1) Audit of Inventories - Lecture

7/28/2019 1) Audit of Inventories - Lecture

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Audit of Inventories

L. R. Cabarles



Nature of Inventories Inventories include• Assets held for sale in the ordinary

course of business (finished goods) • Assets in the production process for

sale in the ordinary course of business(work in process), and

• Materials and supplies that are

consumed in production (rawmaterials)



Standard Assumptions -Physical CountWhen inventory was determined by

physical count at the client’swarehouse:

• Only those items physically presentinside the warehouse were included,and

• All items physically present inside thewarehouse were included.



Items normally excluded,But should be included:Effect: Inventory understated1) Goods in transit:

Purchase – FOB shipping pointSale – FOB Destination

2) Goods out on consignment3) Goods located in other places

Items normally includedBut should be excluded:Effect: Inventory overstated1) Goods held on consignment

2) Goods already sold

Standard Assumptions -Physical Count



Measurement of inventories Inventories are required to be

stated at the lower of cost and

net realizable value (NRV).



Items included in cost • costs of purchase

• costs of conversion, and

• other costs incurred in bringingthe inventories to their presentlocation and condition



Cost Formulas Specific identification

• For items that are not ordinarilyinterchangeable

•

Goods or services produced andsegregated for specific projects

FIFO or Weighted Average Cost

• For all other items



Cost Formulas Specific identification

Cost of EI = Units on hand x Specific UC

FIFO

Cost of EI:

Units on hand x UC of latest purchases

Weighted Average

Cost of EI = Units on hand x WAUC

WAUC = Total cost of GAS/Total units available for sale



What is net realizable value(NRV)? Net realizable value is the

estimated selling price in the

ordinary course of business lessthe estimated costs of completion and the estimatedcosts necessary to make the sale.

NRV = ESP – ECTC - ECTS



Inventory EstimationTechniques - Gross profit rate

- Retail inventory



Gross Profit Rate Method

Inventory, beginning P xxPurchases, net xx

TGAS xx

Inventory, ending ( xx)

Cost of sales P xx

TGAS P xxCost of sales ( xx)

Estimated inventory P xx



COS Computation GPR based on SALES

COS = Net Sales x Cost Ratio

Cost ratio = 1 - GPR

GPR based on COST

COS = Net Sales / (1+GPR)



Retail Inventory Method • Cost ratio = GAS@cost / GAS@retail

• EI at retail = GAS@retail –

Sales (+/- other invty adj.)

• EI at cost = EI at retail x cost ratio

•

Methods:- Conventional/Conservative/LCM

- Average

- FIFO

Method Markdown Beg. Invty.

Conventional Exclude Include

Average Include Include(Deduct)

FIFO Include Exclude

(Deduct)



Transactions Cost Retail

Inventory, beginning 30 50

Purchases 125 150

Purchase discount (10)

Purchase allowance (5)

Purchase returns (5) (10)

Freight in 10

Net mark-up 55

Net mark down (15)

Departmental transfer – in (Debit) 20 30

Departmental transfer – Out (Credit) (10) (15)

Abnormal wastages/breakage/spoilage (35) (45)

GAS 120 200

Cost ratio 60%

Illustration (Ave. Cost Method) Ignored under FIFOMethod

Ignored underConservative Method



Illustration Transaction Retail Price

TGAS, at retail P200

Net sales (90)

Inventory, end at retail 110

X by Cost ratio 60%

Estimated inventory, end at cost P66

Cost of sales (P120 – P66) P54

Gross sales P 80

Sales discount Not deducted

Sales allowances Not deductedSales returns (Sales returns and allowances) (15)

Employee discounts 20

Normal wastages/breakage/spoilage 5

Net sales P90



PAS 41, Agriculture

Applies to:

• Biological assets; and

• Agricultural produce at the point of harvest

When they relate to agricultural activity



Measurement – Biological Assets On initial recognition and at

subsequent reporting dates atfair value less costs to sell,

unless fair value cannot bereliably measured.

A gain or loss on initial recognitionat fair value, and changes in fairvalue during a period, arereported in profit or loss.



Measurement – Agricultural Produce At fair value less costs to sell at the

point of harvest. Because harvestedproduce is a marketable commodity,

there is no 'measurement reliability'exception for produce.

A gain on initial recognition at fair value

should be included in profit or loss forthe period in which it arises.



Analysis of increase in value

Due to price changes xx(same age; different dates)

Due to physical changes xx

(same date; different ages)

1) Audit of Inventories - Lecture

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