## Work-in-Progress: Existence and Valuation Assertions

### Why WIP Is Challenging

Unlike finished goods, WIP is at an intermediate stage — it lacks clear physical form, requires cost estimates, and involves subjective judgement on stage of completion.

### Audit Procedures by Assertion

#### Existence

Procedure	Rationale
Attend inventory count per SA 501	Physical verification of WIP on the factory floor
Understand how WIP stages are identified and measured during the count	Ensures WIP count methodology is sound
Evaluate work of management expert (if used) in estimating WIP quantities/stages	Addresses risk of expert bias or error

#### Valuation

Procedure	Rationale
Ascertain the various stages of production and how value additions are measured	Understand cost accumulation model
Where estimates are used, understand basis and test against costing/financial data	Challenge subjective estimates
Identify cost elements included (material, labour, overhead)	Ensure completeness and correctness of cost components
For overheads: verify basis of inclusion; compare to available costing data	Prevent over/under-absorption of overheads
Ensure material costs exclude abnormal wastage	Abnormal wastage must be expensed, not included in inventory cost

### Abnormal Wastage Rule

Per AS 2 (Valuation of Inventories), only normal wastage is included in inventory cost. Abnormal wastage must be excluded and recognised as a period expense.

### SA 501 Requirement

When inventory is material, the auditor must attend the physical inventory count unless impracticable. For WIP specifically, the auditor should understand how incomplete items are identified and valued during the count.

Worked example

### Example 1

JAL Limited – Chemical Manufacturing WIP:

Scenario: Material WIP expected as at 31 March 2024; chemicals at various processing stages.

Existence procedures:

Attend year-end inventory count; observe how production floor teams identify and segregate WIP batches by processing stage.
Review management's WIP schedule prepared by the production team (management expert); assess their competence and objectivity.

Valuation procedures:

Obtain the cost-build-up sheet for WIP: raw material input + labour hours × rate + overhead absorption rate.
Test overhead absorption: compare absorbed overhead per unit to total overhead / total units produced; assess reasonableness.
Check wastage: identify any abnormal batch losses during the year; confirm these are excluded from WIP and expensed.
For estimated stage of completion, compare to production records (meters processed, kilograms converted) to corroborate management's estimate.

⚠️ Common exam mistakes

Not attending the physical inventory count for WIP — SA 501 makes this mandatory when inventory is material
Accepting management's WIP valuations without evaluating the basis for stage-of-completion estimates
Including abnormal wastage in WIP cost — it must be expensed as a period cost
Not verifying the overhead absorption basis independently using costing and financial data
Treating the management expert's estimates as audit evidence without independent corroboration

Reference: SA 501 – Inventory; AS 2 – Cost of Inventories (abnormal wastage) — SA 501 – Audit Evidence: Specific Considerations for Selected Items; AS 2 – Valuation of Inventories (ICAI)

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Work-in-Progress – Existence and Valuation Audit Procedures

Worked example

⚠️ Common exam mistakes