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Wednesday, October 24, 2012

WESTERN TRADING COMPANY: INVENTORY VALUATION CASE

Statement of Auditing Frequent (SAS) No. 31 issued by the American Institute of Certified Public Accountants (AICPA) requires auditors to collect adequate relevant evidence to lend credence on the goods reflected in the financial statement. SAS No. 31 defines this requirement as being relevant to the existence, completeness, valuation, rights and obligations, and presentation and disclosure of all assets and liabilities.

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With respect to valuation specifically, SAS No. 31 states that appropriate procedures needs to be followed by auditors to assure that asset, liability, revenue, and expense components have been included in the financial statements at proper amounts. SAS No. 31 states additional how the auditor must seek suggestions in GAAPs to measure or disclose transactions and balances.

Within the context of SAS No. 31, the outside auditors clearly were appropriate in seeking the latest and finest facts with which to think about the valuation of the company's grains inventory. The appropriateness with the computer software and interpretation of these data, however, are even now being assessed.

Within the context of SOP 94-6, the outside auditors clearly have been appropriate in identifying the capacity risk towards the significance of the company's assets in its grains inventory. The proposal from the auditors to disclose this risk nonetheless ought to be justified within the context on the reality of the capability risk.

Accounting Research Bulletin (ARB) No. 43 issued by the AICPA requires a write-down of inventory significance as soon as the utility of the items is no longer as excellent as its costs. The general rule is that the historical price principle is "abandoned once the future utility (revenue-producing ability) of the asset is no longer as excellent as is its usual cost." A departure from price in this sort of an illustration is justified because, "a loss of utility should be charged against revenues inside the period exactly where the loss occurs, not within the period wherever it is sold." The general rule under APB No. 43 is that inventory is valued "at the lower of cost or market, with industry limited to an amount that's not more than the internet realizable value or much less than world wide web realizable importance much less a normal profit margin."

 

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