In: Accounting
Case 2: You have been hired as audit supervisor of KMR co. During the meeting you have been informed about the issues found in the organization after the process of audit risk assessment. You have been assigned for the audit of work in progress. You are also going to be a part of the team which will attend the year-end inventory count along with the final audit. The work in progress contains the cars which are partly assembled and the value of this is anticipated to be material. The company values work in progress in accordance with the percentage of completion. The standard costs are then considered and applied to the percentages calculated. The company hires an independent valuer for the valuation of work in progress. The partly assembled cars are then shipped to its subsidiary unit in America for completion and sales. The said inventory is in transit for 2 weeks. Required:
a. What factors the company should consider when placing reliance on the work of an independent valuer. (Marks 2)
b. What audit procedures should be adopted to ensure the correct record of WIP?
a) Factors to be considered while placing the reliance on the work of an independant valuer:
1) Company should evaluate the competancy, capabilities and objectivity of the valuer.
2) Understanding the work being performed by valuer, his expertise in it and the time being spent on it.
3) Should evaluate the adequacy of the expert's work, reasonableness of the assumptions being made and the reliability of the source of the data.
b) Audit procedures for ensuring correct record of WIP:
1) Evaluate the nature, timing and extent of the audit procedures.
2) Using analytical procedure tools to analyse the trends for the current year when compared to the past years/periods.
3) Evaluate the validity or genuinity of the documentation being maintained for goods in transit. Take the average time for transit based on the past records and compare.
4) Gather all the possible changes in the circumstances in the environment that have happened during the year that might effect the entity's performance.
5) Run a walk through test to ensure the adequacy of the controls in place at each level of the production to records the various stages effectively.
6) IDentify the procedures how the cost is being determined at each stage of production and how the percentage of completion is determined.
7) Evaluate the work of the external expert, who has done valuation for the WIP quantities by checking the competancies and objectivity of the expert and his nature and timing of the work.
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