Question 98

(a)
Since Rocks Forever is a company specialising in selling diamond jewellery, therefore the
inventory is material in the accounts of Rocks Forever. The risk that related with inventory is
existence. This is because diamond jewellery is a very valuable commodity in the market and
thus it is highly susceptible to theft and loss.
On the other hand, there is a risk in valuation. As mentioned, that the amount of
inventory is material, however, the valuation of diamond jewellery is subjective as it is
depended on the valuer’s judgement.
According to accounting standards, inventory should be valued at the lower cost and
net realisable value. However, since the inventory of Rocks Forever is jewellery, which is
subject to changing fashions and trends, thus this is a key risk.

(b)
Audit Procedures Reason
Get the cut- off details and review the record To determine whether the cut-off of the
details of the last sales invoice issued before inventory is correct. Items received from the
the count and the last goods in record before suppliers before the count should be classified
the count. as liabilities and in inventory; items sold
before the count should be classified as sales
and cannot be recorded in inventory. Lastly,
any sales and purchases made after the
inventory count should not be recorded and
accounted in this year’s financial statement.

Have a meeting with the diamond jewellery This evidence will support the upcoming
valuer and discuss about the results of his inventory valuation.
findings.
Verify and make sure that all inventory sheets This is to ensure that a complete record of the
issued have been accounted at the end of the results of the inventory count has been
count. obtained. This is because if there are count
sheet missing, the inventory would be
understated.
Take the copies of the count sheets at the end This prevents management from getting the
of the inventory count and retain the copies on opportunity to adjust the figures
file. subsequently.

(c)
The competence of the expert
The auditor should make sure that the expert is a member of a relevant professional body, and
the reputation and experience of the expert should be considered.
The scope of the expert's work
The auditor relies on the evidence which is related to inventory. Thus, the auditor should
make sure that the scope of the expert’s work included the issues that will impact the
valuation of inventory.
The objectivity of the expert
The auditor should alert if there is any personal relationship or financial relationship between
Rocks Forever and UJ. This is to prevent and alert about any inaccurate opinion from UJ.
The need for an auditor’s expert
The auditor must consider the risk of material misstatement. In this case, inventory is material
and thus an expertise is needed within the audit firm.
Evaluation of the work performed
The auditor will need to assess the quality of the work performed by the expert. Source data
used, assumptions and methods used and their consistency with previous years and the
consistency of the results of UJ's work with other audit evidence taking into account DeCe's
overall knowledge of the business should be considered.
(d)
Inventory valuation: audit procedures
The inventory should be valued at the lower of cost and net realisable value.
Cost
Review a sample of items, check the cost price with the original purchase invoice. The
auditor should be careful and make sure that the invoices are related to the specific item in
question.
Net realisable value
Review the report produced by UJ to find any indication that items are not genuine.
Review a sample of items sold after the cut off period and make sure that sales price exceeds
cost. If the sales price is lower than the cost, the item should be written down to its net
realisable value.
Verify that the items valued by UJ have been included in the inventory total. The inventory
balance should be revised to include UJ’s valuation if there is any discrepancy.
Get a schedule of ageing of the inventory. The auditor should discuss with management for
the need to make an allowance if there is any item identified as slow moving.