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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

During the audit of Sundaram Engineering Ltd, the auditor attends the physical inventory count on 31 March. Management count sheets show that a lot of finished goods appears damaged and dusty in a corner of the warehouse, but the stock records carry it at full cost. What is the most appropriate audit response?

The auditor should note the damaged goods seen at the count and test whether net realisable value is below cost, for instance using subsequent selling prices. Inventory must be valued at the lower of cost and NRV, so the observation cannot be ignored or automatically written off in full.

  1. AIgnore it as obsolescence is a matter for management alone
  2. BRecord the observation and evaluate whether net realisable value is lower than cost, testing subsequent selling pricesCorrect
  3. CReduce the sample size of other inventory tests since this lot is identified
  4. DInsist that the lot be written off completely

Explanation

Under AS 2, inventory is valued at the lower of cost and net realisable value. The auditor should note the condition during the count and obtain evidence of NRV, for example post year-end sales prices or scrap values. The auditor does not decide the write-off figure unilaterally, and the issue is not a reason to reduce testing. Ignoring it risks overstated inventory.

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