Following are the objectives of inventory valuation:
a) Determination of Income:
A major objective of inventory valuation is the proper determination of income through the process of
matching appropriate cost against revenues. Gross profit is found out by deducting cost of goods sold from sales. Cost of goods sold is
purchases plus opening stock minus closing stock. Hence, closing stock must be properly valued and brought into accounts. Over valuation of closing stock leads to inflation of the current year profits and deflation of the profits of succeeding years. Similarly, undervaluation leads to deflation of current years profit and inflation of the profit of the succeeding years.
b) Determination of financial position:
In the balance sheet, “inventory’ is a very important item. It is to be shown as current asset in the balance sheet at the end of the year. If the inventory is not properly and correctly valued, to that extent the balance sheet does not give true and fair view of the financial position of the business. Keeping in view the above objectives the auditor’s duty in relation to the verification and valuation of inventories becomes more important.
Therefore, while verifying he should ensure that stock taking is done by responsible a officer, stock figures match with that of stock registers,and the basis of valuation has been consistently the same from year to year. Moreover, he should carry out test checks to ensure the accuracy of valuation.
