For audit of year-end 2010 audit, auditors should form an expectations that inventory level has reduced, as compared to previous year. Inventory level can be computed as inventory as % of sales / inventory as % of last 3 month sales. This provide a good guide / benchmark on the inventory level our audit clients are holding.
In view of the recovering business/ economy, inventory turnover are expected to become relatively quicker than prior year. Aged inventory are expected become relatively lesser either.
If the inventory level, as well as aged inventory level, remain relatively constatnt as prior year, this could indicate higher risk of provision for inventory obsolescence. Auditor should discuss this issue with management.
Showing posts with label Auditing- Inventory. Show all posts
Showing posts with label Auditing- Inventory. Show all posts
#97- Excess inventory after christmas
We were reading one of the business article online on how to deal with the excess inventory after the christmas sales, especially for retailers.
One of the options suggested was to auction it off online. Companies tend to store higher level of inventory during Christmas season, to meet the demand from customers. Demand from customers are often hard to be projected. Neither historical trend, nor forecast can precisely predict the inventory required. Hence, instead of losing sales resulted from insufficient inventory,Companies tend to store higher level of inventory to meet the demand from customers.
After Christmas sales, Companies are required to reduce the relatively high level (if any) of inventory, considering that the warehouse costs/ inventory holding costs/ liquidity costs could be substantial.
One of the options suggested was to auction the inventories off online. Though the pricing might not be attractive, but auctioning off the inventories allow the Companies to reduce all type of costs mentioned above.
Companies could sell the stocks in all sorts of website, including: e-bay.
One of the options suggested was to auction it off online. Companies tend to store higher level of inventory during Christmas season, to meet the demand from customers. Demand from customers are often hard to be projected. Neither historical trend, nor forecast can precisely predict the inventory required. Hence, instead of losing sales resulted from insufficient inventory,Companies tend to store higher level of inventory to meet the demand from customers.
After Christmas sales, Companies are required to reduce the relatively high level (if any) of inventory, considering that the warehouse costs/ inventory holding costs/ liquidity costs could be substantial.
One of the options suggested was to auction the inventories off online. Though the pricing might not be attractive, but auctioning off the inventories allow the Companies to reduce all type of costs mentioned above.
Companies could sell the stocks in all sorts of website, including: e-bay.
#81- Auditing FIFO Costing Method
We received a query from our loyal reader in respect of the auditing procedures on inventory costing method. Our reader specifically points to auditing procedures of First-in First-out ("FIFO") inventory method.
In FIFO inventory method, inventory acquired first acquired / purchased will be the first items sold. To illustrate with an example, Mobilephone retailer purchased one iPhone 3GS in Jun for a cost of US$500. Subseuquently, in end of June, the retailer acquired another iPhone 3GS for a total cost of US$550. What will be the COGS while the retailer sell one iPhone in July?
In FIFO method, it will be US$500. Items stocked first will be sold first.
Auditing Procedures:
In auditing FIFO valuation method, following procedures can be adopted:
- Obtain full stock listing as at balance sheet date, and select certain number of samples
- Obtain stock movement listing of respective sample, where we are able to see the stock-in and stock-out from time to time
- Obtain the stock-in costs for each purchase ( i.e. Jan: Purchase 10 items at US$10 each, Feb: Purchase 20 items at US12 each)
- Test compute the COGS for each deliveries to check that COGS amounts are recorded correctly.
To illustrate with the example above, when the retailer sold the iPhone in July. We can check to profit & loss statement in July, to verify that COGS reflects US$500. (i.e. first in first out basis).
In FIFO inventory method, inventory acquired first acquired / purchased will be the first items sold. To illustrate with an example, Mobilephone retailer purchased one iPhone 3GS in Jun for a cost of US$500. Subseuquently, in end of June, the retailer acquired another iPhone 3GS for a total cost of US$550. What will be the COGS while the retailer sell one iPhone in July?
In FIFO method, it will be US$500. Items stocked first will be sold first.
Auditing Procedures:
In auditing FIFO valuation method, following procedures can be adopted:
- Obtain full stock listing as at balance sheet date, and select certain number of samples
- Obtain stock movement listing of respective sample, where we are able to see the stock-in and stock-out from time to time
- Obtain the stock-in costs for each purchase ( i.e. Jan: Purchase 10 items at US$10 each, Feb: Purchase 20 items at US12 each)
- Test compute the COGS for each deliveries to check that COGS amounts are recorded correctly.
To illustrate with the example above, when the retailer sold the iPhone in July. We can check to profit & loss statement in July, to verify that COGS reflects US$500. (i.e. first in first out basis).
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