December 2012 #3 (b)

Are these risks and responses correct?

– Inventory is valued at SP – Avg. profit margin (Cost) instead of the lower of cost and NRV (IAS 2). The risk is that inventory and profit would be overstated as inventory is only valued at cost and not the lower of cost and NRV. Many items in supermarkets are slow moving or damaged and require writing down to NRV. Again, if not valued per IAS 2, inventory and profit will be overstated.

During the inventory count, I will examine the condition of goods and identify slow moving items. Then I will request mgmt. to write down these goods to NRV as it will be lower than cost.

– All a/c records have been centralised within the head office in 2012.
The risk is that there might have been problems in centralising the client’s a/c records and therefore the opening balances can be brought forward incorrectly resulting in the FS being materially misstated.

I will select a sample of opening balances from each supermarket a/c records and ensure the correct amount in included in the centralised records.

Will I loose marks?