Audit Procedures for Net Realizable Value and Obsolescence Provisioning under IAS 2

Floor

Cost Basis and the Lower of Cost and Net Realizable Value

Auditing inventory under IAS 2 starts at historical cost, verifying that acquisition or manufacturing expenses match actual cash flows before evaluating net realizable value. Paragraph 9 of IAS 2 requires inventory to be measured at the lower of cost and net realizable value. Cost includes purchase price, conversion costs, and any other costs incurred to bring items to their present location and condition.

Checking this baseline involves sampling raw material invoice lines, direct labor allocations, and freight bills to ensure capitalized amounts match underlying disbursements.

Overhead allocation frequently causes errors. Standard costs set at period start depend on budgeted capacity assumptions that seldom match actual throughput. When production volume drops below normal capacity, allocating unadjusted fixed overhead across fewer units artificially inflates unit inventory costs.

Recalculating standard absorption models across four manufacturing facilities during a review showed that 340,000 currency units of unallocated overhead were capitalized into year-end finished goods rather than expensed immediately in profit or loss.

Capitalised freight and import duties added to landed inventory cost must reflect direct vendor invoices rather than unadjusted purchase-order estimates.

Testing purchase transactions requires examining commercial invoices, customs entries, duty schedules, and freight receipts. A frequent exposure arises when entities apply fixed estimated landed-cost surcharges without reconciling them quarterly against actual clearing bills. If estimated surcharges exceed actual spending, inventory remains overstated until adjusted; if estimates fall short, margins drop sharply on subsequent sales.

For raw materials, matching inventory receipts against vendor invoices and payment logs confirms that volume rebates and trade discounts reduce initial carrying values rather than inflating nominal gross margins.

Work in progress adds complexity to completion estimates and cost accumulation. Verification requires physically inspecting shop-floor completion stages alongside time cards and material issuance records, then comparing physical progress to production routing sheets. When a batch sits partially processed beyond standard lead times, its accumulated labor and overhead must be evaluated immediately against potential scrap recovery values.

Purchase Pricing and Variance Allocation Mechanics

Manufacturers using standard cost systems generate purchase price and efficiency variances that modify baseline carrying values. Standard costs satisfy IAS 2 only when they approximate actual cost at the balance sheet date. Checking purchase price variance accounts confirms whether balances are split correctly between cost of sales and ending inventory.

Charging purchase price variances entirely to cost of sales when inventory levels expand overstates profit and leaves inventory on the balance sheet at outdated rates.

Efficiency variances driven by material waste, labor downtime, or machine breakdowns represent abnormal operational losses. Paragraph 16 of IAS 2 requires abnormal amounts of wasted materials, labor, or other production costs to be excluded from inventory cost and expensed in the period incurred. Auditors trace production variance reports to general ledger entries to confirm abnormal yield losses are removed from inventory balances before testing net realizable value.

Purchases in foreign currencies fall under IAS 21. Raw materials or finished goods acquired in foreign currency are translated at the spot rate on the transaction date. Subsequent exchange rate fluctuations do not adjust historical cost, but sharp currency shifts directly affect the net realizable value ceiling when local selling prices cannot absorb higher translated costs.

Auditors cross-reference spot transaction rates against general ledger purchase entries to detect closing exchange rates improperly applied to historical stock balances.

Subcontracting fees and intermediate processing costs require direct verification. When semi-finished components leave the main facility for specialized treatments such as heat treating or anodizing, third-party logistics records and processing invoices must track both physical movement and cost accumulation. Inventory held at third-party processors requires direct confirmation or physical inspection.

Missing documentation for goods in transit between processing steps indicates potential phantom inventory or unrecorded yield losses.

Valuation models for high-volume, varied stock often rely on the retail method or weighted average pricing formulas. The retail method measures cost by reducing the sales value of inventory by the gross margin percentage. Auditors check that this margin percentage reflects marked-down stock and promotional pricing.

Applying historical average margins to heavily discounted inventory understates required write-downs and overstates period profits.

Net Realizable Value Definition and Valuation Ceilings

Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated selling costs. This definition separates net realizable value from fair value less costs to sell under IFRS 13: net realizable value is entity-specific, whereas fair value reflects an arm’s-length transaction between market participants. Establishing this ceiling demands detailed inspection of sales contracts, post-period-end cash receipts, current price lists, and order fulfillment costs.

