(e)
(ii) Appropriate procedures to determine that net realisable value of book inventory is above cost would include:
(1) Assessment of estimated proceeds from the sale of items of inventory. Sales price in the period following the year-end is one important element of net realisable value. Procedures to determine sales prices include:
– Obtain actual sales prices by reference to invoices issued after the year-end and determine that the sales were genuine by vouching sales invoices to orders, despatch notes and subsequent receipt of cash.
– If actual sales prices are not available, the auditor should obtain estimated sales prices from management. It would be necessary to assess how reasonable these estimated prices were. The auditor might be aided in this respect by reviewing the reports from sales staff backed up by discussions with management.
– Particular attention should be paid to sales prices of books identified as slow-moving. (Tutorial note: Slow- moving books might be identified by obtaining lists of sales made in the preceding (say) six months and reviewing reports from sales staff. The sales statistics would also be useful in this respect.)
– For damaged books disposal price may be nil or very low and the auditor should examine records of disposal of such books in the past. (Tutorial note: Damaged books should have been identified during the inventory count.)
(2) Determine estimated costs to completion. These costs represent another important element of net realisable value.
Relevant procedures include:
– Some books may still be in production and will initially be included in inventory at cost to date; for example, they may have been printed but not bound. The auditor should examine production budgets and actual costs (for binding, for example) to determine actual costs to completion. (Tutorial note: It is not uncommon for publishers to print books but leave them unbound until sales in the immediate future are expected.)
– Books returned may incur extra costs before they can be made ready for resale and the auditor should examine cost records to obtain a reasonable estimate of such costs.
(3) Determine costs to be incurred in marketing, selling and distributing directly related to the items in question.
– In general terms the auditor may determine the percentage relationship between sales and selling and distribution expenses.
– However, the distribution costs of heavy books are likely to be higher than for (say) light paperback books and the auditor should assess whether the cost weighting is reasonable.
(4) All of the above matters should be discussed with management bearing in mind that, although they represent an internal source of evidence, they are the most informed people regarding the sale ability of books on hand and regarding determination of the various elements of net realisable value.
(5) Discuss with management the need for an inventory provision for slow moving and/or obsolete books.
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