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Hello,
Thank you for answering and maintaining the forum as always.
I wanted to reclarify IAS 2 and goods in transit.
Depending on the point where the transfer of ownership occurs, the buyer might be recognizing the asset when it is shipped from supplier warehouse. Assuming this is the terms and conditions agreed between client and supplier:
If the client had $500,000 of inventories ordered and on the way to arrive in one month’s time after year end, the items would be recognised in ‘Goods in transit’ in current year’s financial statements.
However, as the goods are still in transit, the auditors will not be able to verify the existence of $500,000 by physically visiting or counting the stock.
I don’t personally think it is enough to rely on the agreement between supplier and buyer to confirm the value of the inventory is enough as there could potentially be manipulation of inventories.
I can’t think of a way that we can verify the amount of the inventory if the items are still in transit,.
What are the possible procedures we can do, and is this a matter that should be disclosed in the audit report?
Many thanks!
So the audit client is the buyer, which is recognising GIT in y/e inventory. If the goods are received after the y/e the auditor can inspect then. The supplier may provide external confirmation that they dispatched the goods. If the buyer has legal ownership you would expect supporting documentation like insurance – would you insure an asset that you didn’t own for $0.5 million.
If the audit client has never ever bought anything from the supplier before and the goods haven’t been received by the time the financial statements need to be approved by the directors then yes, there might be cause for suspicion – but this could be a perfectly normal trading activity – and shipping can take months.
The auditor’s report can only report on material matters – so if there is insufficient evidence for the auditor to conclude whether material misstatement exists, the audit reports this with a qualified opinion (do not say “disclose” – keep this term in the context of financial statement disclosure). But if there is no material misstatement, there can be no mention.
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