Inventory Valuation and Audit Issues

This case study examines the inventory valuation practices of Oasis Ltd. A critical review is conducted on their stock verification process, including auditor involvement and management's acceptance of the valuation. The analysis highlights potential issues related to pressure for expedited audits and the influence of client demands on audit procedures. Furthermore, it explores the ethical considerations surrounding inventory obsolescence and the reporting of financial information.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary:
The most important considerations of the study is to address several types of ethical as
well as legal issues, that require to be considered at the audit division in the Miller Yates
Howarth (MYH). This particular study will comprise the application of the “American
Accounting Association (AAA)” ethical decision model that clarifies the ethical issues related to
the case study provided. The major findings of the Oasis Ltd. Obtained under huge amount of
pressure from the client for the audit completion within the stipulated period of time has been
within one month from the date mentioned in the balance sheet. The several kinds of
recommendation for the study have also been taken under thought regarding the utility of the
particular model. The next part of the report has put the necessary case law and equipped the
recommendations for the MYH managing partners. This however needs to be based on the main
and primary decision of the court whether MYH should or should not be held for negligence.

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Table of Contents
Introduction:....................................................................................................................................3
Answer to question 1:......................................................................................................................3
AAA Model:................................................................................................................................3
Determination of Factual Matters:...............................................................................................3
Ethical issue identification:..........................................................................................................4
Important principles, values and rules identification:..................................................................4
The possible alternatives and their specification:........................................................................5
Comparison of the values as also the alternatives:......................................................................5
Identification of the alternative access of the consequences:......................................................6
Recommended decision:..............................................................................................................6
Answer 2:.........................................................................................................................................6
Report for the managing partners of the MYH:...........................................................................6
Conclusion:......................................................................................................................................9
References......................................................................................................................................10

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Introduction:
The “ American Accounting Association (AAA)” founded in the year 1916 is found as
having a reputable and most significant history for having a place as a premier community of
accountants in academia. The variety of membership has been capable of creating a culture
where there is collaboration as well as innovation.
The report is aimed at addressing the different types of legal as well as ethical reasons
that need to be taken under consideration at the audit division at the Miller Yates Howarth
(MYH). The different types of recommendations for the study have also been thought about for
the use of the model (Abernathy et al., 2015). The particular study needs to have the application
of the AAA ethical decision model shows the ethical issues which are connected to the related
case study. The next part of the report has used the relevant case laws as also prepared certain
recommendations for MYH managing partners.
Answer to question 1:
AAA Model:
Determination of Factual Matters:
The case provided related to the MYH accounting firm, operates primarily in Queensland
and NSW. The organ Fertilisers Pty, is considered to be one of the most primitive clients of the
organisation which has its operations located across the places namely Toowoomba as well as
Tamworth. The contractor for waste management to the Dumparound Ltd. had been recently
changed by Morgan Fertilizers, It was one of the senior audits, Jacqui who had wisdom
regarding the community activities and also knew for certain that the local council was carrying

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out investigation in the Dumparound Limited for the level of toxic waste at one of the particular
sites.
Ethical issue identification:
The thought processes regarding the ethical issues have been majorly found to be
deployed on the Morgan Fertilizers Party which changed its waste management contractor to the
Dumparound Limited. The existing contract between the Morgan Fertilizer and Dumparound
does not include any sort of specification for any sort of damages. The major form of the ethical
considerations was raised by Jacqui Leak, who had the relevant knowledge of the fact that
Dumparound was being searched by the local council to determine the level of toxic waste at a
particular site. Dumparound has not even signed the contract which is thought to be substantially
held for 3 years and the implications are a cause of serious concern for Jacqui.
Important principles, values and rules identification:
Keeping aside the prevalent ethical issue, the major legal issue that is considered has
been identified with the AASB 102 on the inventory valuations. The valuation cost requires to be
recognised in terms of the asset and the same needs to be carried forward for the recognition of
revenue (Onoja & Abdullahi, 2015). The code relevant under “APES 110 Code of Ethics for
Professional Accountants” is found to be applicable to “Section 310 conflicts of interest”.
Regarding the application of this particular rule, the MYH members are required to support the
ethical as well as legitimate objectives in terms of the application as well as the significant
procedure in the particular organisation.

