The auditor’s working paper for auditing inventory balances for the client New Millennium Ecoproducts appears in figure 12.3. It shows the details of the net realizable value (NRV) tests.

Required

a. Why does an auditor test for NRV when auditing inventory?

b. Find the details of the inventory items selected for NRV testing. What is a “key item”? Explain how the auditor has decided whether the inventory items should be shown at NRV or cost.

c. Are any inventory items to be written down to NRV in this example? If so, by how much?

Figure 12.3

Transcribed Image Text:

CLIENT: Period-end: Currency/unit: Sample Item Quantity number code Description Category in stock Key item 1 etc.... Representative sample 701442 routers 2 New Millennium Ecoproducts 12/31/2023 3 700025 switches 800245 fuses 800347 covers etc.... [A] Purchased 2,000 goods Purchased goods Purchased goods Purchased goods 25 700 280 F07- NET REALIZABLE VALUE TESTING [B] Total inventory value Unit price (Currency (Currency TM/ unit) unit) Ref 10,000 13,500 [B/A=C] 7,000 4,200 5 540 10 15 SL SL SL SL [D] Selling price per unit 33 420 28 Distribution costs? (Currency (Currency TM/ unit) unit) 45 Reference [E] 1 1 1 WAS PARTNERS 1 4 Key to audit tickmarks: Agrees to supporting documentation - sales invoice post year end Obsolescence provision is detailed as follows (refer to the review of inventory obsolescence provision in F08 in GAMX): F07 Allowance Ref Variance needed? [D-E-C] 27 (121) 17 29 No Yes No No Prepared by: LH Date: 2/22/2024 Reviewed by: Date: Amount Comments - (3,025) - A