In auditing a client’s inventory, the auditors must be concerned with the detection of goods that...

In auditing a client’s inventory, the auditors must be concerned with the detection of goods that are both damaged and obsolete.

Why are the auditors concerned with detecting damaged and obsolete goods?
How do the auditors test for obsolete goods in the client’s inventory?

Expert Solution

a. The auditors are concerned with detecting damaged and obsolete goods because the net realizable value of these damaged and obsolete goods may be significantly lower than the book value / recorded value of these goods. Thus, non-detection of these damaged and obsolete goods would amount to misrepresentation of value of stock in the financial statements of the organization.

b. In order to test for obsolete goods in client's inventory, the following steps may be taken:

1) The auditor should review the records of perpetual inventory. This would enable the auditor to identify the closing stock.

2) The auditor should apply analytical procedures and calculate some ratio such as the Inventory Turnover ratio. This would help the auditor to identify the number of times inventory has been replaced by the organiation during the given period of time. This would in turn also help in identifying the days for closing inventory.

3) The auditor should make the inquiry of client's personnel. This would help the auditor to identify the internal controls in place. This would also help the auditor to also check the documentation and other related activities done for stock in hand.

ekkarill92 answered 1 year ago

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