Selling price estimates cannot rely on catalog prices when recent sales show widespread discounting or rebate concessions. Auditors sample actual sales invoices executed during the subsequent events window, comparing realized gross revenues per unit against historical carrying costs. Where realized unit net selling prices drop below carrying costs, an immediate write-down is required under IAS 2.

Write-downs cannot be deferred on the speculation that market prices might recover.

Estimating completion costs for work in progress requires engineering assessments and direct costing models. Auditors review bill of materials requirements, expected labor hours, and allocated finishing costs for unfinished production runs. Completed sales values must cover both historical accumulated costs and remaining estimated completion expenses to yield a positive net realizable margin.

If estimated completion costs rise due to material inflation or process failures, total project costs increase, forcing an immediate reduction in the carrying amount of work in progress.

Estimated sales costs include direct expenditures required to complete the transaction, such as agent commissions, specialized export packaging, outbound shipping fees, and non-refundable distribution taxes. General administrative expenses and financing charges are excluded unless directly attributable to specific customer contracts. Auditors analyze historical selling expense ratios to ensure all variable realization costs enter the net realizable value equation.

Firm, binding sales contracts alter how net realizable value rules apply. When an entity holds firm sales agreements covering specific inventory quantities, the contract price serves as the realization baseline rather than general spot market prices. If contract terms specify price penalties or liquidated damages for late delivery, those deductions reduce estimated net selling prices.

Sales realization records across industrial product contracts show that customer-specific price concessions reduced net realizable value below cost despite stable generic catalog rates.

When order books contract, unsold inventory quantities exceeding firm contract commitments must be evaluated against general market spot prices. A small, high-margin sales contract covering ten percent of stock does not justify applying that premium contract price to the remaining ninety percent. Auditors match contract volumes against physical stock quantities to segregate committed inventory from uncommitted surplus stock exposed to market price drops.

Evaluating raw material inventory for impairment follows a specific standard under IAS 2. Materials and supplies held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to sell at or above cost. However, when a decline in material prices indicates that finished product costs will exceed net realizable value, the materials are written down to net realizable value.

In those cases, replacement cost represents the best available measure of net realizable value for raw material stock.

Testing raw materials in practice demands integrated modeling across components and final product margins. Auditors calculate the combined product cost structure by mapping raw material inputs through the current bill of materials to final selling prices. If raw material acquisition costs spike while final product prices remain constrained, raw material inventory requires a write-down to current replacement cost, preventing deferred loss recognition in subsequent production cycles.

Discontinued operations, engineering design changes, and regulatory bans impose immediate limits on inventory realization. When product design alterations make specific spare parts or raw materials obsolete, historical acquisition costs no longer represent valid carrying values. Auditors inspect engineering change notices and product phase-out schedules to identify components made redundant by design updates.

Stock supporting discontinued product lines must be written down to scrap value unless firm aftermarket service contracts guarantee minimum purchase quantities at agreed rates.

Inventory carrying amounts that rely on historical pricing schedules without current post-period sales evidence fail fundamental verification criteria under IAS 2.

Decline

Mechanics of Inventory Obsolescence and Aging Analysis

Obsolescence is the progressive loss of economic value caused by physical decay, technological shifts, changing market preferences, or structural oversupply. Measuring it requires robust aged inventory reporting systems that capture time elapsed since last movement, historical usage rates, and forward-looking demand forecasts. Testing begins by verifying the accuracy of IT-generated inventory aging reports.

System script logic must be checked to ensure stock aging calculates from original receipt dates rather than internal warehouse transfers or re-labeling transactions.

An aging analysis categorizes inventory into age brackets ~ such as 0 ~ 90 days, 91 ~ 180 days, 181 ~ 360 days, and over 360 days ~ based on stock movement data. Simple age classifications can hide underlying risk when high-volume standard stock sits alongside slow-moving custom variants. Auditors calculate inventory turnover ratios and days inventory outstanding at the individual stock-keeping unit (SKU) level rather than relying on aggregated inventory balances, which conceal obsolete items behind fast-moving flagship lines.

Evaluating inventory movement requires comparing stock on hand against historic consumption and forward sales forecasts. Run-rate metrics are calculated by dividing current physical quantities by average monthly consumption over the preceding six or twelve months. If an entity holds 5,000 units of a component with an average monthly consumption of 50 units, that stock represents 100 months of supply.

