#99- Inventory System - Perpetual vs Periodic

Entity can account for its inventory by using either perpetual method or periodic method.

Under perpetual method:
- the entity record for every single movement of the inventory (i.e. in and out of the inventory)
- at any single point of time, the entity is able to recall the inventory on hand
- frequency of stock-take required is lesser than those accounted using periodic method

Under periodic method,
- every single movement for the inventory (i.e. in and out) is not required to be tracked
- the entity perform a periodic stock-take to ascertain the inventory balance
- inventory on hand can only be recalled after the stock-take is performed
- frequency of stock-take required is higher than those accounted using perpetual method
- cost of sales is computed by using the following formula: Opening Stock+ Cost of Goods Manufactured / Purchase - Closing stock

The above summarize the difference between perpetual inventory method and periodic inventory method.

Ernst & Young sued over Lehman's collapse

Here is the big news that might trigger your interest as an auditor.

One of the Big 4 accounting firms, Ernst & Young is facing a civil lawsuit in the US over the collapse of Lehman Brothers! New York's state attorney Andrew Cumo claims that New York's state attorney Andrew Cuomo claims Ernst & Young "sat by silently" as Lehman Brothers tried to conceal billions of dollars in debt from investors before its implosion. The lawsuit says Lehman ran a "massive accounting fraud".

It is claimed that Ernst & Young approved of Lehman's increasingly frequent use of a device known as Repo 105. The lawsuit alleges: "These Repo 105 transactions had no independent business purpose and were designed solely to enable Lehman to manage the company's financial balance sheet metrics."

The case centres on Lehman's use of an accountancy practice known as Repo 105, which involves temporarily removing money from the balance sheet to give the impression of greater financial strength. Mr Cuomo mentioned that, Ernst & Young should not have approved the accounts, knowing that the practice had been used so widely.

The lawsuit seeks more than $150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman's outside auditor,plus other unspecified damages

Ernst & Young has responded, and claims that the firm is going to "vigorously defend" the lawsuit.

#98- Expectation on FY 2010 inventory level

For audit of year-end 2010 audit, auditors should form an expectations that inventory level has reduced, as compared to previous year. Inventory level can be computed as inventory as % of sales / inventory as % of last 3 month sales. This provide a good guide / benchmark on the inventory level our audit clients are holding.

In view of the recovering business/ economy, inventory turnover are expected to become relatively quicker than prior year. Aged inventory are expected become relatively lesser either.

If the inventory level, as well as aged inventory level, remain relatively constatnt as prior year, this could indicate higher risk of provision for inventory obsolescence. Auditor should discuss this issue with management.

#97- Excess inventory after christmas

We were reading one of the business article online on how to deal with the excess inventory after the christmas sales, especially for retailers.

One of the options suggested was to auction it off online. Companies tend to store higher level of inventory during Christmas season, to meet the demand from customers. Demand from customers are often hard to be projected. Neither historical trend, nor forecast can precisely predict the inventory required. Hence, instead of losing sales resulted from insufficient inventory,Companies tend to store higher level of inventory to meet the demand from customers.

After Christmas sales, Companies are required to reduce the relatively high level (if any) of inventory, considering that the warehouse costs/ inventory holding costs/ liquidity costs could be substantial.

One of the options suggested was to auction the inventories off online. Though the pricing might not be attractive, but auctioning off the inventories allow the Companies to reduce all type of costs mentioned above.

Companies could sell the stocks in all sorts of website, including: e-bay.