Inventory Valuation and Audit Negligence

This assignment analyzes a case study involving Oasis Ltd., where auditors failed to detect an error in inventory valuation. The case explores the accepted valuation method by the auditors, despite management overlooking obsolete stock. It delves into the potential negligence of the MYH auditors and its implications for financial reporting accuracy.

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

AUDITING 1
Executive Summary:
This specific study comprises the application of the “American Accounting Association (AAA)”
ethical decision model which clears the ethical reasons related to the given case study. The study
aims to address numerous kinds of ethical and legal issues requiring to be considered at the
Miller Yates Howarth (MYH) audit division. Numerous kinds of recommendations for the study
have also been considered connected to the use of a particular model. The next segment of the
report consists of the relevant case laws as also the equipment for the recommendations for the
management partners of the MYH. The major findings in connection to the Oasis Ltd. found
under huge amount of pressure from the client for completion of the audit within the stipulated
time period is within one month of the mentioned date. This requires to be based on the most
important decision of the court as to the decision to hold the MYH for negligence or not.

AUDITING 2
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:........................................................................4
Comparison of the values and the alternatives:...........................................................................5
Identification of the alternative access of the consequences:......................................................5
Recommended decision:..............................................................................................................6
Answer 2:.........................................................................................................................................6
Report for the managing partners of the MYH:...........................................................................6
Conclusion:......................................................................................................................................8
References......................................................................................................................................10

AUDITING 3
Introduction:
In the year 1916, the “American Accounting Association (AAA)” was founded. It is
considered to be having a reputable and a most important history for possessing a place as
premier accountant community in academia. The different natures of membership are able to
create a culture having collaboration as well as innovation.
The report aims to address different types of legal as well as ethical causes that require to
be considered at the Miller Yates Howarth audit division. The discussed study, needs to posses
the application of the AAA ethical decision model showing the moral issues that are related to
the case study. Several types of recommendations for the study are also thought to be useful for
the model. The other part of the report utilizes the relevant law cases as well as the required
recommendations for the management partners at the MYH.
Answer to question 1:
AAA Model:
Determination of Factual Matters:
The given case associated to the accounting firm, namely MYH, operates most
importantly in Queensland and NSW. The Morgan Fertilizers Pty, is considered to be one of the
most significant and primal clients of the organisation that has its operative aspects located
across the places like Toowoomba as well as Tamworth. It was one of the senior audits, Jacqui
who possessed wisdom relating to the community functions. It was also known for certain that
investigation was been carried out in the Dumparound Limited for the kind of toxic waste at one
of the significant sites (Feng at al. 2014). The waste management contractor to the Dumparound
Ltd. was changed not much long ago by the Morgan Fertilizers.

AUDITING 4
Ethical issue identification:
The line of thought regarding the ethical issues has been majorly found to be based on the
Morgan Fertilizers Party that changed the waste management activities contractor to the
Dumparound Limited. The contract at hand between the Dumparound and the Morgan Fertilizer
does not comprise of any particular sort of requirement regarding the damages. The contract has
not even been signed by the Dumparound as it is considered to be substantially held for 3 years.
Jacqui thinks these implications are a cause of serious concern for him. The chief form of the
principle considerations was raised by Jacqui Leak, who possessed significant knowledge about
the fact that the Dumparound was being searched by the local council in order to understand the
toxic waste level at a specific site.
Important principles, values and rules identification:
Separating the existing ethical issues, the most important legal issue taken under
consideration has been found relevant in connection to the AASB 102 on the basis of the
valuations of the inventory. The relevance of the code under the “APES 110 Code of Ethics for
Professional Accountants” is found to be applicable under the “Section 310 conflicts of
interest”. In connection to the specific rule application the members of the MYH are required to
be supportive of the ethical as well as legitimate objectives in terms of the application as also the
significant procedure in the specific organisation. The cost of valuation needs to be found in case
of the asset and it needs to be moved forward in terms of revenue recognition.
The possible alternatives and their specification:
The most specific criterion of the possible alternative options has been found to be
dependent on the evaluation of the suitable recording of the specific adjustments in the
inventories between the years end as also the physical count dates. Apart from this, the

AUDITING 5
requirement for the auditor to perform analysis of the inward as well outward stock movements
along with the date of the cut off as long as the cut off date is not suitably established along with
the validity of the date based on the closing date of the year (Abernathy et al., 2015).
Comparison of the values and the alternatives:
The comparative study of the values based on the “APES 110 Code of Ethics for
Professional Accountants” application which is found to be genuinely applicable with the
“Section 310 conflicts of interest” vs. “AASB 102 on valuation of inventories”. Based on the
APES application the duty of the member of a particular organisation requires to focus on the
professional indebtedness to conform to the important principles which are actually conflicting
(Doxey et al., 2015). It can further be seen that a particular business member should support the
employer as well as the methods and rules that comprise a significant part of a particular
organisation (Carey, Potter & Tanewski, 2014).
The cost of inventory needs to be further considered in connection or the several
evaluations that focus on the factors including the cost of considering several thoughts reliant on
the cost involved in making the assets ready for use (Gray & Ehoff Jr, 2014). Depending on the
ideas shared in the AASB 102 rulings, the most important characteristics focus on the
measurability of the net reliable cost or the value that needs to be carried forward. Along with
this, the revenue recognition is also considered.
Identification of the alternative access of the consequences:
In cases where the value of the inventory is very highly considered, the net income needs
to be overstated in connection to the company’s gross profit. The retained earnings’
overvaluation needs to be considered (Gaynor et al., 2015). The total asset value, value of equity

AUDITING 6
as well as the current assets possessed by the company might be overvalued along with the
retained earnings.
Recommended decision:
The recommendation of primary importance for the Oasis Ltd. puts the negligence
charged in case of the MYH audit to the forefront. This needs to be the primary decision
however, of the count to tackle the situation in case the m YH is or is not held due to causes of
negligence.
Answer 2:
Report for the managing partners of the MYH:
Based on the deliberations of the AASB 102, focussing on the valuation of the inventory,
the most important issue is concerned with the errors in the inventory valuations at the cost of the
recognised assets as also the carry forwarded values along with the recognition of revenue. The
stock needs to be measured, based on the realisable cost or the value depending on whichever is
lower. The cost of inventory needs to be considered. These are to be done depending on the cost
of conversion, the purchase as well as the cost incurred in making an asset ready for a particular
purpose (Onoja & Abdullahi, 2015). It is necessary to understand that the cost of the inventory
may not be probably recovered in case the portion of the inventory is obsolete or damaged. The
cost of inventory is not recovered as expected if the expenses evaluated based on the sales policy
has been expanded. The most important thought for the recording of the inventory that is below
the cost to the net amount realizable is considered to be reliant in sense that it should not be
carried by the extra amount which is expected from the realisation of the sales (Reineking et al.,
2013).

AUDITING 7
In situations where the stock is overvalued, the net income as well as the gross profit
needs to be overstated. The most important impact will lead to the overvaluation of the necessary
retained earnings, stockholder’s quality as well as the total assets. The net income has also been
valued overtly for the overvaluation of the inventory with lower cost of the sold goods, that
needs to be changed for the revenue (Malaescu & Sutton, 2014). The improved amount of net
profit shows the equity of the stakeholders along with the retained earnings. The time period of
the cost of the goods is to be considered with the CGOS, because this is bound to be extremely
high and is thought to bring the period of the next incomer and also consider the profit to be too
low.Due to the inventory overvaluation, the accounting period has been changed to a time at the
beginning of the inventory to the end of the accounting period unto the starting of inventory
assisted by suitable time frame.
Based on the case of Morgan Fertilizers, it has been seen that a very high amount of value
was carried to the inventories of the balance sheet and taken over successfully by the Oasis Ltd.
After two months elapsed, the company’s stock was overstated. Further, it has been seen that
more than 50% of the stock was out of time and the valuation count inclusion according to the
inventory should have been performed. The different types of inventory were thought to be based
on the real value. The MYH needs to be valued in accordance with the valuation of the stock of
the management (Gu, 2013).
The physical conformation of the inventories is the responsibility of the management and
it is their duty to perform management of the units. The management is also responsible for the
strategic build-up of the strategy of the inventory checking yearly for establishing the financial
statement formulation. In addition to this the auditor is required to do a total review of the
scheme in order to get appropriate and authentic information for the conformation of the audit as

AUDITING 8
well as for tallying the same with the physical inventory. This is performed in order to check the
systems set around the management to show the changes in the procedural accountability. The
auditors can opt for the inventory count of the inventory which is existent according to the
alternative measures as also the adjustments of the inventory with the correctly recorded units
(Onyekwelu & Ugwuanyi, 2014).
The individual also needs to keep in mind that there are certain cut-off techniques for the
valuation of the WIP along with the movement of the inventory (Haribhai-Pitamber & Dhurup,
2014). It is expected that the auditor should the various types of management information as also
the internal control depending on the tagging, recounting of the stock sheets and the
identification of the obsolete and the non-mobile or the rejected items. Based on the general rule,
there is no liability of the auditor towards the clients or the third party. The considerations are as
follows:
 Fallacious fiscal statements
 Intentional or reckless ignorance of a certain untrue fact by the financer
 Errors committed in the preparation of financial accounts
 Auditor negligence
 Intentional financial statement preparation for the third party to take proper action
Based on the case, Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), it has
been found that the corporation gives money to a specific company depending on the audit
report. After the payment default however, Esanda made a claim that the auditors giving a loan
depending upon the audit report that breached the obligatory standards of accounting.

AUDITING 9
Conclusion:
According to collected evidence it can be said that the Oasis Ltd. faced significant client
pressure for the completion of the audit within one month from the balance sheet date.
Depending on the case provided connected to the MYH, the stock verification was performed
correctly by the auditor. The charged negligence in terms of the MYH audit is brought to the fore
by the Oasis Ltd. The auditors also accepted the valuation method. The management did not
consider that the stock was obsolete however.

AUDITING 10
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.

AUDITING 11
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.