Unless long-term binding purchase commitments exist, stock exceeding expected consumption over a reasonable operational horizon requires immediate provisioning.

Engineering modifications routinely render active component inventories obsolete overnight. When product development teams issue engineering change orders, existing component stock may become incompatible with revised production standards. Auditors review engineering change logs, design modification memos, and quality control hold logs.

An audit uncovered 180,000 currency units of obsolete circuit boards retained on active ledger balances because warehouse personnel were never notified of an engineering change notice issued eight months earlier.

Perishable inventory requires specific freshness decay tracking. Chemicals, pharmaceutical ingredients, food products, and adhesive materials carry strict shelf-life limits dictated by chemical stability or regulatory standards. Auditors review lot-tracked inventory databases, matching remaining shelf life against current sales velocity.

Stock that will pass its expiry date prior to planned sale or internal production usage requires complete provisioning down to estimated scrap or disposal value.

Physical deterioration during storage directly causes inventory impairment. Inadequate environmental controls, improper stacking, moisture exposure, or rough handling damage stock long before accounting ledgers flag aging thresholds. During physical inventory counts, auditors inspect physical stock conditions directly, checking for corroded metals, damaged packaging, leaking containers, or dust-covered pallets stored in peripheral warehouse bays.

Common physical and operational indicators of inventory decline and their corresponding audit verification routines under IAS 2 include:

Provisioning Methodologies and Matrix Design

Quantifying obsolescence provisions requires applying empirical matrices to identified risky inventory categories. A standard matrix assigns escalating provision percentages based on inventory age or months of supply on hand ~ for instance, zero percent for stock under 90 days, 25 percent for stock aged 91 ~ 180 days, 50 percent for stock aged 181 ~ 360 days, and 100 percent for stock unmoved for over a year. Auditors evaluate whether matrix parameters reflect underlying market realities and historical recovery rates.

Arbitrary provision matrices unsupported by empirical sales data fail IAS 2 requirements. Auditors review historical liquidation proceeds, secondary market sales, and scrap recovery rates over multi-year periods to validate provisioning percentages. If historical liquidation of three-year-old electronics stock yields ten cents on the dollar, a policy applying only a thirty percent write-down for that age bracket is insufficient.

Forward-looking market dynamics alter provision requirements beyond historical movement trends. Emerging technology launches, economic downturns, or competitor price cuts can compress sales realization overnight. Provisioning models must incorporate forward sales pipeline estimates, open purchase order backlogs, and marketing discount strategies.

Relying solely on historical usage during market shifts leads to significant inventory overstatement.

Customized, non-standard inventory produced for single-client projects carries heightened obsolescence exposure. If a customer cancels a project, defaults on terms, or rejects delivery over specification disputes, contract-specific stock loses valuation support. Auditors inspect open contract files, customer dispute logs, and accounts receivable aging reports.

Where custom inventory clients display financial distress or active legal disputes, the associated inventory must be provisioned unless alternative buyers exist.

Reverse logistics and returned inventory create specialized valuation risks. Returned items often arrive damaged, missing components, or in degraded packaging. Returned goods held in receiving inspection bays pending disposition must not remain in inventory at full retail or standard manufacturing cost.

Auditors review return logs, customer credit notes, and refurbishing cost sheets to verify that returned stock carries write-downs matching true resale values.

What Specific Data Drives the Inventory Obsolescence Calculation?

Developing an empirical inventory obsolescence model requires combining transactional accounting records, operational movement logs, and forward market pricing metrics. Audit procedures evaluate whether management’s provision calculation incorporates accurate, complete data extracted directly from core operational databases.

The key data inputs required for an empirical inventory obsolescence calculation include:

• Stock-Keeping Unit Master Records detailing part descriptions, unit cost baselines, standard bill-of-materials associations, and physical locations.
• Transactional Movement History capturing receipt dates, material issuance records, sales dispatch logs, and internal warehouse transfers.
• Historical Consumption Metrics covering 12-month and 24-month rolling usage figures, seasonality indices, and batch frequency metrics.
• Forward Demand Pipelines incorporating confirmed customer purchase orders, sales forecasts, marketing promotional schedules, and contractual delivery commitments.
• Physical Condition Reports documenting shelf-life expiry dates, quality control hold statuses, scrap dispositions, and warehouse damage logs.
• Secondary Realization Data detailing scrap recovery rates, secondary market broker quotes, historical liquidation yields, and refurbishing expenses.

