During the audit of HST Ltd., CA Mukund, the auditor, observed a significant volume of unsold electronic parts as inventory that had remained…

CA Intermediate · Auditing and Ethics · MTP · January 2025
During the audit of HST Ltd., CA Mukund, the auditor, observed a significant volume of unsold electronic parts as inventory that had remained stagnant for more than two years. He noted that the company was facing difficulty selling these items due to the changes in the market. Additionally, some parts were damaged, and others were discontinued models. CA Mukund also ensured that the inventory was accurately valued to ensure proper financial reporting. You are required to outline the detailed audit procedures that are generally undertaken when auditing such inventories which at the time of observance of physical counting were noted as being damaged or obsolete.

Suggested Answer and Working Notes:

Follow up for items that are obsolete, damaged, slow moving and ascertain the possible realizable value of such items. Carefully examine the valuation of obsolete and damaged inventory. For the purpose, request the client to provide inventory ageing split and follow up for any inventories which at time of observance of physical counting were noted as being damaged or obsolete. Compare recorded costs with replacement costs.Examine vendor price lists to determine if recorded cost is less than current prices.Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is significantly lower.In manufacturing environments, test overhead allocation rates and ensure that only direct labour, direct material and overhead have been included.Verify the correct application of lower-of- cost-or-net realizable value principles.

Topics: Audit of Items of Financial Statements

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