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HI6008 - Auditing Theory and Practice

   

Added on  2020-03-02

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Running head: AUDITING THEORY AND PRACTICEAuditing theory and practiceName of the studentName of the universityAuthor note

1AUDITING THEORY AND PRACTICEReport to the managing partner of MYHAs per the AASB 102 on valuation of inventories the major issue with the valuationof inventories is the cost that is to be identified and recognized as asset and to be carriedforwarded till the recognition of revenues. As per the standard, the inventories shall bemeasured at net realisable value or cost, whichever is lower. The cost of inventories includesvarious costs like purchase costs, conversion cost and any other cost that are incurred formaking the asset ready for its intended use. The inventory cost may not be recoverable if theinventories or part of the inventories become obsolete or damaged. The inventory cost is notexpected to be recovered if the evaluated expenses of completion or the assessed expenses tomake sales have expanded (Carey, Potter & Tanewski, 2014). The act of recordinginventories below cost to net realisable amount is reliable with the view that benefits shouldnot be carried on in excess of the expected amount of realisation from the sale.If the inventory is overvalued, it will also overstate the net income as well as grossprofit of the company. Further, it will also overvalue the retained earnings, stockholder’sequity, total assets and current asset of the company. The net income as well as the grossprofit is overvalued due to overvaluation of inventory as fewer amounts for cost of goodssold is charged to the revenue (Malaescu & Sutton, 2014). Higher amount for the net profitindicates higher amount for stakeholder’s equity as well as retained earnings. Since theovervaluation of inventory toward the finish of one accounting period turns into the startinginventory of the accompanying time frame, that period’s cost of goods sold will be too highand will bring about the period's net income as well as the gross profit benefit being too low.In the given case, Morgan Fertilisers were carrying high value of inventories in theirbalance sheet while it was successfully taken over by Oasis Ltd. However, after two monthsthey discovered that the inventories of the company were overstated. 50% of the inventories

2AUDITING THEORY AND PRACTICEthose were already being obsolete and were not supposed to be included under the valuationwere counted under the inventory. Further, the other inventories were valued at 35% morethan the actual value. Moreover, though the audit firm MYH correctly valued the stock,finally they accepted the valuation of the management.Physical confirmation of inventories is the duty of entity’s management. It ismanagement’s duty to build up strategies for checking of inventories at least once in a year toestablish a basis for the financial statement preparation. The auditor needs to complete reviewtechniques to get adequate and suitable audit confirmation during his participation at the timeof tallying of physical inventory (Reineking et al., 2013). The auditor is ought to bephysically present to inspect and investigate the inventory and to survey whether the systemsset around by the management to record and control the changes of the checking are beingagreed to and to choose the dependability of such procedures. If the auditor cannot go for theinventory count, he is ought to be available on an optional date and settle on alternativemeasures to evaluate whether the adjustments in the inventories between the year end and thedate of physical count are accurately recorded (Feng, McVay & Skaife, 2014). The auditormust analyze the outward and inward movement of stocks from cut-off date till the physicalcount date for establishing the data validity on the closing date of the year. Further, the auditor shall review the internal control and management’s instructionswith regard to the tagging, stock sheets, re-counting and counting of stocks, identification ofobsolete, slow-moving, rejected or damaged items from the inventories and give appropriateimpact on the financial statement (Onyekwelu & Ugwuanyi, 2014). He shall also consider thecut-off procedures, valuation of the work-in-progress and movement of the inventories.However, where the auditor is not able to obtain the appropriate and sufficient evidence withregard to the condition and existence of inventory and offending process for the physicalcount of the inventory, the auditor shall make the reference in the audit report regarding the

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