AAF8
Syllabus D. Audit Evidence D4. The audit of specific items

D4b. Inventory - Valuation 9 / 18

Syllabus D4b)

Explain the audit objectives and the audit procedures in relation to: Inventory:
v) valuation

Inventory is valued at the lower of cost and NRV

NRV = Net realisable value

This is basically selling price less cost to sell it. This is normally higher than cost

Sometimes it is not because it is obsolete or in poor condition

This can be checked at the inventory count

Raw Materials / Goods for resale Cost

  1. Cost to be Included:
    • Actual cost of the items (plus delivery)

  2. Audit Tests
    • Confirm which Inventory method used (FIFO, AVCO etc)

    • Check figures to purchase inventories

Cost of Manufactured goods and WIP

  1. Here you need the different elements of cost:

    direct materials
    direct labour and 
    production overheads

  2. Audit Tests
    • Get breakdown
      of costs of finished and WIP goods

    • Calculations
      Check and recalculate

    • Materials
      check fifo etc and to purchase invoice

    • Labour
      Check pay rates against payroll records

      Check hours worked with time records

    • Production overheads
      Ensure only production overheads (not selling or admin)

      Ensure overhead absorption rates are based on normal levels of output

    • Work in Progress
      Check the stage of completion, for both materials, labour and overheads

Net Realisable Value

  1. Audit Tests
    • Review Procedures
      for comparing cost to NRV

    • Follow up

      Evidence from:
      1) Inventory count
      2) Lots of returns
      3) Price reductions given to customers

    • Check
      for slow-moving items

    • Review prices
      after year end

    • Ensure
      estimated costs to complete are accurate