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Hellow sir, I would like to ask about NRV testing. Why auditors want to check after year-end sales invoice to assess nrv? why not before year end?
And I notice that auditor would want to inspect after year end documents in most cases. Can you explain to me why? Thank u sir.
Because if it’s sold before the year end its in revenue not inventory (!)
Sale proceeds after the year end confirms what the inventory is capable of realising (before selling/distribution costs).Consider for example a department store sells shirts for $45 in December and the year end is 31st December. The shirts not sold at 31st December are available for sale in January at $25. If they cost $30 to manufacture, their realisable value at 31 December is $25.
Ooo, okay got it! And I have another one question.
Auditor inspects post year-end sales invoice if the damaged/slow-moving inventory had been sold. Right?
What if after y/e , the damaged/slow – moving inventory still not yet sold. What is the best evidence that auditor could obtain to do NRV testing?
It would depend on the nature of inventory and industry. In fashion retail – if it doesn’t sell in the end of season sale it’s not going to come out again the following season. (According to a recent FT report only about half of clothes sell at full retail price and the remainder are discounted.) So most likely it will be got rid of in some way – perhaps in a “final clearance” sale it might be discounted 90% – but beyond that it’s just be scrap value – or might be donated to charity (abroad) – or even shamelessly burnt or dumped (!)
The auditor should know what is done with it (from understanding the business and its environment) and there will be evidence of NRV of last year’s unsolved inventory in this year’s current audit – e.g. y./e 31 Dec 2018 – goods still in inventory when audit signed off in April 2019, but what happened to that inventory during the year to December 2019? How good was management’s estimate of NRV?
For perished food stuffs the answer is easy – $0!!!
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