Auditors perform independent integrity checks on these underlying datasets. Data extraction routines are verified using computer-assisted audit techniques (CAATs) to re-run system query scripts across historical transaction tables. If underlying source data contains incorrect transaction dates, missing part numbers, or unrecorded physical stock adjustments, the derived obsolescence matrix yields unreliable metrics.

Group-level provision policies must adapt to local operating environments. Applying a uniform corporate obsolescence matrix across diverse product categories, geographic jurisdictions, or market channels can misstate inventory values. Regional market dynamics, local import restrictions, or supply chain bottlenecks alter realization timelines.

Auditors verify that corporate management reviews and adjusts global matrix parameters based on local operating conditions.

Reversals of inventory write-downs are governed by explicit provisions in IAS 2. Paragraph 33 requires that when circumstances that previously caused inventory to be written down below cost no longer exist, or when clear evidence shows an increase in net realizable value due to changed economic circumstances, the write-down is reversed. The reversal is capped at the original write-down amount, ensuring inventory is never carried above historical cost.

Auditors verify that write-down reversals rest on verifiable cash transactions or firm purchase contracts rather than speculative management expectations.

The operational consequence of failing to establish rigorous obsolescence testing models became clear during a facility restructuring review, where unrecorded inventory write-downs wiped out two quarters of reported operating margins once physical scrap disposals occurred.

Evidence

Substantive Audit Procedures and Testing Frameworks

Substantive audit testing for inventory valuation under IAS 2 integrates physical verification, analytical evaluation, and detailed transactional testing. Audit protocols gather evidence confirming the existence, completeness, valuation, and rights to recorded inventory balances. Testing begins with physical inventory count attendance, where auditors observe management’s counting controls and execute independent sample test counts across high-value and slow-moving stock lines.

Physical inventory counts provide direct evidence of stock condition and existence. Auditors perform test counts from the warehouse floor to count sheets to verify completeness, and from count sheets to physical stock to verify existence. During counts, auditors specifically flag damaged items, dusty packaging, rusty components, or disorganized stock arrangements.

These physical indicators are cross-referenced against post-count valuation schedules to ensure identified physical impairments receive proper obsolescence write-downs.

Auditors must independently trace physical stock condition noted during inventory count procedures directly to final NRV calculation sheets.

Cutoff testing ensures inventory receipts and dispatches are recorded in the correct accounting period. Improper cutoff distorts income by mismatching inventory carrying balances against revenue recognition. Auditors sample shipping documents and goods received notes (GRNs) executed immediately before and after the period-end closing date.

Tracing GRNs to vendor invoices and inventory accounts confirms that acquired goods are recorded alongside corresponding trade payables.

Detailed net realizable value testing involves selecting a representative sample of inventory items, stratified by total carrying value, age, and product category. For each sample item, auditors extract the recorded unit cost and compare it to recent post-period-end sales invoices. If post-period sales prices drop below cost, auditors calculate the precise unit shortfall and project the identified error across the unsampled population using statistical sampling methods.

The procedural workflow for auditing net realizable value write-downs follows a structured decision path:

1. Extract Complete Inventory Ledger and verify mathematical accuracy, balancing detail totals against general ledger inventory control accounts.
2. Stratify Inventory Population by monetary value, stock age, product category, movement velocity, and physical location.
3. Perform Scripted CAAT Analysis to calculate SKU-level metrics including days-on-hand, consumption run-rates, and price-variance distributions.
4. Sample High-Risk Stock Lines including items with no movement over 180 days, high unit costs, expiring shelf lives, or negative gross margins.
5. Gather Direct Realization Evidence by inspecting post-period-end sales invoices, sales orders, third-party broker quotes, or secondary market scrap receipts.
6. Recalculate Required Write-Downs comparing calculated net realizable value ceilings against historical cost, testing management’s provision accuracy.
7. Inspect General Ledger Adjustments confirming write-down entries are posted to appropriate profit or loss cost-of-sales accounts.

