Inventory valuation

Inventory valuation is important to the audit of financial statements because inventory maybe material in some industries, for example, the manufacturing industry. Besides, its value will affect the calculation of cost of goods sold and hence, affecting the amount of profit. If it is overvalued, profit will be more likely overstated as well, vice versa. Therefore, the year-end inventory count would be important in determining the value of inventory especially when the control procedures are weak.

Weaknesses

The inventory count instructions were received late just on the day before the count was due to take place. The areas were untidy and inventory was put in different areas, therefore, it was difficult to find. Also, inventory was labeled wrongly. And there were insufficient time for counters to count the inventory properly. Besides, the issue and receipt of inventory sheets was not properly controlled and there are significant differences remained outstanding

Potential consequences

It is possible that there was not enough time for the auditor and counters to prepare for the count. Furthermore, some inventory maybe omitted or counted twice during the count due to the unallocated distribution of inventory. The classifications of inventory may not be correct because of the incorrect labeling. The improper control of inventory sheets may lead to the missing of them. It implies the possibility that some inventory was not counted at all, resulting to the understatement of inventory. Moreover, due to the high value of crystal, fraud may exist more easily with improper control. Finally, the significant variance confirms the misstatement and itself leadings to the misstatement of financial statements.

Recommendations

For current year, to ensure the accuracy and valuation of inventory, the market value and unusual movement may be examined. The inventory sheets that were issued should be reconciled to a list of inventory sheets that have been issued. If certain sheets have been duplicated or omitted, and the amounts are material, it will be necessary to recounting those areas of inventory. If time available is insufficient, more counters may be needed in order to perform the count accurately.

In the future, the instructions should be sent to the auditors and counters on time. Inventory should be properly labeled and put in the allocated area before the count starts. it is also essential for the inventory sheets be properly recorded by pre-numbering and signed with the person in charge to enforce the accountability.

To establish which inventories are worth less than cost at Waterflyer, it will be useful to enquire the client the practice they used to perform to identify inventory that is worth less than cost in prior years. Second, existing market information of the inventory can be get from reports of marketing or sales, or professional valuation etc. And the comparison between the cost and market value of inventory can be performed. Third, the inventory movement records and their conditions should be examined to identify the types of crystal that are not saleable or slow-moving. For example, for those crystals that stay in the warehouse for long time or damaged may be regarded as slow-moving. Also, note should be made whenever any inventory is found to be not saleable and corresponding inspection should be performed to see if the count records show such information.

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