Question

Question 4

You work in an audit firm who acts as the external auditor of ABC Trading Limited. The audit partner has asked you to carry out audit procedures in relation to the cut off assertion and to verify the inventory quantities at the end of the financial year.

All information about inventory is kept in a computerized system, called inventory control. Relevant information in relation to quantities is being updated in the computerized system using the GRNs and sales invoices.

Inventory count is performed on a monthly basis with the purpose to count fast moving and inventory items having high cost. In addition, the company performs additional inventory counts throughout the year for all inventory items securing that all inventory items will be counted sufficiently within a year.

You have attended the inventory count on 18 December 2018 and the additional inventory count which took place on the 8 January 2019. The company’s financial year ends 31 December 2018.

Inventory valuation was performed using information obtained from the computerized inventory system as at 31 December 2018 BUT no inventory count has taken place at the end of the year; 31 December 2018.

Required

a) List and describe the principal matters you should have checked and the matters you should have recorded when you attended the company's inventory count on 18 December 2018
b) List and describe the checks you will perform in checking sales and purchases cut-off have been correctly carried out:
i. At the date of inventory count on 18 December 2018
ii. At the year-end
c) The work you will carry out to check that the book inventory records have been correctly updated from the counts at the inventory count
d) The work you will carry out to satisfy yourself that the inventory quantities used in the valuation of the inventory at the year-end are correct

Answer 1

(a)steps in the process are as follows:
-Preview Inventory
-Precount inventory
-Freeze warehouse
-order count tags
-Outside storage locations will be notified
-investigate unusual results
-Verify tags on online data entry system
-Count Inventory

(B)Sales cutoff procedures
-this will usually arise when companies recognise revenue based on the date on which the sales invoices are generated
-Auditors need to consider and understand cutoff error risk in each level.
-Credit notes issues after year end and determine any sales made before year end are returned to the company to year end
-Have significant impact on the sales at year end before recognised

Purchases cutoff Procedures
-Obtain delivery orders of suppliers
-check dates of receipt of goods by the company fall in same accounting period.
-if there is no indication of the date of recepit of goods on delivery orders,obtain alternative evidence from other procedures.

(c)Inventory counts

Before the client performs their inventory count,clients proposed policies pertaining to inventory count

-Two person count teams
-Master count sheet
-shipping and receiving of goods
-Pre numbered tags with proper sequencing

During inventory count
-observe the quality and condition of goods
-checking of policies and procedures being performed correctly and effectively
-have to run own tests and makes note of it,if any adjustments that have to be followed up and updated in records and ledger.

After Inventory count
-It have to be valued at lower of either cost or market values.
-Match the quantities forward from the count