosed in accordance with accounting standards. The auditor should review the entity’s financial statements for completeness and accuracy, and perform substantive testing, such as inspecting the accuracy of the presentation of goods in transit in the balance sheet.
These audit assertions are critical in ensuring that the auditor has a thorough understanding of the entity’s transactions and events related to goods in transit and can obtain sufficient evidence to support their opinions.
Walkthrough Testing:
Walkthrough testing is a procedure that auditors use to gain an understanding of the entity’s business processes and internal controls related to goods in transit.
This involves reviewing flowcharts or process diagrams, talking to key personnel, and observing transactions being processed. The objective of walkthrough testing is to obtain an understanding of the process and identify potential areas of risk.
Test of Controls:
Test of controls is a procedure that auditors use to evaluate the effectiveness of the entity’s internal controls over goods in transit. This may include testing controls over shipping and receiving procedures, inventory management, and accounting for goods in transit.
The objective of test of controls is to determine whether the entity’s internal controls provide reasonable assurance that transactions related to goods in transit are recorded accurately and in compliance with accounting standards.
Substantive Audit Procedures:
Substantive audit procedures are tests performed by auditors to obtain sufficient evidence to support their opinions on the financial statements. The following are ten substantive audit procedures for goods in transit:
- Reconcile the balance in the goods in transit account to the general ledger.
- Obtain and review shipping documents, invoices, and receiving reports.
- Perform physical inspections of goods in transit, if feasible.
- Compare the description, quantity, and value of goods in transit to supporting documentation.
- Verify the terms and conditions of shipping contracts and the entity’s payment obligations.
- Review the entity’s policies and procedures for valuing goods in transit.
- Recalculate the value of goods in transit using supporting documentation.
- Confirm the existence and location of goods in transit with the entity’s suppliers or carriers.
- Test the accuracy of the presentation of goods in transit in the balance sheet.
- Review the disclosures in the financial statements related to goods in transit for completeness and accuracy.
These substantive audit procedures help auditors to obtain sufficient evidence to support their opinions on the financial statements and provide reasonable assurance that the transactions and events related to goods in transit are recorded accurately and in compliance with accounting standards.