Accounting Standards Checklist
AS 2 : VALUATION OF INVENTORIES
Sr. Audit Procedure Y/N/NA WP Reference
No.
1 Obtain a complete list of the following:
• Inventory items and codes
• Groups
• Cost of sheets (if the volume is high, sample check and append a
note)
• Inventory valuation statement as at valuation date
• Note on procedure for valuing inventory
• Note on method of determining net realisable Value
(NRV)
2 Check whether inventorised asset includes
• Held for sale in the ordinary course of business (Includes
goods purchased and held for resale - Trading activities)
• In the process of production for such sale (WIP); or
• In the form of materials or supplies to be consumed in the
production process
2.1 Ensure that Inventories include materials, maintenance supplies,
consumables and loose tools awaiting use in the production process
2.2 Ensure that inventories do not include spare parts, servicing equipment and
standby equipment which meet the definition of property, plant and
equipment as per AS-10 Property, Plant and Equipment
3 Measurement of Inventories
Are Inventories valued at lower of cost (as computed as per
Point 3.1 detailed below) or NRV? (Para 5 of AS-2)
If yes, are they for individual items or a group of items? Specify
3.1 Have you ensured that the cost of inventories include
• Costs of Purchase — Purchase price including duties and taxes
(other than those subsequently recoverable by the enterprise from
taxing authorities), freight inward and other expenses incurred
in respect of acquisition of the inventory, trade discounts, rebates,
duty drawbacks and other similar items are deducted in
determining the costs of purchase.
• Costs of Conversion — Costs directly attributable to the
production units and systematic allocation of fixed and variable
overheads. Are the fixed production overheads allocated on the basis
of the normal capacity except when the actual production exceeds
normal production? Are unallocated overheads expensed off in the
period in which they were incurred?
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Accounting Standards Checklist
Sr. Audit Procedure Y/N/NA WP Reference
No.
• Other Costs — Does it include costs other than those incurred for
bringing the inventory to the present location and condition?
Interest and borrowing costs are to be excluded from the costs of
inventories
3.2 Have you ensured that it does not include
(a) abnormal amounts of wasted materials, labour, or other production
costs;
(b) storage costs, unless those costs are necessary in the production process
prior to a further production stage;
(c) administrative overheads that do not contribute to bringing the
inventories to their present location and condition; and
(d) selling and distribution costs.
*The above mentioned should be recognised as expenses in
the period in which they have been incurred
3.3 Computation of Net Realisable Value (NRV)
Is the calculation satisfying the following formula? - Estimated selling
price (-) Estimated costs of completion (-) Estimated costs necessary to
make the sale?
3.3.1 In case the inventories are written down to NRV -
Have the estimated costs of completion or the estimated costs
necessary to make the sale increased?
Are there such class of goods/item whose NRV is below cost for reasons
such as damage, fall in selling price, obsolescence, etc?
3.3.2 As per Para 22, Have you considered that Estimates of net realisable value
are based on the most reliable evidence available at the time the
estimates are made as to the amount the inventories are expected to
realise?
Also whether the estimations have taken into consideration fluctuations of
price or cost directly relating to events occurring after the balance sheet
date to the extent such events existed at the Balance sheet date
3.3.3 Ensure that the Materials and other supplies held for use in the
production of inventories are not written down below cost if the
finished products in which they will be incorporated are expected to be
sold at or above cost. (Para
24)
4 The appropriate method for determination of Cost is as follows:
(Cost Formulae)
4.1 • FIFO/Weighted Average - where client’s business is general
category and where goods are ordinarily interchangeable
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Accounting Standards Checklist
Sr. Audit Procedure Y/N/NA WP Reference
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• Specific Identification - where goods are made for a specific
purpose. Example, custom made business systems
• Retail Method - Retail business or businesses where costs are not
readily ascertainable
Here, valuation of inventory will be on the basis of the selling price
adjusted for gross profit margins
• S tan d ard Cos t - Should be used only if it
approximates the actual cost
*Standard costs take into account normal levels of
consumption of materials and supplies, labour, efficiency and
capacity utilisation. They are regularly reviewed and, if necessary,
revised in the light of current conditions
4.2 Is the method appropriate as defined above? If not, specify
4.3 Have excise duties payable on the balance sheet date been included in the
inventories of finished goods
5 Overheads
5.1 Obtain a list of overheads
5.2 Have you ensured that costs like advertising, selling, sales promotion, all
costs that do not contribute to bringing the inventories to their present
location and condition are eliminated?
5.3 Have you ensured that any cost which relates to ex- factory
movement (not being transfer to depot is not considered?
6 Joint products/By-Products/Non-Usable Waste
6.1 Obtain a certified list of by-products
6.2 Have these been valued in accordance with Para 10 of AS-2
7 Disclosure
7.1 Has the Accounting policy for valuation been disclosed in the
Financial Statements?
Are cost formulas also disclosed?
7.2 Is the total carrying amount and its appropriate classification
disclosed in the accounts?
7.3 Have the inventories been classified in the accounts under the following
heads -
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading) (e) Stores and
spares
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Accounting Standards Checklist
Sr. Audit Procedure Y/N/NA WP Reference
No.
(f) Loose tools
(g) Others (specify nature)
8 Consistency
8.1 Is the method of Valuation same as in the previous year?
8.2 If 8.1 is no, is the change likely to be immaterial for:
(a) Current or (b) Later periods?
8.3 If 8.2 is no, append working note for the financial impact if determinable.
8.4 If the amount is not determinable, review by senior to determine the
nature of note and qualification
Checked by : Reviewed by :
Date : Date :
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