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FRS 2: Inventory

Accounting Issues
Lower of Cost or NRV

Cost Quantity x Cost Price

1. Maintain perpetual inventory
2. Conduct inventory count
a. Final FY end count
b. Perpetual/Cyclical Inventory

Cost Price
1. Trading Co Purchase Cost
a. Include directly attributable cost
to bring the asset to its present
location & condition
b. Depends on FIFO, WACC, LIFO
2. Manufacturing Co
a. Product Cost = DM + DL + MOH
b. Predetermined Overhead Rate,
ABC, Standard Cost

Auditing Issues (RMM)

1. Quantity (inherent risk)
a. Movement during inventory count
b. Numerous quantities
c. Different product lines
d. Stored at many locations
e. Obsolete/Damaged goods may be included in count (goods inventory)
f. Consignment goods may be included in count
g. Specialized inventory
2. Cost company should only record directly attributable cost and not other costs
that should be charged as an expense
a. Include costs which are not directly attributable to inventory
b. Cost are not appropriately measure according to accounting policy
c. Use inappropriate base/driver to apply overheads
d. Misstatement in applying overheads to products to avoid impairment loss
being recorded
e. Provide false information intentionally is an offence
3. NRV

a. Based on subjective estimates that leads to high risk of management

b. Reliant on factors characteristics of product (e.g technological risk,
economic factors, seasonal trend, rapid deterioration
c. Depends on availability of market prices
Audit Procedures
1. Existence/Completeness
a. Attend inventory count
i. Observe the inventory count process to ascertain whether count has
been properly conducted E.g instructions are been followed
1. To decided whether to rely on the inventory count result
Results of inventory count will need to show that physical items and inventory record
are matched and tallied. Auditor needs to observe the count to provide assurance that
the inventory count results are reliable. (Test of control test the effectiveness of
internal control)

Perform test count to test for existence and completeness

1. Existence select a sample of inventory item found in the record
and trace to physical items counted
2. Completeness select a sample of inventory items sighted and


counted to ensure it agrees with inventory record

Observe the procedures for movement of inventory to ensure that
goods have not been omitted or counted twice

Goods to be delivered out and received should be placed at its designated areas.

Take note of last GDN # and GRN # for cut off procedures

(E.g last GDN #1000 so for GDN #1001: included in the count; GRN #900 so for GRN
#901: excluded in count because its for next year purchases and inventory)

Inspect condition of goods and ensure that obsolete/damaged goods


are excluded (Valuation)

Identify and record consignment goods excluded in count (Rights and


Obtain a photocopy of completed sequentially numbered inventory

sheets for follow up at final audit

2. Valuation
a. Cost
i. Inspect supplier invoice shipping document
ii. Review the cost applied to inventory to ensure that they are in line with

accounting policy
Direct labour inspect timesheets/records & payroll record for direct


labour rate
Manufacturing Overhead Review the basis of cost allocation,
apportionment and absorption/application to products. Ensure that

basis used is reasonable

b. NRV
i. Review subsequent sales and ascertain sales price is above cost
ii. If no subsequent sales, obtain market prices
Inquire with management their basis in estimating NRV if no market

price is available
Consider the characteristics of products and assess the risk of


impairment loss e.g falling demand (ask to see their order book)
Review inventory ageing report
Perform analytical procedures - compare inventory turnover ratio (if the
trend is consistent, client may be right)

Perpetual/Cyclical Inventory Count Audit Procedures

1. Review the cyclical inventory count procedures to ensure procedures are
sufficient and consistently applied.
2. All inventories in different locations must be counted at least once a year
3. Attend cyclical count and select a sample of items to conduct necessarily
4. Review all inventory count sheets to ensure that they are properly accounted for
(e.g signature, prenumbered)
5. Review inventory count reconciliation ensure all discrepancies are
investigated and resolved