Auditing inventory obsolescence and write-downs involves assessing the adequacy of inventory valuation and determining whether any inventory
Question:
Auditing inventory obsolescence and write-downs involves assessing the adequacy of inventory valuation and determining whether any inventory items are impaired, obsolete, or likely to be sold below cost. Inventory obsolescence refers to the situation where inventory items become outdated, expired, or no longer in demand, leading to a decline in their value. Write-downs involve reducing the carrying value of inventory to its net realizable value to reflect its impaired value accurately.
Key Audit Procedures:
Review of Inventory Valuation Policies:
Understanding Policies: Auditors review the company's inventory valuation policies to understand how inventory is valued, including cost flow assumptions (e.g., FIFO, LIFO, weighted average), methods for determining obsolescence, and criteria for inventory write-downs.
Assessment of Compliance: Auditors assess whether the company's inventory valuation policies comply with applicable accounting standards (e.g., IFRS, GAAP) and regulatory requirements.
Analysis of Inventory Aging Schedule:
Examination of Inventory Aging: Auditors analyze the inventory aging schedule to identify slow-moving, obsolete, or excess inventory items that may require write-downs or adjustments.
Evaluation of Provision for Obsolescence: Auditors assess the adequacy of provisions for inventory obsolescence by comparing inventory aging data with historical sales trends, market demand, and management's estimates.
Testing of Inventory Impairment:
Sampling of Inventory Items: Auditors select a sample of inventory items for testing impairment, focusing on items with indications of potential obsolescence or decline in market value.
Comparison to Net Realizable Value: Auditors compare the carrying value of selected inventory items to their net realizable value (selling price minus disposal costs) to determine if write-downs are necessary.
Evaluation of Management Estimates:
Assessment of Management's Estimates: Auditors evaluate the reasonableness of management's estimates related to inventory obsolescence and write-downs, considering factors such as market conditions, technological changes, and customer demand.
Documentation of Assumptions: Auditors document the key assumptions and judgments made by management in estimating inventory obsolescence and write-downs and assess their appropriateness.
Objective Question:
Based on the audit procedures for inventory obsolescence and write-downs,find audit procedure involves analyzing the inventory aging schedule to identify slow-moving, obsolete, or excess inventory items?
Auditing A Business Risk Approach
ISBN: 978-0538476232
8th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg