Question

You are an auditor at a public accounting firm. You and your team are entrusted by Partner to handle clients engaged in the home appliance retail business. Your client is a company that has go public. The client's financial statement in the previous year reported a loss, however this year reported a material gain. After you check, it turns out that the client reports income that is not much different from the previous year, however, there can be a profit due to the decrease in Cost of Goods Sold (COGS). The client reports that the amount of inventory has increased drastically, even though sales have not increased and the account payable balance is almost the same as in previous years, this has led to suspicion of a double counting scheme in the client's inventory. In addition, when a random check was carried out incidentally at one of the client's warehouses, it was found that many inventory were out of date but the client did not make adjustments. Question:

a. If you wanted to perform an analytical procedure to check the suspected occurrence of this double counting scheme, what ratio would you calculate? Explain your answer!

b. What assertions are related to the above case? Explain your answer!

Answer 1

a) As the Auditor of the company, for check of double counting of inventory analysis of inventory turnover ratio shall be conducted by the auditor to analyse how many days it takes to sell the inventory at average basis from that it can be evaluate how many times company turns it stock in a year to generate the total revenue Also the auditor should analyse the inventory outstanding ratio, this helps to identify how much stock should be maintain with the company on average basis .

b) Following are the assertion relates to the given case

1. Valuation: Valuation of inventory in the books of the client is the main concern of the auditor in the given case as the outdated stock shall be recorded or adjusted in the books at the correct value (fair value / Net realizable value) instead of cost.

2. Existence: The chance of the double counting of stock leads to the fact that there might be the stock which does not exist, but still appearing in the books.

3. Completeness: drastic fall change in the profit raises the question on Completeness of the books for example there might be the chance that purchases and expenses are not properly recorded In the books of accounts.