AUDIT VERIFICATION -INVENTORY

AUDIT VERIFICATION -INVENTORY

CHAPTER OBJECTIVE

1. INVETNORY VALUATION
2. INVENTORY COUNT
3. THE AUDITOR’S WORK ON INVENTORY VALUATION

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1.  INVENTORY VALUATION

Definition:
The term inventory includes raw materials, bought in parts, work-in-progress and finished goods.
Inventory Valuation:
IAS2 inventory requires individual inventories to be measured at the lower of cost and net realisable value.
Inventory valuation methods such as FIFO or weighted average cost are acceptable, but LIFO is no longer allowed.

Production Overhead:
 Overheads include items like factory property taxes and lighting and heating.
 Production overheads are included in the costs of goods based on the normal activity level. If the company produces less goods than expected, then the unabsorbed overheads are written off as expense and not included in the inventory valuation.
 Overhead allocations based on pre-determined figures, calculated before the actual overhead costs, so activity levels in excess of that expected may require a reapportionment of overheads. If this is not done, it may result in an excessive amount of overhead being included in inventory valuation.
 There are many different methods of including overheads into the cost of inventory. The methods must give a close approximation to the actual cost of overheads.
Net Realisable Value:
Estimated selling price or actual selling price ( net of trade discount but before settlement discount)
Less:
Further costs to completion
Further costs of marketing, selling or distribution
There are a number of situations where net realisable value may be less than cost:
– Increased costs of manufacture
– Reduced selling prices of products
– Deterioration of inventory ( particularly food stuffs)
– Obsolescence of products
– Deliberate selling at loss ( supermarket ‘loss leaders’)

2. INVENTORY COUNT

Inventory Counting Methods:
1. Under a continuous system ( also called a perpetual system), some items of inventory are counted say every week or every month through the accounting period.
2. Under period inventory counting system, inventory is counted only once in each accounting period.
The Auditor’s Attendance at the Inventory Count:
The auditor is not expected to attend the count with following situations:
1. If inventory is not material, or
2. If the accounting record rather than the inventory count is used as the source of inventory quantities.
We can analyse the role of the auditor in connection with the inventory count under three headings:
1. Before the inventory count
2. During the inventory count
3. After the inventory count

3. THE AUDITOR’S WORK ON INVENTORY VALUATION

The main objective of the auditor attending the inventory count is to obtain evidence:
1. Audit evidence in relation to the existence of inventory .
2. Evidence is also required on the valuation of inventory – the lower of cost and net realisable value
Valuation of inventory will depend on the type of inventory items:
1. Raw materials and consumable suppliers: elements of cost, damaged or obsolete inventory.
3. Work-in-progress: elements of cost ( material, labour costs and production overheads) are included, stage of completion, any old, obsolete or damaged items.
3.Finished goods and goods for resale: cost consists of the same elements as work in progress but if items were brought in their completed state, it is purchase price from supplier; damaged or obsolete inventory.

Source:

1. Kaplan, FAU
2. Phnom Penh HR