Auditing and Assurance service - Essay Example

Question Valuing Inventory is one of the most senstive tasks to be performed by organizations as they can esaily be singled out to use so called creative accounting while valuing inventory to manipulate their profits. However, changing the valuation methods of inventory does not necessarily change the economic reality faced by the organization however the impact of inventory valuation methods on the taxes paid by the firms, their impact on the profitability are some of the fact that suggest that inventory valuation methods may not be as simple as they may seem.

(Jaiswal, 2008)One of the basic principle of valuing inventories is lower of cost or net realisable value. Any inventory is valued on this principle therefore firms tend to assess both costs as well as net realisable value of the inventory at the time of reporting them into their balance sheet. However, due to lack of assessing the net realisable value with fair degree of accuracy, firms often stick to using cost as the main method of valuing inventories. For a firm working in Information Technology such as Dynamic Data, the issue of valuing inventories at cost or net realizable values is critical because the industry is highly volatile and dynamic in nature with technology becoming obsolete at much higher speed as compared to other traditional goods.

Thus there are different factors which compel firms to use cost as the basis of valuing their inventories and reporting them into their financial statements.As discussed in the case study that there are some news articles which indicate that the technology used in different products by Dynamic Data may be good enough to serve the current needs however, they are adequate enough to meet future demands therefore there are chances that their market value may come down very fast. A low valued inventory reported on the balance sheet may indicate that the firm is efficient in handling its inventory however on the other hand, it would substantially reflect into the income statement of the firm in the shape of provisions to be made against the diminuation in the valuation of inventory.

This not only would reduce the profitability but also may serve as an strong signal to the market regarding the marketability of the firm's products.However, as discussed by the CFO, the external factors such as general slow down in economy as well as variability in the demand patterns justify the use of valuing inventories at cost rather than at market value so that the negative impact of external events of short term nature should not reflect on the overall business prospects of the firm. It is also important to mention that the so called holding cost of inventory, in I.T. related firms, is a significant portion of the overall inventory cost of the firm therefore valuing inventories at market values may not truly reflect the overall picture and may reflect poorly on the overall investment made by the firm in holding its inventories.

(Callioni, Montgros, Slagmulder, Wassenhove, & Wright, 2008).BibliographyCallioni, G., Montgros, X. d., Slagmulder, R., Wassenhove, L. N., & Wright, L. (2008). Inventory-Driven Costs. Retrieved October 14, 2008, from Harvard Business Review: http://www.hbsp.harvard.edu/hbsp/hbr/articles/article.jsparticleID=R0503J&ml_action=get-article&print=trueJaiswal, M. (2008). Inventory Valuation: Creative Accounting neccessiating improved Corporate Governance. Retrieved October 14, 2008, from www.crisil.com: www.crisil.

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