A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 2 1. Existence and valuation of inventories Why significant How our audit addressed the key audit matter At 30 June 2022, the Group holds inventories of $4,333.0 million which are recorded at the lower of cost and net realisable value. The Group’s accounting for inventories is complex due to the nature of products being manufactured requiring multiple inputs into the cost which leads to a risk that gross inventories may be incorrectly valued. Provisions can be recognised for all components of inventories, including raw materials, work in progress and finished goods. The Group considers a number of factors when determining the appropriate level of inventory provisioning, including regulatory approvals and future demand for the Group’s products. In addition, the geographic footprint of the Group and the movements and sale of inventory between the Group’s operations means both the existence of inventories and the valuation of inventories is a key audit matter. This includes considering whether any mark up of inventories from sales within the Group is appropriately eliminated in the consolidated financial statements. The Group’s disclosures with respect to inventories is included in Note 5 of the financial report. We have assessed the carrying value of inventories, including the determination of cost and provisions for obsolescence and those that ensure inventory is carried at the lower of cost and net realisable value at 30 June 2022. The existence of inventories has been addressed through our assessment of the internal controls which included attendance at periodic cycle counts or through attendance at year-end inventory stocktakes in locations with significant stock holdings. We remained alert for obsolescence issues during our observation of physical inventories. We assessed the appropriateness of the determination of inventory cost by assessing the accuracy of the standard cost approach used by the Group and assessing the recognition of variances from standard costs. We assessed whether inventory is recognised at the lower of cost or net realisable value at period end by comparing the inventory value measured at cost to evidence supporting net realisable value such as the current selling price of the products and achieved margins. We assessed whether the provisions for obsolescence calculated by the Group reflect known quality issues and commercial considerations including product expiration, market demand, and manufacturing plans, as well as their compliance with Australian Accounting Standards. We assessed the elimination of any unrealised profits on transactions between group entities and resultant tax consequences by the Group. We have assessed the Group’s disclosures with respect to inventories in Note 5 of the financial report. CSL Limited Annual Report 2021/22 143
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