ABC Corporation, a manufacturing company, maintains a large inventory of raw materials, work-in-progress (WIP), and finished goods. As part of their annual audit, the auditors are tasked with assessing the risk of inventory obsolescence and ensuring proper valuation through write-downs where necessary.

1. Inventory Assessment: The auditors begin by assessing the company's inventory management practices, including policies for categorizing inventory items, tracking usage, and identifying potential obsolescence risks. They review inventory records, including inventory aging reports, to identify slow-moving or obsolete inventory items.

2. Evaluation of Market Conditions: Auditors consider external factors such as changes in market demand, technological advancements, and industry trends that may impact the salability and value of inventory items. They analyze sales forecasts, customer demand data, and industry reports to assess the likelihood of inventory obsolescence.

3. Review of Inventory Valuation: Auditors evaluate the methods used by ABC Corporation to value its inventory, such as the lower of cost or market (LCM) method or the net realizable value (NRV) method. They verify the accuracy of cost allocations, including direct costs, overhead expenses, and inventory carrying costs.

4. Identification of Obsolete Inventory: Auditors identify obsolete inventory items based on criteria such as physical condition, usage patterns, sales history, and technological relevance. They inspect inventory storage facilities and conduct physical inventory counts to assess the condition and salability of inventory items.

5. Assessment of Write-Downs: If auditors identify obsolete inventory items, they assess the need for write-downs to reflect the lower of cost or market value. They calculate the amount of write-down required to adjust inventory carrying values to their estimated net realizable values, ensuring compliance with accounting standards.

Objective Type Question:

In auditing inventory obsolescence and write-downs, auditors primarily focus on:

A) Identifying obsolete inventory items
B) Maximizing inventory turnover ratios
C) Increasing inventory carrying values
D) Minimizing cost of goods sold

 

Answer rating: 100% (QA)

A Identifying obsolete inventory items Auditors primarily focus on identifying obsolete inventory i... View the full answer