Question

You are the auditor from a CPA firm who each year audits a company called ABC Grocers, Inc. ABC Grocers, understandably, has a large amount of their assets tied up in Inventory. Some of their inventory is small such as candy at the check out counters, but some of it is rather large in size and dollar amount such as large amounts of meat that is waiting to be butchered. The inventory is susceptible to spoilage and theft.

During the second quarter of this fiscal year, ABC Grocers uncovered a scheme of employees' stealing produce and meats from the store and selling them at discount to friends and family. Based on their investigation these thefts had been going on for approximately two months before it was discovered.

Based on this information, evaluate which financial statement accounts are at risk of being misstated. Also, explain what you would do as the auditor to ensure that the Inventory account is valued properly and that all losses from the theft have been accounted for.

Answer 1

In the given case ABC Grocers have large amount of assets tied up at inventory ranging from as small as candy and large amount of meat ready to be butchered with high chances of spoilage and theft.

While thefts are going on from last two months in second quarter of fiscal year, financial statements accounts at risk of misstatement are inventory, inventory loss account, reserves account, COGS, insurance claim(if goods were insured).

As an auditor one should attend physical inventory count and audit inventory records to ensure inventory account is not misstated.

As per ISA 500 Audit Evidences, if auditor is unable to attend inventory count, he should perform physical count on alternate day and perform procedures on intervening transactions. Check if inventory records are updated from time to time as and when sale is made or theft/spoilage occurs. Check for the controls in ABC Grocers to avoid such mishaps in future as this would doubt theft of various other assets like cash and capital goods.