Question

You have commenced planning the audit of FC, as part of your preliminary planning you visit the factory.
While there you notice there are large quantities of high value raw materials, genuine silks and other similar
high value items stored in an unlocked store room at one end of the building. Workers would walk in select
bolts of material and take them back to the cutting tables. On enquiry you are told that each night the
storeman notes down the bolts of material in the store, and uses those notes to calculate re-order
requirements.
Required:
Given the above information critically analyse the control system surrounding raw materials, and explain in
depth, using the Audit Risk Model as a tool, what effect the above information will have on your approach to
the audit of raw material inventory.

Answer 1

Here is my Answer for the above question

i) information about the Control system surrounding Raw materials

An effective Internal control structure for inventory includes a companies plan of organisation and all the procedures and actions it takes to:

1. Protect its assets against theft and waste.

2. Ensure compliance with company policies and federal law.

3. Evaluate the performance of all personnel to promote efficient operations.

4. Ensure accurate and reliable operating data and accounting reports.

Protection of Assets

Companies protect their assets by (1) segregating employee duties, (2) assigning specific duties to each employee, (3) rotating employee job assignments, and (4) using mechanical devices.

Here in the above case High value Raw materials are not stored in locked room, so there is no protection of Assets

and bolts of material also no control on its use while taking from the store, due to lack of control there is chance of theft of Assets

B) Audit Risk Model

Audit risk is the risk that Financial statements are materially incorrect, even though the audit opinion states that the Financial reports are free from material misstatements.

There are 3 types of Audit risk

1. Control risk. This is the risk that potential material misstatements would not be detected or prevented by a client's control systems.

2. Detection risk. This is the risk that the audit procedures used are not capable of detecting a material misstatement.

3. Inherent risk.

In the above case there is control risk that potential material misstatements would not be detected or prevented by a clients control system.

Here on the inventory there is no proper controls, due to lack of proper controls high value material may effect to theft and there is no controls on bolts of raw material also