- Determine the correct cost components to be included in the inventory.
- Verify the inventory valuation method being applied if such is acceptable for tax purposes and consistently applied from year to year.
- Compare inventory balances in the return under examination with the balances on the prior and subsequent year’s returns and financial statement; then verify these with the taxpayer’s records.
- Check BIR authorization for changes in inventory valuation method and verify taxpayer’s compliance with the requirements set forth under existing rules and regulations.
- Check gross profit percentage variations. Conduct in-depth verification of items with substantial variations.
- Determine the significance of any notes or qualifying statements on financial reports prepared by independent accounting firms.
- Determine the taxpayer’s computation of standard rates, if standard rates are applied.
- Verify cost of production reports and test check certain costs reflected therein to supporting documents.
- Determine if year-end purchases were included in the closing inventory.
- Analyze unusual entries to cost of sales account such as materials, labor and overhead charges not directly related to sales or transfers of finished goods, if applicable.
- Determine if there have been write downs for “excess” inventory to below cost. Verify authorization and supporting document/report for such write- downs.
- When items have been removed from inventory for the owners’ or shareholders’ use, check if these are properly recorded as part of sales. These required minimum audit procedures, however, should not deter the Revenue Officer from making a more detailed examination of the inventory account, when warranted.
Reference: RAMO 1-2000