Question

If you are auditing inventory, what accounting standard will be relevant to you before starting the audit? Are there different categories within inventory? If so, list them.

Answer 1

An inventory audit is an analytical procedure that cross-checks if financial records match inventory records, or the count of physical goods. Inventory audits don’t have to be done by auditors, but it helps to have an experienced auditor run through your finances to confirm your stock counts are accurate

Accounting Standard relevant to us before starting the audit are as follows-

1. IAS 2 - It provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by:

• specific identification of cost for items of inventory that are not ordinarily interchangeable; and
• the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable (generally large quantities of individually insignificant items).

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs.

Yes, there are different types of inventory which are as follows:

1. Raw Materials-

Materials that are needed to turn your inventory into a finished product are raw materials. For example, leather to make belts for your company would fall under this category. Or if you sell artificial flowers for your interior design business, the cotton used would be considered raw materials.

2. Work-In-Progress-

Inventory that is being worked on is Work-In-Progress (WIP), just like the name sounds. From a cost perspective, WIP includes raw materials, labor, and overhead costs. Think of the inventory under this category as being a part of the bigger end-product picture. If you sell medical equipment, the packaging would be considered WIP. That’s because the medicine cannot be sold to the consumer until it is stored in proper packaging. It’s literally a work-in-progress.

3. Finished Goods-

Maybe the most straight-forward of all inventory types is finished goods inventory. That inventory you have listed for sale on your website? Those are finished goods. Any product that is ready to be sold to your customers falls under this category.

4. Overhaul / MRO-

Also known as Maintenance, Repair, and Operating Supplies, MRO inventory is all about the small details. It is inventory that is required to assemble and sell the finished product but is not built into the product itself. For example, gloves to handle the packaging of a product would be considered MRO. Basic office supplies such as pens, highlighters, and paper would also be in this category.