The following is a copy of the auditor’s working paper for auditing inventory balances for the client New Millennium Ecoproducts. It shows the details of the net realizable value (NRV) tests. 

Required 

(a) Why does an auditor test for NRV? 

(b) Find the details of the inventory items selected for NRV testing. What is a “key item”? Explain how the auditor has decided whether or not 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?

Transcribed Image Text:

New Millennium Ecoproducts CLIENT: EY Period-end: Dec. 31, 2016 $ 000 F07 - NET REALIZABLE VALUE TESTING Currency/unit: Reference FO7 [D - E - C] [A] [B] [B/A=C] [D] [E] Selling price per unit Distribution Unit price costs? Sample number Item code Description Quantity Total stock value in stock (Currency unit) (Currency unit) TM/Ref (Currency unit) (Currency unit) TM/Ref Variance needed? (Currency 000) Comments Allowance Amount Category Key item 700025 Purchased goods 2,000 switches 10,000 SL 33 27 No etc... Representative sample Purchased goods routers 13,500 (3,025) 701442 25 540 SL 420 (121) Yes 800245 fuses 800347 covers Purchased goods 3 440 7,000 16 SL 28 11 No Purchased goods 288 4,200 15 SL 45 29 No etc.... Key to audit tickmarks: v Agrees to supporting documentation – sales invoice post year end * Obsolescence reserve is detailed as follows (refer to the review of inventory obsolescence reserve in F08 in GAMX): Value ($000) Item 701442 ЗА 233999 50 234567 49 987239 50 Total 152 F-Lead Comments: v None (No error detected, exception noted was correctly provided for by the company.)