Page 172 - CA Inter Audit PARAM

CA Ravi Taori

• Vouch recorded purchases to underlying documentation (purchase requisition, purchase order,
receiving report, vendor invoice, and cancelled check or payment file).
• Examine invoices for evidence of ownership.
• Review consignment agreements.
• Evaluate the consigned goods. Examine client correspondence, sales and receivables records,
purchase documents.
• determine existence of collateral agreements.

Rights and Obligations of Inventory not physically available with us :
• Review material purchase commitment agreements.
• For instances of inventory held by third party, the auditor should insist on obtaining declaration
from the third party on its business letterhead and signed by authorized personnel of that third
party confirming that the items of inventory belong to the entity and are being held by such third
party on behalf of and for the benefit of the entity under audit.

QNO-- Valuation of Inventory As Per AS-2 New Course – (M24E)
AIFS.36.95 Bhaskar CNO – Unique

ABC & Co. are in the business of manufacturing toys. The stock taking process has been done by the
company as on 31.3.2024. The company has used FIFO method for valuation of its inventories. The cost of
inventory as on 31.3.24 is ₹ 25,25,000/- and the net realizable value of the inventory on the same date is ₹
25,24,000/-.

The cost of inventory includes the following:

(1) Material purchase cost - ₹ 25,05,000/-
(2) Allocated transport cost - ₹ 18,000/-
(3) Abnormal wastage - ₹ 2,000/-

The management seeks your advice in arriving at the value of inventory to be shown in the financial
statements of the company. What should be the value of inventory in accordance with AS-2
Answer Value of Inventory: Inventory to be recognized at the lower of cost and net realizable value in accordance
with AS 2 - Inventories. Further, any costs that could not be reasonably allocated to the cost of production
(e.g. general and administrative costs) and any abnormal wastage have been excluded from the cost of
inventory. An acceptable valuation basis (e.g. FIFO, Weighted average etc.) has been used to value inventory
as at the period-end.

In the given situation, ABC & Co. is using FIFO method for valuation of its inventories. Further, cost of
inventory as on 31.03.2024 is rupees 25,25,000 which includes material purchase cost of rupees 25,05,000,
allocated cost of transport of rupees 18,000 and abnormal wastage of rupees 2,000. Net realizable value of
said inventory is ₹ 25,24,000. In view of provisions of AS 2, cost allocated to transport for inventory is relating
to bringing the inventory to the location, thus it will be added in cost of material. However, abnormal
wastage of rupees 2000 should be excluded from cost of inventory.

Thus, cost of inventory will be ₹ 25,25,000 – ₹ 2,000 = 25,23,000 rupees and Net realizable value of inventory
is ₹ 25,24,000.

For valuation in accordance with AS 2, “Inventory”, lower of cost and net realizable value will be considered.
Accordingly, ₹ 25,23,000 to be considered as value of inventory in the given situation.

QNO-- Inventory Completeness New Course – (S24M)
AIFS.36.98 Bhaskar CNO – AIFS-P2.060

Zed Limited is engaged in the manufacturing and export of shoes. The statutory auditor of the company
wants to reasonably ensure that only the inventories recorded in the financial statements are exclusively
owned by the company and do not include any inventories that belong to third parties but includes
inventories owned by the company but lying with third party. Advise the auditor on the audit procedures
to be performed to achieve this assurance.

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