#40 Audit for Inventory Valuation

As mentioned in post #39, stocks should be valued at lower of its cost or net realizable value. This has posted a imperative audit work step: to ascertain that the respective items is value at cost or net realizable value (Note: each Respective items have to be valued at cost or net realizable value).

How do we ensure that the stocks are valued properly?

1. Randomly selected a certain number from inventory listing.
2. To find out the most recent sales/ subsequent sales after year end. (general guide: 3 months)
3. From the invoices, noted down selling price.
4. Compare the selling price to the actual cost of the sample.
5. Cost > Selling Price, valued at selling price
Selling Price > Cost, valued at cost.

#39 Inventory Valuation (anwer to #38)

Inventory items have to be revalued at ‘lower of cost or net realizable value’. Practically, net realizable value means the amount at which the Company could sell in an open market (selling price).

To answer the question post in #38

1) Value at cost of $2.00. ( as cost of $2.00 is lower than its net realizable value of $2.50)
2) Value at Net realizable value of $1.50 ( as cost of $1.50 is lower than its cost of $2.00)

#38 Accounting for Discount on Prompt Payment

The accounting for prompt payment discounts depends on the nature of the discount. If the prompt payment discount is effectively part of normal trade rebates, i.e. generally everyone receives them, whether they pay promptly or not, they should be accounted as a deduction from the cost of inventory rather than as finance income.

#38 Inventory valuation

As at balance sheet date, client need to value its stocks. Assuming Client ABC has only one stock, Product Y on hand.
Let's consider the following different circumstances, ( assuming balance sheet date is 31 Dec 2007)

1) Client ABC bought Product Y at US$ 2.00 in Aug 2007. They sold Product Y at US$ 2.50 in Dec 2007. How should the client value the stocks ? Should the company use cost or realizable value ( its selling price) to value the stocks?

2) Client ABC bought Product Y at US$2.00 in Aug 2007. The client priced Product Y at US$2.50 and they are unable to sell any single stocks. Hence, the management decided to give discount and sell the stocks at US$1.50 in Dec 2007. How should the client value the stocks? Should the company use cost or realiable value (its selling price) to value the stocks.
[ Refer to next posting coming up for answer]

#37 Stock Take Audit Procedure 3

Things to pay attention to by auditor during stock take:

- to walk around the warehouse / factory to observe if there is any physically impaired/ damaged items.
- if the items are damaged, to check if these damaged items are included i stock listing (if yes, then request client to write off the inventory items)
- to check if the damaged items are properly segregated, as the client might put the damaged item in along with normal goods and resulted in overstatement of inventory.
- if the items appeared to be dusty, check with client if the items are saleable. ( potential provisoin for inventory issue).

Rule of thumb: to observe the physical condition of stocks and report any stock obsolescence.

#36 Stock Take Audit Procedure - 2

As mentioned in previous posting ( Post #35), test count samples in stock take need to be selected: 1) from the floor and 2) from the list.

The purpose of selecting samples from the floor means select the samples from the warehouse floor, test count the result then match to inventory listing as at balance sheet date, to check that the stock listing is complete.

The purpose of selecting samples from the list means select the samples from the list, to check that the inventory appear on the list exist.

#35 Stock Take in Audit Procedure

Purpose of stock take is to verify the existence of the inventory accounted by the company. Procedures in stock take:

1. Obtain stock listing as at balance sheet date from client.
2. Randomly select certain number of samples from stock listing to physically count the inventory to check that the inventory listing ( as prepared by client) has no material difference.
3. Randomly select certain number of samples from the floor ( and test count the number of the items) to check that the stock listing is complete.
4. Make any adjustment if necessary.