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“scenario: In October, there was a fire in one of the warehouses; inventory of $0.9 million was damaged and this has been written down to its scrap value of $0.2 million.
Audit risk: This write down should have been charged to profit or loss.
If the goods remain unsold after the year?end the scrap value may be overstated. There is a risk of inventory being overvalued.”
Maam i don’t understand why in the audit risk the kit states that “write down should have been charged to SPL”? I mean when we have already reduced the inventory to its NRV then recording a separate impairment loss will mean that 0.7+0.7=$1.4m of the loss will be charged in the SPL, isnt it?
Audit risk is that inventory is overstated and hence profit is overstated.
You are correct that writing closing inventory down to NRV results (automatically) to recognition of expense in profit or loss.
“This write down should have been charged to profit or loss.” is really a statement of fact/conclusion on how it should have been recognised. Per se, it does not explain/describe the risk.