Inventory

Question 1

How should inventory be valued under IAS2?

Answer 1

At the LOWER of cost and net realisable value

Question 2

What is “cost”?

Answer 2

Purchase price and cost of bringing it to its present location and condition

Question 3

What is “NRV”?

Answer 3

Estimated selling price in ordinary course of the business, less estimated costs of completion and estimated costs necessary to make the sale

Question 4

What are the key assertions for inventory?

Answer 4

Cut off
Completeness
Existence
Rights and obligations
Valuation

Question 5

Why is an inventory count required?

Answer 5

To create an up to date inventory figure to be posted to the FS

Inventory may be missed/damaged/stolen during the year

It also provides evidence of existence and condition of inventory

Question 6

What should the auditor do in relation to inventory?

Answer 6

Attend the physical inventory count

• Conclude if the count has been properly carried out and reliable basis for existence of inventory
• Are there any amendments to be made?
• Judge whether the figure in the FS is reasonable

Question 7

What is “consignment inventory”?

Answer 7

Goods are delivered to customer but only invoices customer once customer says used

Question 8

What are the risks with inventory valuation?

Answer 8

Old or damaged stock may be valued at cost rather than NRV, thus inventory is overstated

SOFP - Inventory (assets) overstated

Question 9

What 2 things does the auditor need to do at the inventory count?

Answer 9

Observe staff to see if inventory count procedures are being followed

Reviews procedures for identifying damaged, obsolete and slow moving inventory

Question 10

What are some Audit procures for continuous inventory counts?

Answer 10

Attend at least one of the counts to review whether the controls are adequate

Review the adjustments made on a monthly basis to gain an understanding of level of differences month by month

If significant differences constantly arise - indicates inventory records are not adequately maintained.
Discuss with management how they will ensure that year-end inventory will not be over/understated

Consider attending year end inventory count in order to confirm the existence and completeness of inventory

Question 11

Audit procedures BEFORE the inventory count?

Answer 11

• Discuss with management whether any specific have experienced significant control issues
• Decide which warehouses the audit team will attend, based on materiality and risk of each site
• Obtain a copy of the proposed inventory count instructions, review them to identify any control deficiencies and discuss with management prior to the counts

Question 12

Audit procedures DURING the inventory count

Answer 12

• OBSERVE counting teams to confirm the instructions are being followed correctly
• Select a SAMPLE and perform test counts
• CONFIRM procedures for identifying and segregating damaged gods
• IDENTIFY and make note of the last good received notes and goods dispatched notes for year end date to perform cut-off procedures

Question 13

Audit procedures - writing down inventory

Answer 13

Must write down to its net realisable value
If material then amend the FS

Discuss with directors if they are prepared to write down to this amount

Review the board minutes to assess whether this was the only case of defective inventory as there could be other that needs writing down