ASSIGNMENT 2 SEMESTER 2
REQUIRED 1
As we cannot make use of the previous auditors work relating to the opening balance of inventory, we
need to perform substantive procedures.
If we are satisfied that the system of internal control over inventory works, we can rely on the system
and the quantities of items given in the inventory records can be accepted. However if this is not the
case the following additional substantive procedures will be performed:
Valuation
• Recalculate the value of inventory and compare to the schedule (cost * quantity)
• Select a sample of inventory from the stock records at 30 September 2018 and perform the following
tests:
Agree the cost price per the inventory list, to the costs used to calculate the inventory
value in the general ledger to ensure the correct value was used
Ensure inventory was recorded at the lower of cost and net realizable value (per IAS 2)
by comparing the cost value per the inventory list to the most recent selling price of
that item of inventory (as the selling price of inventory has not increased, we could use
the latest available sales invoice to obtain this amount)
As inventory is kept on the FIFO basis, perform testing on the cost of inventory by
applying the product code and description to its matching purchase invoice price to
ensure the value of inventory is correctly calculated
• Enquire from management regarding the provision for stock obsolescence in the prior year (as this
would reduce the value of inventory) and perform the following procedures over the estimate:
Discuss the policy relating to the inventory provision with management and consider
the reasonableness thereof
Consider the appropriateness of management assumptions and methods used o
Compare the provision to the actual write off of inventory in the current year consider
management’s ability to provide accurately
• Review the reasons for credit notes issued during the first few months in the new year (2019) and any
customer complaints received may also be inspected to determine any obsolete or defective inventory
• Select entries from the inventory records for both the inflow and the outflow of inventory and follow
them through to the source documents to ensure that all entries in the inventory records are valid.
• Perform casting of the general ledger and inventory lists at 30 September 2018 to ensure inventory
recorded at right amount
• Inspect the minutes of meetings or journal entries for any large write down/(s) of inventory during the
first few months in the new year (2019) of the financial year.
, Cut off
• For purchases of inventory: o Obtain 10 purchase invoices/Goods received notes just before 30
September 2018 and 10 invoices just after 30 September 2018
For those items purchased before the year end, trace through to the GL to ensure they have
been recorded o For those items purchased just after year end, ensure they are not included in
the stock listing
• For sales of inventory:
Test 10 entries before and after 30 September 2018 that they are appropriately included or
excluded from the inventory records
Existence
• As no stock count was performed by the previous auditor, obtain a copy of the stock count performed
by Mr Hands Free to confirm a stock count was actually performed
• Consider if we can rely on the stock count performed by:
evaluating the results of our assessment of the control environment as well as, o the integrity
and reliability of the warehouse manager (if he is in a position to manipulate results of the stock
count (access to records, segregation of duties etc)
• Inspect the stock count sheet for evidence of differences identified at the count and trace through to
the general ledger to ensure they were correctly processed.
• Obtain a copy of the stock count instructions to ensure that the count was appropriately performed
i.e. evidence that stock was counted by teams, the count was performed in a separate area blocked off
from deliveries
• Agree the quantity on hand according to the perpetual inventory list to the stock count sheets
performed by Mr Hands Free.
• Scrutinise the 2018 inventory listing for any abnormal inventory items not in-line with Banana’s
business activities of cell-phones and cell-phone accessories
Perform roll back procedures (existence/valuation):
Reconcile opening inventory to the current inventory count (Opening units plus units purchased
less units sold)
agree the reconciling items to supporting documentation for example quantities sold to invoice
quantities sold during the year
Agree the reconciling items to supporting documentation for quantities purchased to supplier
invoices or good receive notes.
Completeness
• Perform subsequent sales testing, by selecting sales invoices in October 2018 and tracing them back to
the inventory list at year end to ensure they were accurately recorded
REQUIRED 1
As we cannot make use of the previous auditors work relating to the opening balance of inventory, we
need to perform substantive procedures.
If we are satisfied that the system of internal control over inventory works, we can rely on the system
and the quantities of items given in the inventory records can be accepted. However if this is not the
case the following additional substantive procedures will be performed:
Valuation
• Recalculate the value of inventory and compare to the schedule (cost * quantity)
• Select a sample of inventory from the stock records at 30 September 2018 and perform the following
tests:
Agree the cost price per the inventory list, to the costs used to calculate the inventory
value in the general ledger to ensure the correct value was used
Ensure inventory was recorded at the lower of cost and net realizable value (per IAS 2)
by comparing the cost value per the inventory list to the most recent selling price of
that item of inventory (as the selling price of inventory has not increased, we could use
the latest available sales invoice to obtain this amount)
As inventory is kept on the FIFO basis, perform testing on the cost of inventory by
applying the product code and description to its matching purchase invoice price to
ensure the value of inventory is correctly calculated
• Enquire from management regarding the provision for stock obsolescence in the prior year (as this
would reduce the value of inventory) and perform the following procedures over the estimate:
Discuss the policy relating to the inventory provision with management and consider
the reasonableness thereof
Consider the appropriateness of management assumptions and methods used o
Compare the provision to the actual write off of inventory in the current year consider
management’s ability to provide accurately
• Review the reasons for credit notes issued during the first few months in the new year (2019) and any
customer complaints received may also be inspected to determine any obsolete or defective inventory
• Select entries from the inventory records for both the inflow and the outflow of inventory and follow
them through to the source documents to ensure that all entries in the inventory records are valid.
• Perform casting of the general ledger and inventory lists at 30 September 2018 to ensure inventory
recorded at right amount
• Inspect the minutes of meetings or journal entries for any large write down/(s) of inventory during the
first few months in the new year (2019) of the financial year.
, Cut off
• For purchases of inventory: o Obtain 10 purchase invoices/Goods received notes just before 30
September 2018 and 10 invoices just after 30 September 2018
For those items purchased before the year end, trace through to the GL to ensure they have
been recorded o For those items purchased just after year end, ensure they are not included in
the stock listing
• For sales of inventory:
Test 10 entries before and after 30 September 2018 that they are appropriately included or
excluded from the inventory records
Existence
• As no stock count was performed by the previous auditor, obtain a copy of the stock count performed
by Mr Hands Free to confirm a stock count was actually performed
• Consider if we can rely on the stock count performed by:
evaluating the results of our assessment of the control environment as well as, o the integrity
and reliability of the warehouse manager (if he is in a position to manipulate results of the stock
count (access to records, segregation of duties etc)
• Inspect the stock count sheet for evidence of differences identified at the count and trace through to
the general ledger to ensure they were correctly processed.
• Obtain a copy of the stock count instructions to ensure that the count was appropriately performed
i.e. evidence that stock was counted by teams, the count was performed in a separate area blocked off
from deliveries
• Agree the quantity on hand according to the perpetual inventory list to the stock count sheets
performed by Mr Hands Free.
• Scrutinise the 2018 inventory listing for any abnormal inventory items not in-line with Banana’s
business activities of cell-phones and cell-phone accessories
Perform roll back procedures (existence/valuation):
Reconcile opening inventory to the current inventory count (Opening units plus units purchased
less units sold)
agree the reconciling items to supporting documentation for example quantities sold to invoice
quantities sold during the year
Agree the reconciling items to supporting documentation for quantities purchased to supplier
invoices or good receive notes.
Completeness
• Perform subsequent sales testing, by selecting sales invoices in October 2018 and tracing them back to
the inventory list at year end to ensure they were accurately recorded
