Inventory Audit and Financial Reporting

This assignment examines a case study about an inventory audit conducted by MYH for Oasis Ltd. It delves into the auditor's procedures, including physical verification, valuation methods, and consideration of obsolescence. The analysis covers the adequacy of evidence gathered, potential conflicts arising from client pressure, and the implications for financial reporting accuracy. Students are tasked with evaluating the auditor's actions, identifying potential issues, and recommending improvements to ensure reliable financial statements.

Running head: AUDITING THEORY AND PRACTICE
AUDITING THEORY AND PRACTICE
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The main interpretation of the study is intended to address the legal and the ethical issues which
need to be considered by the audit division at Miller Yates Howarth (MYH). The main
consideration of the study will consist of application of “American Accounting Association
(AAA)” based on the ethical issues and the decision models. The recommendations of the study
have shown an effective use of the model. The final section of the study has been seen with the
relevant application of the case laws which has been prepared as per the recommendations made
by the managing partners at MYH. The considerations of the ethical issues have been considered
as per the activities of Morgan Fertilisers Pty, who has changed its contractor to the Dumparound
Ltd. for management of waste. The ethical concern has been considered as per the investigation
made by Dumparound Ltd. for waste management at one of the sites. The contract made between
Dumparound and Morgan Fertilisers is seen to be investigated by the local council norms and the
toxic level in one of the sites. The contract between Morgan Fertiliser and Dumparound has not
been able to specify for any damages and has not been signed by Dumparound Ltd. The main
aspect of the contract is held substantially for last 3 years and has concerning issues for Jacqui.

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Table of Contents
Introduction......................................................................................................................................3
Answer to Question1.......................................................................................................................3
Answer to Question 2......................................................................................................................6
Conclusion.......................................................................................................................................8

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Introduction
“American Accounting Association (AAA)” incorporated in 1916, is seen to be having a
reputable and rich history for holding premier community of the accountants in academia. The
diversity among the membership has been able to create an environment with appropriate
innovation and collaboration.
The study is intended to address the legal and the ethical issues which need to be
considered by the audit division at Miller Yates Howarth (MYH). The main consideration of the
study will consist of application of “American Accounting Association (AAA)” based on the
ethical issues and the decision models. The recommendations of the study have shown an
effective use of the model. The final section of the study has been seen with the relevant
application of the case laws which has been prepared as per the recommendations made by the
managing partners at MYH.
Answer to Question1
AAA Model
Determination of Facts
The given case is considered as per the consideration made by the MYH accounting firm.
This is seen to mainly operate in NSW and Queensland. Morgan Fertilisers Pty has been further
considered to be long standing client with the operations located in Tamworth and Toowoomba.
Morgan Fertilisers has gone through recent changes as the contractors for the waste management
has been changed to Dumparound Ltd. Jacqui Leaks one of the senior auditor has been seen to be
having the knowledge about the community activities and she has been seen to be having the

4AUDITING THEORY AND PRACTICE
knowledge about the local council investigating norms in the toxic waste in one of the sites
(Azahari, 2013).
Identification of ethical issues
The considerations of the ethical issues have been considered as per the activities of
Morgan Fertilisers Pty, who has changed its contractor to the Dumparound Ltd. for management
of waste. The ethical concern has been considered as per the investigation made by Dumparound
Ltd. for waste management at one of the sites. The contract made between Dumparound and
Morgan Fertilisers is seen to be investigated by the local council norms and the toxic level in one
of the sites. The contract between Morgan Fertiliser and Dumparound has not been able to
specify for any damages and has not been signed by Dumparound Ltd. The main aspect of the
contract is held substantially for last 3 years and has concerning issues for Jacqui.
Identification of major principals and rules, values
The existing ethical and the legal concern have been considered as per “AASB 102 on
valuation of inventories”. The cost of valuation needs to be recognized as per the asset and this
needs to be carried forward for recognition of the revenue. The main applicable code has been
seen to be “APES 110 Code of Ethics for Professional Accountants” is applicable as per
“Section 310 conflicts of interest”. The application of the rule has shown that MYH members
are expected to extend the support for ethical and legitimate objectives and apply relevant
procedure in the organization (BIRD & OROZCO, 2014).
Specification of the alternatives

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The alternative specification has been evaluated as per the adjustment of the inventories
and this has been adjusted in the inventories as per the years end and the dates of physical count.
Furthermore, the auditor is required to analyze the inward and the outward movement of stocks
with the cutoff date and established the validity date as per the closing year date (Nelson, Proell,
& Randel, 2016).
Comparison of values and alternatives
The values have been compared based on the “APES 110 Code of Ethics for
Professional Accountants” vs. “AASB 102 on valuation of inventories”. The application of the
APES rules of the membership has been seen with the responsibility of the employing the
organization as per the professional obligations and comply with the various types of the
fundamental principles. The member in the business needs to support the procedures and the
rules appropriate to the organization.
The important consideration for the AASB 102 rulings has been based in terms of
measuring the net realizable value and the cost of asset and these needs to be carried forward
with the recognition of the revenue. The inventory cost has been based on the evaluations and the
reliable factors of the cost in making the assets ready for use.
Identification of the alternatives access the consequences
The inventory value is seen to be overvalued and the various types of the income needs
are overstated in the gross profit of the company. The overvaluation has been further seen to be
take place in the retained earnings. The various types of the consideration for the equity and the
total assets may be seen to be overvalued as per the retained earnings.

