1) audit of inventories - lecture
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7/28/2019 1) Audit of Inventories - Lecture
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Audit of Inventories
L. R. Cabarles
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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)
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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.
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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
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Measurement of inventories Inventories are required to be
stated at the lower of cost and
net realizable value (NRV).
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Items included in cost • costs of purchase
• costs of conversion, and
• other costs incurred in bringingthe inventories to their presentlocation and condition
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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
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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
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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
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Inventory EstimationTechniques - Gross profit rate
- Retail inventory
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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
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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)
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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)
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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
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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
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PAS 41, Agriculture
Applies to:
• Biological assets; and
• Agricultural produce at the point of harvest
When they relate to agricultural activity
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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.
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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.
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Analysis of increase in value
Due to price changes xx(same age; different dates)
Due to physical changes xx
(same date; different ages)