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Inventory valuation

Forums › ACCA Forums › ACCA AA Audit and Assurance Forums › Inventory valuation

  • This topic has 2 replies, 3 voices, and was last updated 5 years ago by Kim Smith.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • November 5, 2019 at 9:29 am #551588
    iza1
    Participant
    • Topics: 115
    • Replies: 112
    • ☆☆☆

    A company conducted the inventory count on the last day of this year.
    $1000 of clothes were not included during inventory count as GDNs were raised. But these goods were despatched only next day as the pickup of goods didn’t arrive. The invoices for this sale was included in the next periods first day on the sales day book . What must be done now to remove any error in FS ?

    1. Do nothing as everything is recorded
    2.add the sales invoices into the sales day book of this year
    3. Include the clothes back to inventory at year end and include sale in sales day book of this year
    4.inlcude clothes back to inventory at year end at selling price.

    I understand that first and last option is wrong. Can’t include it at selling price as it’s not sold yet so must adhere to lower of cost and nrv.

    Answer is 2 but I don’t understand why
    Also why is 3rd wrong ?

    November 5, 2019 at 3:16 pm #551604
    boychenkove
    Participant
    • Topics: 16
    • Replies: 92
    • ☆☆

    “Make a note of the last few goods received noted and dispatch notes of the year. This will be
    used later in cut-off tests.” Lecture notes, page 94.

    GDNs were issued in the reporting period, so sales should be recorded in the reporting period.

    November 5, 2019 at 6:03 pm #551618
    Kim Smith
    Keymaster
    • Topics: 135
    • Replies: 8308
    • ☆☆☆☆☆

    Hi Izabel

    I do not see the source of the Q but this is how I see it. There is an error because the clothes are:
    – NOT included in inventory (at cost)
    – NOT included in revenue/receivables (at selling price)

    There has to be an asset – inventory or receivable. I think because it says “the pickup of goods didn’t arrive” that we assume that this was down to the customer and therefore the sale was on the last day of the year – so:
    – exclusion from inventory is correct
    – the sale – revenue/receivables – must be recognised in the current period.
    This is consistent with the response above but it is not, from an auditing perspective, simply because the GDN was issued. If the pick-up didn’t happen due to some “fault” of the COMPANY (or it’s delivery contractor) – it would not be correct to regard it as a sale simply because the GDN “has been raised”. Consider if lots of GDNs were raised and goods set aside sales/profit could be materially overstated (in which case the auditor would be asking management to correct the “cut-off” error by including the goods in inventory as at the reporting date.

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