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The possible alternatives and their specification:
The major specification of the possible alternate options has been found to depend on the
evaluation of the appropriate recording of the adjustments in the inventories between the years’
end as well as the dates of the physical count. Additionally, there is the need of the auditor to
analyse the inward and the outward stock movements with the date of cut off date as long as the
cut off date is not established with the validity of the date based on the years’ closing date
(Gaynor et al., 2015).
Comparison of the values as also the alternatives:
The value comparison is based on the “APES 110 Code of Ethics for Professional
Accountants” application which is found to be applicable with the “Section 310 conflicts of
interest” vs. “AASB 102 on valuation of inventories”. Depending on the APES application the
responsibility of the member to a particular organisation requires to be based on the professional
indebtedness to conform to the fundamental principles that are in conflict. It can further be seen
that a business member needs to support the employer as also the methods and the rules where
are significant as per the organisation.
Depending on the thoughts put forward in the rulings of the AASB 102, the most
important considerations are based on the measurability of the net reliable cost or value which
needs to be carry forwarded along with the recognition of the revenue. The inventory cost
requires to be further considered regarding the numerous evaluation that rely on the factors such
as the cost of considering the various evaluations that rely on the cost involved in making the
assets use ready (Gu, 2013).

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Identification of the alternative access of the consequences:
In situations where the inventory value is highly valued, the net income requires to be
overstated regarding the gross profit of the company. The overvaluation of the earnings retained
requires to be understood as per the retained earnings. The equity value, total asset value as well
as the current assets of the company may be overvalued along with those earnings which have
been retained (Feng et al., 2014).
Recommended decision:
The most important recommendation that has been seen with the Oasis Ltd. Puts to the
fore, the negligence charged in terms of the MYH audit. This however needs to be the primary
decision of the count to deal with the situation on its way where MYH may or may not be held
on cause of negligence (Gray& Ehoff Jr, 2014).
Answer 2:
Report for the managing partners of the MYH:
Depending on the considerations of the AASB 102, on the inventory valuation, the major
issue has been considered with the mistake in the inventory valuations at the cost of the
recognised assets as well as the carry forwarded values with the revenue recognition. There is the
need for the inventory to be measured, depending on the realisable cost or the value, accordingly
as the one which is lower (Reineking et al., 2013). The inventory costs need to considered,
depending on the cost of conversion, the cost of purchase as well as the incurred cost in making
the asset ready for a specific purpose. It requires to be noted that the cost of inventory may not be
possible to be recovered in case the inventory portion is damaged or obsolete (Malaescu &
Sutton, 2014). The cost of inventory is not recovered as expected if the evaluated expenses

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regarding the sales policy have been expanded (Doxey et al., 2015). The major consideration for
the inventory recording below the cost to the net realizable amount is considered to be reliable by
nature that should not be carried by the extra amount expected from the sales realisation.
In cases where the inventory is overvalued, the net income as well as the gross profit
requires to be overstated. The major impact will lead to the overvaluation of the retained
earnings, total assets as well as the stockholder’s equity. The net income has also been valued
overtly for the inventory overvaluation with fewer cost of goods sold, that need to be changed for
the revenue. The improved profit amount of the net profit shows the stakeholders’ equity as also
the retained earnings. Because of the overvaluation of inventory the period of accounting has
been changed to the period at the beginning of the inventory towards the end of the period of
accounting turning onto the starting of inventory accompanied by the suitable time frame. The
time period of the cost of the goods needs to be considered with the CGOS, as this is bound to be
too high and is considered to be able to bring the period of the next income and also consider the
profit to be too low (Haribhai-Pitamber & Dhurup, 2014).
According to the case of Morgan Fertilizers, it has been seen that a high amount of value
was carried to the inventories in the balance sheet and successfully taken over by the Oasis Ltd.
Despite this, after the elapse of two months, the company’s inventory was overstated. Further, it
has been seen that more than about 50% of the inventory was out of time and the inclusion of the
valuation count according to the inventory should not have been done. The various type of
inventories were thought to be based on the actual value. MYH should be valued in accordance
with the stock valuation of the management (Onyekwelu & Ugwuanyi, 2014).