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Recommended Decision
The recommendation for Oasis Ltd has brought forward the negligence which has been
charged during the conduction of audit at MYH. It needs to further base on the sole consideration
to deal with the way MYH may or may not held for the issue of negligence.
Answer to Question 2
Report for the managing partners of MYH
The various types of the considerations as per “AASB 102 on valuation of inventories”
has been identified as main issue and the error in the inventory valuation is based on the cost of
the asset recognized or the total value whichever is lower. The inventory cost needs to be based
on the cost of purchase, conversion cost and the cost incurred in making of an asset which is
ready with a specified purpose. The inventory cost may or may not recovered as per the
inventories which are seen to be obsolete or damaged. It has been further observed that the
inventory cost has not been recovered based on the evaluated expenses and assessed the expenses
based on the sales policy expansion. The important consideration for recording of the inventory
is below the cost of the net realizable amount which is seen to be reliable in nature. This should
not be carried with the excess amount of the expected realization of the sales amount.
The inventory is seen to be overvalued with the net income and the gross profit needs to
be overstated. The important consideration has been further seen to be considered as per the
overvaluing of the equity of stockholder, retained earnings and amount of net profit. The
overvaluation of the inventory has been further seen to be considered as per the starting period of
the accounting year and the same has been seen to be considered as per the accompaniment of

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the time frame. The cost of goods needs to be considered as per the COGS will be high and the
period of the net income and gross profit is considered to be too low.
As per the Morgan Fertilisers case, the carrying value of the inventory has been
considered to be particularly high based on the inventory value which has been depicted in the
balance sheet of the company. 50% of the inventory has been further considered to be obsolete
and this has been not supposed to include the valuation of the inventory. The different types of
the considerations made for the inventory has been further seen to base on the actual value.
MYH stock valuation needs to be taken into consideration by the management.
The case of Morgan Fertilisers is considered as per the high inventory value and the
values which have been taken into the consideration in the balance sheet of Oasis Ltd. Despite of
the varying nature of the considerations, after two months the inventory value of the company
has been seen to be overstated. More than 50% of the inventory has been also considered as
obsolete in nature and this has been further seen to be obsolete and not included in the valuation
of the inventory.
The physical confirmation of the inventories has been considered as the responsibility of
the management. The duty of the management has been further seen to be considered as per the
checking of the inventories once in every year and this has been seen to be conducive in the
establishment of the financial statement. The auditor needs to consider the evaluation with the
complete review of the technique and get acquainted to the adequate and suitable audit
confirmation, which is comparable with the physical inventory. The auditor needs to be present
physically with the inspection and the investigation of the inventory to check the systems around
the management to record the changes based on the dependability of the procedures. The auditor

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cannot opt for the inventory count which is seen to be available as per the alternative measures
for the inventory adjustments in terms of the date of count and accurate recording of the same.
The auditor needs to review the management information and the internal control with
the various considerations of the tagging, identification of the obsolete and non moving items.
The auditor needs to consider the various types of the cut off procedures for the valuation of the
WIP and the movement in the inventory. The various types of the third party considerations are
depicted below as follows:
 The financial statement is not seen to be true in nature
 The auditor has been recklessly ignoring the fact and considering the same to be untrue
 The errors has been committed while preparation of the final accounts
 There has been certain amount of negligence on part of the auditor employer
The main applicable case has been seen to be done based on “Esanda Finance Corporation
Ltd v Peat Marwick Hungerfords (1997)”. The main observation has shown that the corporation
has lent money as per the audit report. The default in the payment has been observed with
Esanda claiming to the auditors to provide the loans as per the audit report and the breaches
made in the accounting standard (Wang & Cuthbertson, 2015).
Conclusion
The given case has been able to show that MYH has verified the stock appropriately. It
has been also seen that they have been able to approve the valuation and did not consider the
obsolescence for stock. The different types of the evidence has been further able to depict that

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Oasis Ltd. has been included for significant pressure which has been considered by the client
based on the completion of the audit process with the limited nature of the time. The completion
of the audit process has been further seen to be considered from the balance sheet of the
company. The various considerations of the report has been also able to depict that Oasis Ltd
should bring forward the significant negligence with the audit of MYH.

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Reference List
Azahari, F. (2013). Shariah Audit in a Legal Process: Future Growth in Specialised Skills.
Malayan Law Journal, 6(xciii), 1–18.
BIRD, R. C., & OROZCO, D. (2014). Finding the Right Corporate Legal Strategy. MIT Sloan
Management Review, 56(1), 81–89. Retrieved from
http://www.redi-bw.de/db/ebsco.php/search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=98547057&site=ehost-live
Nelson, M. W., Proell, C. A., & Randel, A. E. (2016). Team-oriented leadership and auditors’
willingness to raise audit issues. Accounting Review. https://doi.org/10.2308/accr-51399
Wang, T., & Cuthbertson, R. (2015). Eight Issues on Audit Data Analytics We Would Like
Researched. Journal of Information Systems, 29(1), 155–162. https://doi.org/10.2308/isys-
50955