Techniques for the measurement of the cost of inventories, such as the ‘retail method’, may be used for convenience if the results approximate cost. The cost of the inventory is determined by reducing the sales value by the appropriate percentage gross margin.

Requirement

(a) Discuss when it might be appropriate to use the method referred to above.

(b) Ifa company traditionally applied a policy of calculating actual cost by item but changed to the above method, would a prior year adjustment (as defined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) be required? (See Chapter 21.)

(c) You are the audit senior of a company that uses the above method of inventory valuation.

What factors would you consider in the audit of inventory?