(d) Substantive procedures to confirm valuation of inventory
– Select a representative sample of goods in inventory at the year end, agree the cost per the records to a recent purchase invoice and ensure that the cost is correctly stated.
– Select a sample of year end goods and review post year end sales invoices to ascertain if NRV is above cost or if an adjustment is required.
– For a sample of manufactured items obtain cost sheets and confirm:
– raw material costs to recent purchase invoices
– labour costs to time sheets or wage records
– overheads allocated are of a production nature.
– Review aged inventory reports and identify any slow moving goods, discuss with management why these items have not been written down.
– Compare the level/value of aged product lines to the total inventory value to assess whether the provision for slow moving goods of 1% should be reinstated.
– Review the inventory records to identify the level of adjustments made throughout the year for damaged/obsolete items.
If significant consider whether the year end records require further adjustments and discuss with management whether any further write downs/provision may be required.
– Follow up any damaged/obsolete items noted by the auditor at the inventory counts attended, to ensure that the inventory records have been updated correctly.
– Perform a review of the average inventory days for the current year and compare to prior year inventory days. Discuss any significant variations with management.
– Compare the gross margin for current year with prior year. Fluctuations in gross margin could be due to inventory valuation issues. Discuss significant variations in the margin with management.
Substantive procedures to confirm completeness of provisions or contingent liability
– Discuss with management the nature of the dispute between Smoothbrush and the former finance director (FD), to ensure that a full understanding of the issue is obtained and to assess whether an obligation exists.
– Review any correspondence with the former FD to assess if a reliable estimate of any potential payments can be made.
– Write to the company’s lawyers to obtain their views as to the probability of the FD’s claim being successful.
– Review board minutes and any company correspondence to assess whether there is any evidence to support the former
FD’s claims of unfair dismissal.
– Obtain a written representation from the directors of Smoothbrush confirming their view that the former FD’s chances of a successful claim are remote, and hence no provision or contingent liability is required.
Credit will be awarded for any substantive procedures which test for additional provisions or contingent liabilities of Smooth brush.
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