We received an email from one of our reader asking the following question: what will be the high risk area of the high-end fashion retail industry (i.e. which account assertion has the high risk).
To answer your question in brief before proceeding to detail analysis:
Inventory- Measurement/ Valuation, Provision for Stocks- Completeness, Valuation
In high-end fashion industry, the products are unique and the inventory turnover rate is relatively low for some of the items. For instance, a US$500,000 watch might take more than one year to market the products to end-user.
How can we assess the inventory particularly for low inventory turnover then? We request the management to classify the products into different classes of inventory, and we assess the historical sales trend of that particular class to develop and understanding of the client’s inventory. Herein, the in-depth understanding of the stocks provides a reasonable ground to assess the provision for stocks as at today.
Also, we checked to subsequent sales to check if the stocks have been subsequently sold after year end to assess that the inventory have been sold at a selling cost at least above its cost. We have to check that the inventories are valued at ‘lower of cost or net realizable value’.