Question

Sarah has been assigned to Jewelry Warehouse (JW), a maker of inexpensive rings and necklaces. JW uses C-Grade gems in its products. This allows JW to sell nice looking products at a low price. Sarah has been granted almost full access to the inventory but is supervised as she goes through the plant, which she noted was clean and well organized.  

The one area she was not permitted to go was the vault where the gold and silver were kept. The plant manager brought the metal bars out to her one by one to count. Sarah agreed the count to the amount claimed on the company records and recalculated the value of the inventory based on the prices paid by JW. This is sarah first assignment as an auditor.

Required

a) Identify some assertions that are at increased risk of a material misstatement.

b) In audit terms, identify the type of evidence obtained and whether you feel it is sufficient to support the inventory amount stated on the balance sheet.

Answer 1

a) Some assertions that are at increased risk of a material misstaments are as follows

Inherent risk:-Inherent risk is the risk occur due to error or omission in financial statement due to a factor other than failure of internal control. in financial audit inherent risk is most likely to occur where the transcations are complex or situation that require high degree of judgement in regard to financial statement.

In the given scenario the JW deals with C-Grade gems in its product to lower the price of the product. So auditor should have basic knowledge about the Gems business how it works and should seek the help of expert in valuing the inventory to know fair vaue of it.

Control Risk:-Control risk is the risk that occur when the management or company fails to apply the internal controls properly.

In the above scenario the JW deals with C-grade gems , so the company should have proper control over account receivable and accounts payables and other activity because as the JW fails to conduct independent review of accounts receivable and other activity there will be high control risk assertion during the audit. So the auditor should check whether the company is inline proper internal control aor not.

b)The types of evidence obtained during audit are as follows

1) Financial Statement

2) Accounting information

3) Bank accounts

4) Invoice

5) Receipts

6) Payroll listings

7) Fixed assets register

8) Bank Confirmations

9) Managements accounts

10) Inventory lock book

11) All other documents used by businesses to supprot financial transcations or events in financial statement.

In the above scenario sarah was allowed to business premises for audit but she was not allowed to enter the Vault where the gold and silvers where kept. she should have allowed to vault because as auditor she has the right to check the invetory physically and match it with records of company and she also have the right to check for the purchase invoice when the inventory is bought and whether they have recorded with correct value in inventory register or not. and she can aslo check whether the freight charges are include in inventory or charged to profit and loss account on period basis.

So in my opinion there is ristriction to access the vault , where the company stores the inventory ,there might be chance that management doesnot disclose the total inventory to sarah they must have shown that much what they have recorded in financial statement. Due to limitation in accessing the stock physically sarah can't authenticate the exact amount of inventory stated in financial statement.