AUDITING AC34-3
What am I required to do in this assignment?
You are an audit team leader of A & Y LLC (Abdullah and Yaseen) and are in the process of reviewing the inventory system and documentation for your client, Ahmad Company which manufactures high tech equipment. The company’s factory and warehouse are located away from the city and is spread over a huge area, and their financial
year-end on June 30th 2019.
The Company is planning to undertake a full inventory count at the year-end of its raw materials, work in progress and finished goods and you will be attending this count. In preparation you have been reviewing the inventory count instructions for finished goods provided by Ahmad Company.
The count will be undertaken by 15 teams of two counters from the warehouse department with Ahmad Company’s Inventory controller providing overall supervision. Each team of two is allocated a number of bays within the warehouse to count and they are provided with sequentially numbered inventory sheets which contain product codes
and quantities extracted from the inventory records. The counters move through each allocated bay counting the inventory and confirming that it agrees with the inventory sheets. Where a discrepancy is found, they note this on the sheet.
The warehouse is large and approximately 10% of the bays have been rented out to third parties with similar operations; these are scattered throughout the warehouse. For completeness, the counters have been asked to count the inventory for all bays noting the third-party inventories on separate blank inventory sheets, and the finance department will make any necessary adjustments.
Some of Ahmad Company’s finished goods are high in value and are stored in a locked area of the warehouse and all the counting teams will be given the code to access this area. There will be no dispatches of inventory during the count and it is not anticipated that there will be any deliveries from suppliers. Each area is counted once by the
allocated team; the sheets are completed in ink, signed by the team and returned after each bay is counted.
As no two teams are allocated the same bay, there will be no need to flag that an area has been counted. On completion of the count, the financial controller will confirm with each team that they have returned their inventory sheets.
Additionally, following three matters have also been brought to your attention.
The company’s profit before tax for the year ended June 30th 2019 is RO 16·3m and total assets as at that date are RO 66·8m. You attended a meeting with your audit manager where the following matters were discussed:
Trade payables and accruals
Ahmad Company purchases its raw materials from a large number of suppliers. The company’s policy is to close the purchase ledger just after the year end and the financial controller is responsible for identifying goods which were received pre year-end but for which no invoice has yet been received. An accrual is calculated for goods received but not yet invoiced (GRNI) and is included within trade payables and accruals. The audit strategy has identified a risk over the completeness of trade payables and accruals. The audit team will utilize computer assisted audit techniques (CAATs), in the form of audit software while auditing trade payables and accruals.
Bank overdraft and savings accounts
Ahmad Company’s draft financial statements include a bank overdraft of RO 2·6m, which relates to the company’s main current account. In addition, Ahmad Company maintains a number of savings accounts. The savings account balances are classified as cash and cash equivalents and are included in current assets. All accounts have been
reconciled at the year end.
Directors’ remuneration
Ahmad Company’s board is comprised of eight directors. Their overall remuneration consists of two elements: an annual salary, paid monthly; and a significant annual discretionary bonus, which is paid in a separate payment run on 20 June. All remuneration paid to directors are included within wages and salaries. Local legislation requires disclosure of the overall total of directors’ remuneration broken down by element and by director.
You are required to write a report to your audit engagement partner in which you are required to cover the following in respect of the inventory count procedures at Ahmad Company:
- Identification and evaluation of five deficiencies in inventory system of Ahmad Company.
- Recommend a control to address each of these deficiencies which you identified.
- Describe a test of control you would perform to assess if each of these recommended controls (as recommended in point 2 above) if implemented, is operating effectively.
- Discussion on substantive procedures that you should perform to obtain sufficient and appropriate audit evidence in relation to the “Completeness” of Ahmad Company’s trade payables and accruals.
- Discussion on the procedures which could be carried out during the audit of Ahmad Company’s trade payables and accruals.
- Discuss substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence
in relation to Ahmad Company’s year-end bank balances. - Discuss substantive procedures would perform to confirm the directors’ remuneration included in the financial
statements.
What do I need to do to pass? (Threshold Expectations)
• Demonstrate skills of identifying and evaluating five deficiencies in inventory system, recommend a control for each deficiency identified and suggest a test of control to check the operational efficiency of that control.
• Show and ability to discuss substantive procedures which are performed to obtain sufficient and appropriate audit evidence in relation to the “Completeness” of Ahmad Company’s trade payables and accruals.
• Discussion on the procedures which could be carried out during the audit of Ahmad Company’s trade payables and accruals.
• Discuss substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Ahmad Company’s year-end bank balances.
• Show the ability to discuss substantive procedures that can be performed to confirm the directors’ remuneration which is included in the financial statements.
How do I produce high quality work that merits a higher grade?
Critical reasoning is consistently evident across the discussions. The tasks have relevant and adequate discussion and detailed narrations.
Evidence of exemplary understanding of relevant theory and research. Reference to appropriate theoretical background conceptual frameworks, accounting and auditing standards where necessary.
How does assignment relate to what we are doing in scheduled sessions?
During the scheduled sessions, guidance and explanation will be given regarding various issues related to audit of inventory, the related controls, test of controls, substantive procedures for obtaining evidences for various financial statement assertions specially for trade payable, accruals, bank balances and directors remuneration.
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