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Hi,
May I be clarified with this. The audit risk is: Selling prices of goods are heavily discounted and this may mean that inventory is overstated if the NRV of goods had fallen below cost?
The Auditor’s response is: Obtain a breakdown of cost of a range of inventory items and compare these to the sales prices achieved for such items to determine whether the selling price is above cost.
I Cannot understand the relationship between the discount and inventory is overstated. Thanks in advance.
Put some easy numbers to this. Suppose a product costs $50, the mark-up (i.e. on cost) is 100% and selling/distribution cost (e.g. postage and packaging is $5).
The net realisable value is $95 ($100 – $5) – clearly greater than cost – so no problem.
We don’t know what a “heavy” discount is – but presumably it doesn’t mean just 5-10%. Suppose it’s 50% (i.e on selling price).
Now the NRV is $45 (50% x 100 – 5) – which is less than cost. So an allowance would have to be made to write-down the inventory.
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