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The physical conformation of the inventories is the management authorities’
responsibility as well as their duty to manage the units. The management is also responsible for
building the strategy of the inventory checking yearly for establishing the financial statement
formulation. Further, the auditor is required to do an entire review of the method to get suitable
and genuine information for the audit conformation as well as for tallying the same with the
physical inventory. There is a requirement for the auditor to be physically present for the
investigation and inspection of the inventory. This is done in order to check the systems set
around the management to record changes in the accountability of the procedures. The auditor
can opt for the count of the inventory which is present as per the alternative measures as well as
the inventory adjustments in the inventory with the count of the accurately recorded units (Carey,
Potter & Tanewski, 2014).
The auditor is required to review the different types of the management information as
well as the internal control in terms of the tagging, recounting stock sheets as also the
identification of the obsolete as well as the non-mobile or the rejected items. The person also
needs to consider the cut-off techniques for the WIP valuation along with inventory movement.
According to the general rule, there is no liability of the auditor towards the clients or the third
party. The third party consideration is shown as:
 Untrue financial statements
 The intentional or reckless ignorance by the financer of a certain untrue fact
 Committed errors in the final accounts preparation
 Negligence by the auditors
 Intentional preparation of the financial statement for the third party to take proper action

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According to the case Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), it
has been seen that the corporation lends money to a particular organisation based on the audit
report. After the default of payment however, a claim was made by Esanda to the auditors
providing a loan based on the audit report that breached the mandatory standards of accounting.
Conclusion:
Oasis Ltd. brings forward the charged negligence in terms of the MYH audit. According
to the provided case of the MYH, the verification of the stock was done correctly by the auditor;
the valuation was also accepted by them. The management however did not consider the stock to
be obsolete. Evidence reveals that the Oasis Ltd. was under significant client pressure for the
audit completion within one month from the date of balance sheet.

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References
Abernathy, J., Hackenbrack, K. E., Joe, J. R., Pevzner, M., & Wu, Y. J. (2015). Comments of the
Auditing Standards Committee of the Auditing Section of the American Accounting
Association on PCAOB Staff Consultation Paper, Auditing Accounting Estimates and
Fair Value Measurements: Participating Committee Members. Current Issues in
Auditing, 9(1), C1-C11.
Carey, P., Potter, B., & Tanewski, G. (2014). AASB Research Report No.
Doxey, M. M., Geiger, M. A., Hackenbrack, K. E., & Stein, S. E. (2015). Comments by the
Auditing Standards Committee of the Auditing Section of the American Accounting
Association on PCAOB Release No. 2015-004, Supplemental Request for Comment:
Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form:
Participating Committee Members. Current Issues in Auditing, 10(1), C1-C10.
Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over
financial reporting affect a firm's operations? Evidence from firms' inventory
management. The Accounting Review, 90(2), 529-557.
Gaynor, G., Janvrin, D. J., Pittman, M., Pevzner, M., & White, L. (2015). Comments of the
Standards Committee of the Auditing Section of the American Accounting Association
on IESBA Consultation Paper Improving the Structure of the Code of Ethics for
Professional Accountants.
Gray, D., & Ehoff Jr, C. (2014). Lower Of Cost Or Market Inventory Valuation: IFRS Versus
US GAAP. Journal of Business & Economics Research (Online), 12(1), 19.

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Gu, S. (2013). Research and analysis on issued inventory valuation methods of
enterprises. Balance, 50, 541-544.
Haribhai-Pitamber, H. U., & Dhurup, M. (2014). Inventory control and valuation systems among
retail SMEs in a developing country: An exploratory study. Mediterranean Journal of
Social Sciences, 5(8), 81.
Malaescu, I., & Sutton, S. G. (2014). The reliance of external auditors on internal audit's use of
continuous audit. Journal of Information Systems, 29(1), 95-114.
Onoja, E. E., & Abdullahi, Y. U. (2015). Inventory Valuation Practices and Reporting: Nigerian
Textile Industry Experience. Mediterranean Journal of Social Sciences, 6(4), 74.
Onyekwelu, U. L., & Ugwuanyi, U. B. (2014). Effects of IFRS adoption on inventory valuation
and financial reporting in Nigeria. European Journal of Business and Management, 6(8),
29-34.
Reineking, C., Chamberlain, D. H., Rudolph, H. R., & Smith, M. (2013). An examination of
inventory costing convergence under generally accepted accounting principles and
international financial reporting standards.