Auditors analyze post-period credit notes and sales returns to identify potential valuation adjustments. Large post-period credit notes issued to customers signal billing disputes, defective shipments, or unrecorded promotional allowances that reduce net selling prices. Auditors inspect credit notes issued within 60 to 90 days following the reporting date, evaluating whether underlying returned items or contract price adjustments impact inventory valuations at the balance sheet date.

Inventory held at third-party locations ~ such as public warehouses, consignment agents, or contract manufacturers ~ requires specialized confirmation procedures. Under ISA 501, auditors request direct written confirmation from third-party custodians regarding physical quantities and stock condition. If third-party inventory represents a material portion of total assets, auditors perform physical test counts at custodian facilities or inspect independent auditor reports on custodian internal controls.

Analytical Procedures and Ratio Analysis

Substantive analytical procedures provide broad context on inventory valuation trends, revealing unexpected variances or operational anomalies that demand detailed testing. Auditors calculate key financial ratios, including inventory turnover ratio, days inventory outstanding (DIO), gross profit margin by product line, and provision-to-total-inventory ratios. Comparing these metrics against prior periods, industry benchmarks, and internal budgets highlights underlying valuation risks.

An expanding gap between sales growth and inventory growth indicates potential overstocking or unrecorded obsolescence. If sales increase by five percent while inventory expands by forty percent without a corresponding supply disruption or strategic buffer requirement, inventory turnover drops rapidly. Auditors investigate the root cause of declining turnover, focusing on product lines experiencing volume contraction.

Gross margin analysis by individual product line reveals cross-subsidization patterns where profitable items mask losses on failing lines. Disaggregating gross margin schedules allows auditors to identify specific SKUs selling at negative margins. When a product line yields negative gross margins after accounting for direct production and realization expenses, all remaining finished goods and work-in-progress stock dedicated to that line requires immediate write-down under IAS 2.

Vertical and horizontal balance sheet analysis tracks movements in inventory categories over time. Comparing raw materials, work in progress, and finished goods proportions reveals operational bottlenecks. A sharp accumulation of work in progress alongside flat finished goods output points to production disruptions, missing components, or quality control holds that impede completion and lower realization values.

Audit procedures include evaluating management’s historic forecasting accuracy. Comparing prior-period inventory provision estimates against actual historical liquidations and write-offs tests estimation reliability. A pattern of underestimating required write-downs suggests systematic bias or flawed provision methodology, prompting auditors to expand substantive testing samples and challenge current-year assumptions.

Third-party market pricing reports, industry trade indexes, and commodity exchange prices supply objective benchmarks for evaluating inventory realization values. For standardized raw materials, agricultural products, or metals, spot market rates provide clear evidence of replacement cost or net realizable value. Auditors cross-reference ledger costs against published benchmark indexes, calculating precise write-down requirements where market indexes drop below historical acquisition costs.

Reliance on supplier documentation ended when independent customs clearing logs revealed that declared landed shipping values were twelve percent lower than internal inventory cost ledger allocations.

Realization

Financial Statement Disclosures and Management Estimates

Financial statement disclosures required by IAS 2 must provide clear context regarding inventory measurement policies, carrying values, write-down amounts, and underlying estimation uncertainties. Paragraph 36 of IAS 2 mandates specific disclosures, including accounting policies adopted in measuring inventories, total carrying amounts, carrying amounts in classifications appropriate to the entity, carrying amounts of inventories carried at fair value less costs to sell, amounts recognized as an expense during the period, write-downs of inventories, and any reversals of write-downs.

Auditors inspect draft disclosures to confirm that qualitative accounting policy notes reflect actual operational practices. Generic boilerplates copied from software manuals do not satisfy IAS 2 requirements when specific valuation methods, such as weighted average pricing or standard costing, are employed. Disclosures must state the specific cost formula used, overhead allocation policies, and the precise empirical bases applied when estimating net realizable value write-downs.

Classification disclosures require distinct categorization on the balance sheet or in financial statement notes. Standard categories include raw materials, work in progress, finished goods, production supplies, and merchandise held for retail sale. Presenting a single aggregated inventory figure without a sub-category breakdown impairs financial transparency and violates IAS 2 presentation rules.

Auditors reconcile note disclosure totals back to general ledger schedules and subsidiary sub-ledgers.

