During the planning and risk assessment

o The auditor has to understand the general

economic environment, industry development,
nature of industries.

During economic downturns, consumer demand may

fall and this will lead to more obsolete inventory and
higher risk of material misstatement

Industry developments such as for example the

government requirement for cigarette labels will result
in cigarettes without labels being unsellable and a need
to adjust the net realizable value.

Nature of inventories when assessing the

reasonableness and adequacy of allowance for
inventory obsolence.
Perishable products such as fruits will have a higher
risk of obsolence.

Also the auditor can enquire about special

arrangements with suppliers, for example unsold
magazines can be returned to suppliers.

Observation during inventory count can help the

auditor to identify dented, rusty goods which should
be brought to the attention of management.

The companys provisioning policy should also be

assessed.
For example, if provisions are made on the basis of an
aging report of inventories, The accuracy and integrity
 of the report should be reviewed to ensure that the
underlying data is captured accurately.

The auditor must review the continuing appropriateness of

management estimate provision policies

By its prior period results

Industry practices
And future plans of management as disclosed to the auditor.

The provisioning policy has to be challenged each year.

Subsequent events can also be used

By verifying selling price of inventories sold after year end

to ascertain that inventories are correctly recorded at the
lower of cost and net realizable value.

Final analytical prcedures such as

Comparisons of financial information

Eg. Inventory turnover and aging receivables
With comparable information for
Prior periods
Anticipated results and similar industry information

Differences could indicate potential obsolete or surplus

inventories issues exist and follow up action should be
taken.