- 15 Marks
AA – May 2019 – L2 – Q7 – Audit Evidence
Discussion on the importance of closing inventory to auditors, risks of misstatement, and constituents of inventory valuation.
Question
For many businesses (except service organizations), inventory is one of the areas that needs most attention from the auditor. Hence, audit work on inventory is often given to more experienced members of the audit team who will subject the work to a more rigorous review and quality control. In addition, IAS 2 requires that inventory should be valued at the lower of cost and net realizable value on an item-by-item basis.
You are required to:
a. Briefly explain SIX reasons why closing inventory is very important to the auditor. (6 Marks)
b. Explain FIVE principal risks of misstatement associated with closing inventory. (5 Marks)
c. Identify the constituents of cost and net realizable value in an inventory valuation exercise. (4 Marks)
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