[Oimie]

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about

A. Existence

B. Rights

C.Presentation

D. Valuation

Answer is valuation, but I feel it should be existence. Here’s how I look at it:

By using the turnover rate, we can have an estimate about how much inventory is being sold and about how much inventory would be left over. Compare the results with a physical count or etc. and it would be evidence for a variety of situations for existence. Different results may be evidence of missing inventory or excess of inventory (over stating sales).

On the other hand, I don’t see how inventory turnover rate would be evidence for valuation. How is taking the company’s numbers to come up with a rate evidence of valuation? Auditors are not even sure if the numbers are correct.

Maybe I am not understanding their process. What are they comparing the rate to? Or what is the rate suppose tell them? To calculate the rate, do the auditors use the company’s numbers or they come up with their own numbers?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[mvrcdntx]

As inventory items become obsolete, those obsolete (and maybe worthless) items will affect the valuation. Inventory, as a dollar amount, will increase because those obsolete items sit on the shelves and take longer to sell. That will impact the inventory turnover.

Think of it this way, existence means that the items are there (on hand to sell) – regardless of value. The company owns them and those items exist. Valuation relates to how much is my inventory really worth. Obsolete items will impact inventory worth and also the turnover ratio.

[golfball7773]

Join the AUD study group for Quarter 3 as we have been posting questions all the time since we have nothing better to do at work during the day 🙂

FAR: 63, 55, 62
REG: 65, 77*
AUD: Fail, 64, 71
BEC: 72, 74, 81

*expired

[Oimie]

@mvrcdntx: I think I get it now. Is it like this? So basically they're taking this years rate and comparing it with previous years. And if there are significant differences between the rates, it would be an indication that inventory might be worth more or worth less depending on which way the rate went?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Sleep Optional]

Look at it this way:

Bob owns and runs a computer store. Bob sells computers to the general public. Bob has sold 1 computer last year but had average inventory of 1000 computers. Bob's inventory turnover is incredibly low. That indicates Bob had a ton of computers sitting in his warehouse.

Bob would like to tell the auditors that the computers are worth $1 million. However the majority of those computers were sitting in his warehouse for say 10 years. Over 10 years those computers became obsolete and its value dropped significantly. Those computers that were previously worth $1 million may now be worth 50k due to obsolescence.

BEC: ☑ x1 attempt(s)
REG: ☑ x2 ''
AUD: ☑ x1 ''
FAR: ☑ x2 ''

Done!

[thehip41]

This really has nothing to do with Existence.

As other have already covered, the inventory turnover rate can be one way you can tell the inventory is obsolete.

If the IT ratio changed drastically over the last three years, we would look into that number. One explanation is the inventory is becoming/is obsolete.

It won't tell us if the inventory exists or not.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Oimie]

Thank you guys.

@thehip41: I see how it can be related to valuation now. But I still don't see why it cannot be used to indicate existence. Low turnover rate would indicate there is a lot of inventory leftover right? High turnover rate would indicate there is less inventory leftover? Isn't indication of how many (quantity) inventory related to existence?

For example a company may say they have very little inventory leftover. An auditor calculates the turnover rate and it was really low for the year. This would be an indication that there might actually be a lot more inventory than stated (existence), and would call for an investigation.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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