Question

Section 03: Inventory
South City is a construction company which builds houses, offices and hotels. Materials
(cement, bricks, etc…) are purchased from a large number of suppliers. As a member of the
audit team, you are required to attend the inventory count of South City. On the day of the
inventory count, you attended the warehouse premises of South City and observed the
following activities:
 Pre-numbered count sheets were being issued to the client's staff carrying out the count.
The count sheets showed the inventory ledger balances for checking against physical
inventory.
 All count staff were warehouse staff and they were counting in teams of two.
 Information was recorded on the count sheets in pencil so amendments could be made
easily as required.
 At the end of the count, all count sheets were collected and the numeric sequence of the
sheets checked; the sheets were not signed.
Required
(i) In respect of your attendance at South City Co's inventory count, state one test of
control and one substantive procedure that you should perform.
(ii) List four audit procedures that an auditor will normally perform prior to attending the
client's premises on the day of the inventory count.
(iii) List two deficiencies in the control system for counting inventory at store and state how
that deficiency can be overcome.

Answer 1

Solution: (i)

Test of Control:

One of the test of control the auditor will perform will be testing the tagging of the inventory that whether the invnetory is tagged properly for making the physical count and whehter the cut off procedures are being followed or not.

Substative Procedure:

The auditor will take part in the physical count and will perform the test count himself to ensure the physical count and will observe the physical count done by the management.

Solution (ii)

a) The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.

b) Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting

c) Observe the performance of management’s count procedures

d) Inspect the inventory and perform test count

e) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results

Solution (iii)

a) The sheets provided to count the stock available were already pre numbered. Ideally these sheets should be blank and manually filled with the actual physical count.

b) The sheets were also not signed. Once the verification is done , it should be signed by the verifier and also reviewed by the senior official and signed.