CD Manufacturing Ltd., engaged in the production and trading of consumer goods, has significant inventories comprising finished goods and goods held…

The auditor should perform the following audit procedures for valuation of finished goods and goods for resale: Enquire as to what costs are included, how these have been established and ensure that the overheads included have been determined based on normal costs and appear reasonable in relation to the information disclosed in the financial statements.Ensure that inventories are valued at net realizable value if they are likely to fetch a value lower than their cost. For any such items, also verify if the relevant semi/partly processed inventories (work in progress) and raw materials have also been written down.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 this purpose, request the client to provide inventory ageing analysis and follow up for any inventories which were noted as damaged or obsolete during physical verification.Compare recorded costs with replacement costs to identify any significant variations.Examine vendor price lists to determine if recorded cost is less than current prices.Calculate inventory turnover ratio. Obsolete inventory may be indicated if the ratio is significantly lower.In manufacturing environments, test overhead allocation rates and ensure that only direct labour, direct material and appropriate overheads have been included.Verify the correct application of the principle of lower of cost or net realizable value. Thus, the auditor should ensure that inventory is properly valued at lower of cost or net realizable value and that adequate provisions are made for obsolete, damaged and slow-moving items to present a true and fair view of the financial statements.