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Inventories
The following topics will be covered during the workshop: Definitions Financial statements assertion Methods of obtaining audit evidence Understanding of inventory system Physical inventories Valuation of inventories Presentation and disclosures Quiz and multiple choice questions
Definitions
Inventories are assets Held for sale in the ordinary course of business; In the process of production for such sale; or In the form of materials or supplies to be consumed in the production process in the rendering of services. Net realizable value Is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale. Fair value Is the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing 3 parties in an arm length transaction.
Occurrencetransactions and Events that have been recorded have occurred and pertain to the entity Completenessall transactions and events that should have been recorded have been recorded Accuracyamounts and other data relating to recorded transactions and events have been recorded appropriately. Cutofftransactions and events have been recorded in the correct accounting period Classificationtransactions and events have been recorded in the proper accounts
Existenceassets, liabilities, and Occurrence and rights and equity interests exist Obligationsdisclosed Rights and obligationsthe entity events, transactions, and holds or controls the rights to other matters have occurred assets, and liabilities are the and pertain to the entity. obligations of the entity Completenessall assets, liabilities Completenessall disclosures that should have been included and equity interests that should in the financial statements have have been recorded have been included. been recorded Valuation and allocationassets, Classification and understandability financial information is liabilities, and equity interests are appropriately presented included in the financial statements and described, and disclosures at appropriate amounts and are clearly expressed any resulting valuation or allocation Accuracy and valuationfinancial adjustments are appropriately and other information recorded are disclosed fairly and at4 appropriate amounts
Inspection of tangible assets Observation Inquiry Confirmation Recalculation Re performance Analytical procedures
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INVENTORY SYSTEM
Purchase Requisition
Store Department
Yes Approval
Approval
Finance / Store
Finance / Store
Prepared at department
store
for
issuance
to
next
relevant
Process
Additions
Packing
Warehouse
Sale Order
Delivery Note
Finance / warehouse
Invoice
Physical inventories
Objective of physical attendance Need for physical stock taking General audit procedures for stock take Audit procedures for physical stock taking Specific areas
If unable to attend the physical inventory count on the date planned, take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions.
Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should consider alternative procedures.
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The sheets shall be signed by all persons who were involved in the physical stock taking Ensure all inventory sheets are accounted for Ensure rough inventory sheets are retained Cut off testing of receiving and dispatch of documents Prepare reconciliations in order to reach at year end stock, if the physical stock tacking is performed before or after year end Document/ Inquire the observations/ discrepancies between physical and sheets provided noted during the course of physical stock take
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Specific Areas
Stocks held at third party 1. 2. Obtain direct confirmation As to the quantities. As to the condition of inventory. Depending on materiality of this inventory the auditor would also consider the following: The integrity and independence of the third party. Observing, or arranging for another auditor to observe, the physical inventory count. Obtaining another auditors report on the adequacy of the third partys internal control for ensuring that inventory is correctly counted and adequately safeguarded. Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts, or obtaining confirmation from other parties when such inventory has been pledged as collateral.
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Specific areas
Stock in transit The auditor should verify through reviewing purchase invoices and subsequent status. Considerations to quarantine inventories Stock in bonded ware houses 1. Auditor obtain direct confirmation in writing, from custodian. 2. The auditor should also apply one or more of the following additional procedures: Review and test clients procedures for investigating the warehouseman and evaluating his or her performance. observe physical counts of goods, if applicable. if warehouse receipts have been pledge as collateral, confirm details of pledged receipts with lenders.
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Definition of Inventory
Inventory includes: Inventories of Manufacturing Concern 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 to be consumed in the production process (raw materials) or rendering of services. [IAS 2.6]. Inventories of Service Provider In the case of service provider, inventories include the costs of the services which consist primarily of the labor and other costs of personnel directly engaged in providing of the service, including supervisory personnel and attributable overheads for which the entity has not yet recognized the related revenue (see IAS 18 Revenue)
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Initial Recognition
Cost should include all: [IAS 2.10] Costs of purchase (including taxes, transport, and handling) net of trade discounts received; Costs of conversion (including fixed and variable manufacturing overheads); and Other costs incurred in bringing the inventories to their present location and condition. Inventory cost should not include: [IAS 2.16-2.18] Abnormal waste; Storage costs; Administrative overheads unrelated to production; Selling costs; Foreign exchange differences; and Interest cost.
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Cost Formulae
For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23] For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25]. The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise. For groups of inventories that have different characteristics, different cost formulae may be justified. [IAS 2.25] The standard cost and retail methods (For Commercial Importers and Traders) may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]
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Subsequent Measurement
Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs. Any reversal should be recognized in the income statement in the period in which the reversal occurs. [IAS 2.34] What is NRV: NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6].
