ABC Company is selling automobile, including 2 different style: new version and old version. 3 approaches of inventory valuation are under consideration: LIFO, FIFO and specific identification. There are 6 staffs in the Internal Control De......
ABC Company is selling automobile, including 2 different style: new version and old version. 3 approaches of inventory valuation are under consideration: LIFO, FIFO and specific identification. There are 6 staffs in the Internal Control Department. All of them were working for a company which was run by ABC’s CEO. ABC’s CEO has decided to set a position of chief auditing office (CAO), who needs to report to CFO, and the latter also has been authorized to assist CAO for setting the scope of internal auditing.
1、To identify if the independence of internal auditing is impaired and how to resolve them
The independence of internal auditing is impaired.
The resolutions are :
（1）The company should set up an auditing committee and CAO should be determined by auditing committee. Besides, CAO should directly report to the board of auditing committee.
（2）CFO should not be authorized to assist CAO for setting the scope of internal auditing. The scope of internal auditing should be determined by auditing committees.
2、To define LIFO, FIFO and specific identification, and illustrate one advantage and disadvantage of these 3 approaches. To determine an approach of inventory measurement for ABC
LIFO assumes the newest items of inventory are the first sold.
FIFO assumes the first goods purchased are the first sold.
Specific identification requires determining which specific items are sold and therefore reflects actual physical flow of goods.
We should use specific identification to measure inventory for ABC.
3、As the vehicles with old version are sold at low price, which cause loss for ABC. Which adjustment should be employed to report ABC’s income fairly?
ABC should calculate the contribution for old version, if the contribution for old version is positive, ABC should still operate it in short-time, and shut down in long-time; if the contribution for old version is negative, ABC should immediately shut off the operation of old version.
4、To illustrate the differences between IFRS and GAAP in terms inventory valuation
IFRS value the
IFRS measures inventories at the lower of Cost and Net Realisable Value. Net Realisable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. It’s an entity-specific value, instead of a market value.
US GAAP measures inventory at the lower of Cost and Market(replacement cost), where Market means current Replacement Cost with Net Realisable Value as the upper limit and Net Realizable Value reduced by an allowance for normal profit margin as the lower limit.