ACC707 Computing Solutions Inventory Case - Assignment Solution

Executive summary 

This report contains two different scenarios that determine the presence of key risk assertions in relation to inventory and intellectual property. The inventory scenario has risks under the subject of completeness and valuation, which arises due to the change in the performance of inventory management as compared to previous year’s performance. The software problems in the product account for some suspicion in the financial statement and the value of the inventory that is recorded, as many of the items are returned and there is no mention of a warranty claim. The inventory on hand accounts for 26% of the sales which indicate the presence of some uncertainty in the recognition of these items under revenue in the financial statements. Substantive action has to be taken to make sure that the financial statements are in line with valuation and completeness of the inventory. The second scenario presents risk assertions under valuation and right & obligations. The intellectual property (secret formula to create organic hair products) belongs to a firm that Beautiful Hair has acquired and the rights and ownership of the mentioned property is not clear under the laws of AASB 3. The intellectual property has to be separately accounted for in order to become identifiable by the acquirer, who intends to make it a valuable asset. The valuation of the asset will be conducted under the AASB 138 and will be a part of the goodwill paid at the time of acquisition. Substantive measures are required to check the correctness of the value of the asset and presence of “transfer of ownership” documents for the property. Under the ASA 701 – Communication of Key Auditing Matters, is discussed to emphasize the importance of the asserted risks. The risks mentioned in both scenarios are considered Key Auditing matters due to their potential fraudulent/misstatement nature.       

Computing solutions Inventory 

Computing solutions is producing the best-selling products that people have come to trust over the years. This year computing solutions decided to move their inventory from one central warehouse to 6 different regional ware house in order to increase their mobility of its products throughout the country. This year computing solutions has faced a high level pf returns of the products sold and the problem behind it is related to software. 

Inventory turnover ratio

Last year the inventory turnover ratio equaled 5.2 all the inventory was stored in the central warehouse and moved from there, but this year the inventory turnover ratio came down to 3.8. Looking at the inventory turnover ratio formula:

Inventory turnover ratio = Cost of goods sold 

                                               Average Inventories   

Looking at this formula there are two ways how the ratio could have dropped:

• If the costs of goods sold increase while average inventories remained the same or decreased

• If the average inventories number increases while the cost of goods sold remained constant or decreased 

Given the fact that computing solutions opened six regional warehouses the number of inventories might have increased and also the cost of goods sold could have dropped. Although the number of inventory being returned could also be accounted for the drop in the ratio as it would increase the average inventory in the warehouses while the relative cost of goods sold would have remained the same.

Inventory on hand  

Inventory on hand at the end of the financial year in 2019 accounted for 26% of the total sales which increased from 19% in 2018. This shows that the retail shops that have the products ready to be sold are more than last year (Dictionary, 2019). The reason could be that the demand has lessened due to decrease in quality or resources invested in marketing. The number of returns of the products also must have affected the demand of the products as people must have heard the news about the significant number of returns due to software problems.