Audit Procedures for Independent Inventory Situations

Situation (a): Valuing Inventory at Net Realisable Value

Question 2: Audit Procedures (suggested word count: 500 words)

Consider these independent inventory situations, then answer the questions that follow.

(a) ABC company sells high fashion garments and the accountant of the company advises you that all inventory has been valued at net realisable value.

(b) A jewellery manufacturing company manufactures necklaces, earrings and rings for mid- range customers. The company also operates a number of retail outlets. One inventory item is a large roll of wire that is used in jewellery manufacturing. The CEO advises you that the wire is made of gold and therefore you estimate the value by taking the average of quotes from two gold buyers’ websites.

(c) Fantastic foods supply their shops from a number of different warehouses. They import preserved food (canned, bottled & frozen) from a number of countries. Their customers are large caterers and restaurants. Often goods are required to be shipped overnight to different locations from where they are stored.

(d) Awinemaking company has a large warehouse full of bottled wine and contracts to buy more grapes in the next season. The market price for wines has recently fallen and the winemaker is in financial distress.

Required:

For each of the above situations outline the audit procedures that you would undertake. Ensure you outline:

(i) Underlying audit risk and provide a brief explanation of why it is at risk. (8 marks)
(ii) The substantive procedures you would undertake including any assistance you would need in ensuring there are no material discrepancies in the value of inventory. (12 marks)
(iii) The internal controls you believe you should be able to rely on. (4 marks)