Disclosure of inventory write-downs recognized as an expense in the period requires prominent presentation. Write-downs must be included in cost of sales or disclosed separately on the face of the statement of profit or loss or within financial statement notes. If a write-down is substantial or results from an unusual event, such as a natural disaster or major regulatory shift, separate disclosure under IAS 1 presentation rules is required.

Auditors verify that write-down amounts reported in disclosure notes match audited adjustments posted to profit or loss accounts.

Reversals of inventory write-downs require explicit financial statement disclosures detailing the specific economic circumstances driving the recovery.

IAS 1 requires entities to disclose key assumptions concerning the future, along with other sources of estimation uncertainty at the balance sheet date, that carry a significant risk of causing a material adjustment to asset carrying amounts within the next financial year. Inventory obsolescence provisions and net realizable value adjustments represent major management estimates. Disclosure notes must quantify sensitivity ranges or describe underlying assumptions, such as expected demand trajectories or obsolescence timelines, enabling users to evaluate valuation exposure.

Pledged inventory disclosures are governed by IAS 2 paragraph 36(h), which requires disclosing the carrying amount of inventory pledged as security for liabilities. Entity growth plans frequently rely on asset-backed lending facilities, invoice discounting, or revolving credit lines secured by inventory pledges. Auditors confirm pledged inventory balances directly with secured lenders, verifying that disclosures accurately state encumbrance levels and borrowing base boundaries.

Impact on Working Capital, Covenants, and Growth Financing

Inventory valuation directly impacts key financial ratios, working capital metrics, and lender debt covenant calculations. Unrecorded inventory write-downs artificially inflate current assets, gross margins, operating profit, and net equity. When an audit uncovers necessary inventory write-downs, recording the adjustment compresses gross margins, reduces working capital, and lowers asset coverage ratios, potentially triggering immediate covenant breaches on asset-backed credit facilities.

Asset-backed lending facilities establish borrowing capacity by applying an agreed advance rate ~ typically between 50 and 80 percent of eligible cost ~ to eligible inventory balances. Lenders exclude slow-moving, aged, custom, or impaired inventory from borrowing base calculations. A net realizable value adjustment reduces total inventory value and shrinks the eligible borrowing base, forcing immediate debt repayments or credit limits that strain liquidity.

Debt covenants commonly mandate maintaining minimum net working capital, current ratios, interest coverage, or tangible net worth thresholds. A substantial inventory write-down reduces current assets and equity simultaneously, impacting current ratio and leverage compliance. The table below illustrates how a 1,500,000 currency unit inventory write-down alters key debt covenant calculations and credit facility parameters for a representative manufacturing business.

The cash conversion cycle (CCC) measures the time required to convert raw material investments into realized cash inflows. Days inventory outstanding is a core component of that calculation. Overstating inventory carrying values or failing to write off non-moving stock artificially inflates DIO, masking operational inefficiencies and presenting a misleading picture of working capital health.

Recognizing write-downs drops reported inventory days to reflect realistic turnover expectations, exposing true cash generation constraints.

Growth financing demands explicit alignment between inventory acquisition plans and working capital capacity. Expanding order volumes force companies to commit substantial cash to raw materials and work in progress months before finished goods delivery and customer payment. If expanding inventory contains embedded obsolescence or unmarketable stock, working capital becomes trapped in illiquid assets, draining liquidity needed to fund ongoing operations and service debt.

Auditors evaluate going concern assumptions under ISA 570 when material inventory write-downs threaten liquidity or trigger covenant defaults. If required write-downs breach credit covenants, lenders possess legal rights to accelerate debt repayments or freeze revolving credit lines. Auditors review management’s cash flow forecasts, debt refinancing options, and lender waiver negotiations to confirm that going concern disclosures appropriately address working capital constraints.

Management teams occasionally attempt to defer necessary inventory write-downs to protect short-term reported earnings, executive bonuses, or bank facility limits. Auditors maintain professional skepticism throughout net realizable value testing, recognizing that deferring inventory write-downs is a common form of financial statement misstatement. Rigorous substantive testing of post-period sales, empirical obsolescence modeling, and direct verification of physical stock conditions are required to defend balance sheet integrity.

Standard credit agreement clauses specify that any inventory falling below verified net realizable value is immediately excluded from eligible collateral, reducing maximum facility drawdowns by the full magnitude of the calculated audit adjustment.