Inventory is usually:
- Large in value on the balance sheet
- Easy to manipulate (changing inventory can affect profit)
- Complex and time-consuming to audit, especially year-end balance testing
Why complex?
- Inventory may be stored in many locations (harder to count/control)
- Items can be diverse (e.g., jewels, chemicals, electronic parts) → hard to observe/value
- Valuation judgement is needed (e.g., obsolescence, cost allocation in manufacturing)
- There are several acceptable valuation methods
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