Auditing inventory at the lower of cost and NRV

How to test that a client's inventory is valued at the lower of cost and net realisable value, from cost build-ups to slow-moving stock and NRV analytics.

By Achekam · 11 October 2026 · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya

The stock count went well. Every bin was counted, the sheets agree to the listing, and the team is satisfied the inventory exists. Then the partner asks the obvious question: is it worth what the client says it is? The listing prices every item at cost, including the pallet of last season's stock in the back corner and the spare parts for a machine the client sold two years ago.

Existence and valuation are different assertions, and inventory valuation is often where the misstatement hides. This article covers how to test that inventory is carried at the lower of cost and net realisable value, for retailers, wholesalers and manufacturers in South Africa, Nigeria and Kenya.

Cost: purchase, conversion and getting it there

Under IAS 2, inventories are measured at the lower of cost and net realisable value. The IFRS Foundation explains that cost includes all costs of purchase, costs of conversion, meaning direct labour and production overhead, and other costs incurred in bringing the inventories to their present location and condition.

Test cost from both directions:

• For bought-in goods, select items from the listing and agree the unit cost to recent supplier invoices. Check that import duties, freight and clearing costs to bring the goods to the warehouse are included where the client's policy includes them, and that the cost formula the client uses is applied consistently.
• For manufactured goods, obtain the cost build-up: materials, labour and overhead. Agree material costs to invoices, labour rates to payroll and the overhead absorption rate to the client's calculation. Overhead absorbed on abnormally low production can overstate cost.
• For the overall listing, recompute extensions (quantity times unit cost) and agree the total to the trial balance.

Net realisable value: what the stock will actually fetch

IAS 2 defines net realisable value as 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. If net realisable value is below cost, the item is written down.

The best evidence of selling price is what the client actually achieved. Test a sample:

1. Take items from the year-end listing.
2. Find sales of those items after year end and note the price achieved.
3. Deduct the costs still to be incurred: completion for work in progress, and selling costs such as commission, delivery and discounts.
4. Compare with cost. Where net realisable value is lower, the write-down should already be in the listing.

For items with no sales after year end, ask why. No sale is evidence too.

Slow-moving and damaged stock

ACCA, explaining year-end adjustments, notes that because IAS 2 requires inventory at the lower of cost and net realisable value, damaged or slow-moving items may need to be written down, which increases cost of sales and reduces inventory. IAS 2 also says any write-down to net realisable value, and all losses of inventory, are expensed in the period they occur.

Sources of evidence on slow-moving and damaged stock:

• The count. Note damaged, dusty or obsolete items during attendance; that is the cheapest evidence you will get. Our guide to inventory count attendance covers what to record.
• Ageing reports. Items with no movement for a long period, by the client's own definition.
• Product changes. Discontinued lines, superseded models, expired or near-expiry goods.
• The client's provision. Understand how it is calculated and test that the method is applied to the actual ageing.

Analytics on last purchase and last sale prices

ACCA gives net realisable value testing as an example of an audit procedure performed with data analytics: comparing the last purchase and last sale of each inventory item and the price. With a full item-level listing and the sales and purchase history, the test runs across every line:

• items whose last sale price is below last purchase cost;
• items with no sale since a date the team chooses;
• items whose last sale was at a deep discount;
• items held in quantities far above recent sales.

The output is a list of candidates for write-down. Each still needs a judgement, and the larger ones need evidence, but the analytic directs effort to the lines that matter.

Observation notes and samples in Achekam

In Achekam, the Inventory Observation screen keeps the team's count work against the chosen engagement, so the notes on damaged and obsolete items made on the warehouse floor are in the same engagement as the valuation testing. The ISA numbers on its badges are labels, not evidence that a standard has been met.

For the valuation sample, Audit Intelligence risk-scores a loaded population, such as the item-level inventory listing, and proposes a sample. A reviewer who did not prepare the sampling plan approves it before it is drawn, and every draw can be reproduced from its stored seed. Sample sizes are proposed only once materiality has been approved and a confidence level set. The scoring helps choose items; the net realisable value judgement on each is the team's.

Write-down evidence to keep

For each write-down the client made, or the team proposes, keep:

• the item, quantity, cost and the net realisable value used;
• the evidence for the selling price: post year-end sales, quotes, price lists, or the scrap value;
• the costs to complete and sell deducted;
• the reason for the write-down: damage, obsolescence, slow movement, price fall;
• management's agreement, or the reason it disagrees.

Net realisable value is an accounting estimate, so apply the same scepticism you would elsewhere. Our article on auditing accounting estimates sets out the approach, including looking back at how last year's provision turned out.

The IFRS Foundation's summary of IAS 2 Inventories sets out the measurement rule, the components of cost and the definition of net realisable value, and is the reference to check the client's policy against.

Before your next count, ask the client for the item-level listing with last purchase and last sale dates and prices. Run the analytic before you go to the warehouse, and you will know which corners to look in.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.