Acca aa s21 Notes

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Chapter 20
INVENTORY
1. Introduction
Inventory is one of the more involved audit areas. It will usually be material for any business that 
manufactures or sells goods. Remember also that inventory directly affects both the statement of 
financial position (as a current asset) and reported profit (as closing inventory is deducted in 
calculating cost of sales). In particular, the auditor has to check:
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The quantity of the inventory and must make sure that it is properly described. If it’s not 
properly described it is going to be difficult to decide what its value should be as its condition 
has to be assessed. This includes not only its physical condition, but also whether the inventory 
is old and therefore not as saleable, or perhaps there is too much inventory so that it will have to 
written down to net realisable value.
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The value of the inventory. Cost can usually be ascertained by looking at purchase invoices/cost 
records, but there can be considerable disagreement over whether or not the costs are lower or 
higher than the inventory’s net realisable value, and indeed what the net realisable value should 
be.
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Ownership. Just because an item of inventory is in a client’s warehouse doesn’t mean that it is 
owned by the client. It may be third party inventory which is being held there, or the items may 
have been sold but have not been despatched yet.