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Particulars
Activity Based Costing Limited Finished Goods Physical Stock Sheet As at June 30 2005 Audit Tick Slow Moving/ Location Quantity Physical Damage/ of Item Held Count Obsolete W1-A 10,232 7,685 567 7,898 3,455 5,692 9,843 15,468 8,756 1,938 8,762 1,450 617 82,363 P S D O P P P P P P P P P P P P P 205 154 11 158 69 114 197 309 175 39 175 29 12 1,647
Item - A Item - B Item - C Item - D Item - E Item - F Item - G Item - H Item - I Item - J Item - K Item - L Item - M
Audit Tick for Physical Verification Audit Tick for Slow Moving Stock Audit Tick for Demaged Stock Audit Tick for Obsolete Stock
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Particulars
Quantity Held 10,232 7,685 567 7,898 3,455 5,692 9,843 15,468 8,756 1,938 8,762 1,450 617 82,363
Average Cost 102.5 345.32 85.47 1257.63 628.82 419.21 314.41 251.53 209.605 179.66 104.80 69.87 52.40
Activity Based Costing Limited Finished Goods Stock Valuation Sheet As at June 30 2005 Estimated Estimated Estimated Total Selling Completion Selling Cost Price Cost Cost 1,048,780.00 2,653,784.20 48,461.49 9,932,761.74 2,172,555.83 2,386,143.32 3,094,713.02 3,890,604.17 1,835,301.38 348,183.85 918,279.51 101,309.08 32,331.57 28,463,209.15 117.88 397.12 98.29 1,265.70 723.14 482.09 361.57 245.35 241.05 206.61 120.52 80.35 60.26 2.36 7.94 1.97 25.31 14.46 9.64 7.23 4.91 4.82 4.13 2.41 1.61 1.21
Net Realizable Value 115.52 389.18 96.32 1,240.39 708.67 472.45 354.34 240.44 236.22 202.48 118.11 78.74 59.06
Total NRV 1,181,975.06 2,990,814.79 54,616.10 9,796,568.63 2,448,470.41 2,689,183.52 3,487,741.58 3,719,172.32 2,068,384.66 392,403.20 1,034,901.00 114,175.34 36,437.68 30,014,844.29
Lower of Cost/ NRV 1,048,780.00 2,653,784.20 48,461.49 9,796,568.63 2,172,555.83 2,386,143.32 3,094,713.02 3,719,172.32 1,835,301.38 348,183.85 918,279.51 101,309.08 32,331.57 28,155,584.20
Item - A Item - B Item - C Item - D Item - E Item - F Item - G Item - H Item - I Item - J Item - K Item - L Item - M
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Activity Based Costing Limited Provision for slow moving/ demaged/ obsolete stock As at June 30 2005 Slow Moving/ Amount Particulars Demage/ Average of Obselence Cost Provision Item Item Item Item Item Item Item Item Item Item Item Item Item A B C D E F G H I J K L M 205 154 11 158 69 114 197 309 175 39 175 29 12 1,647 102.5 345.32 85.47 1257.63 628.82 419.21 314.41 251.53 209.605 179.66 104.80 69.87 52.40 20,975.60 53,075.68 969.23 198,655.23 43,451.12 47,722.87 61,894.26 77,812.08 36,706.03 6,963.68 18,365.59 2,026.18 646.63 569,264
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Particulars
Activity Based Costing Limited Raw Material Physical Stock Sheet As at June 30 2005 Slow Moving/ Quantity Physical Demage/ Held Count Obselence 5,116 3,467 635 7,475 3,258 5,936 9,254 12,655 7,536 1,675 8,265 1,923 715 67,910 P S D O P P P P P P P P P P P P P 102 69 13 150 65 119 185 253 151 34 165 38 14 1,358
Item - RM - A Item - RM - B Item - RM - C Item - RM - D Item - RM - E Item - RM - F Item - RM - G Item - RM - H Item - RM - I Item - RM - J Item - RM - K Item - RM - L Item - RM - M
Audit Tick for Physical Verification Audit Tick for Slow Moving Stock Audit Tick for Demaged Stock Audit Tick for Obsolete Stock
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Activity Based Costing Limited Raw Material Valuation As at June 30 2005 Particulars Quantity Held 5,116 3,467 635 7,475 3,258 5,936 9,254 12,655 7,536 1,675 8,265 1,923 715 67,910 Average Cost 51.25 172.66 42.74 628.82 314.41 209.61 157.20 125.76 104.80 89.83 52.40 34.93 26.20 Amount of Valuation 262,195.00 598,612.22 27,136.73 4,700,392.13 1,024,339.64 1,244,215.28 1,454,763.50 1,591,530.77 789,791.64 150,466.45 433,096.33 67,178.40 18,733.45 12,362,451.52
Item Item Item Item Item Item Item Item Item Item Item Item Item
RM RM RM RM RM RM RM RM RM RM RM RM RM
A B C D E F G H I J K L M
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Activity Based Costing Limited Provision for slow moving/ demaged/ obsolete stock As at June 30 2005 Slow Moving/ Amount Particulars Demage/ Average of Obselence Cost Provision Item Item Item Item Item Item Item Item Item Item Item Item Item RM RM RM RM RM RM RM RM RM RM RM RM RM A B C D E F G H I J K L M 102 69 13 150 65 119 185 253 151 34 165 38 14 1,358 51.25 172.66 42.74 628.82 314.41 209.61 157.20 125.76 104.80 89.83 52.40 34.93 26.20 5,243.90 11,972.24 542.73 94,007.84 20,486.79 24,884.31 29,095.27 31,830.62 15,795.83 3,009.33 8,661.93 1,343.57 374.67 247,249.03
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Activity Based Costing Limited As at June 30 2005 Stock in Trade: Finished goods Work in progress Raw material Less: Provision 2005 28,155,584 14,556,654 12,362,452 55,074,690 569,264 54,505,426 2004 26,344,876 16,765,489 10,982,345 54,092,710 54,092,710
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Solution c Reason Recorded test counts are compared with the clients final inventory listing to provide assurance that the clients counts were not changed between the time they were made and the time the final inventory listing was prepared.
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Before the start of the inventory, the auditor should review the clients inventory instructions. T
The auditor tests a clients inventory cut off to determine that physical items and their related costs are treated in a consistent manner. T The objective of a receiving cut off test is to determine whether items that are received near the end of the year and included in inventory also are recorded as purchases and accounts payable. T The test of inventory pricing in a job-order cost system usually involves a review of the flow and accumulation of costs by cost centre for the major products. F The review of costs by cost centre is performed when auditing a process cost system
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