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.
Net Realizable Value Test
Meaning
Asset valuation procedures compare the recorded book value of stored inventory against its estimated selling price minus completed assembly and disposal costs. Performing a net realizable value test prevents financial statements from overstating inventory assets when market demand drops or inventory deteriorates. Failing to record inventory write-downs promptly violates accounting standards and inflates corporate asset valuations artificially during external audit cycles.
Valuation Assessment
Accounting teams evaluate current market prices, scrap recovery values and remaining finishing costs for aged or obsolete inventory. When net realizable value falls below historical cost, inventory carrying values are written down immediately to reflect net recovery value. This adjustment records inventory losses in the period they occur.
Impairment Impact
Inventory write-downs reduce reported current asset values and increase operating cost of goods sold. Regular valuation tests protect balance sheet integrity by clearing obsolete stock from asset registers. Financial audits confirm that inventory valuation methods align with lower of cost or market rules.
Test Boundary
Valuation tests apply to all raw material reserves, work in progress components and finished goods held in storage. Goods subject to firm, non-cancellable sales contracts are evaluated based on agreed contract pricing rather than spot market rates. Written-down inventory values cannot be written back up if market prices recover subsequently.