Audit Testing Protocols for Finished Goods Landed Cost Allocations under IAS 2
IAS 2 requires capitalizing directly attributable import freight and duties while expensing demurrage, demanding substantive audit matching of port documentation.
Inventory Turn Ratio
Meaning
Financial efficiency defines the frequency with which a company replaces its stock over a given period. The inventory turn ratio quantifies this cycle by dividing the cost of goods sold by the average balance of held assets. A high number suggests strong sales or effective purchasing while a low figure reveals stagnant supply or procurement errors.
Calculation requires total expenditure on sold products matched against the mean value of goods stored during the same timeframe.
Operational Efficiency
Production managers examine this metric to identify hidden costs within the supply chain. Frequent rotations indicate that materials move quickly through the factory floor to the final point of purchase. Delays in this movement tie up capital and increase the risk of product obsolescence.
Firms monitor these cycles to confirm that procurement aligns with actual demand rather than speculative projections.
Audit Accuracy
Internal controllers use historical accounting data to verify the integrity of reported stock levels against physical counts. Discrepancies between the calculated ratio and the actual movement of assets suggest errors in logging or theft. Auditors review the consistency of this turnover to ensure that depreciation charges remain aligned with reality.
Consistent tracking prevents the inflation of asset values on the balance sheet.
Supply Sustainability
Procurement teams determine the health of vendor relations through the speed of stock replenishment. Stable turnover rates permit organizations to maintain lean operations without risking stockouts during peak demand. Rapid movement allows for the integration of fresher materials into production lines.
Excessive focus on turnover at the expense of volume reliability creates systemic fragility.