Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Your firm is the auditor of Trent Textiles Ltd, and you are planning your audit work on the stock-take, which will be carried out at the firm‘s year-end of 31 May 19X3.

Trent Textiles manufactures knitted garments, including pullovers. The production process comprises:
(a) Knitting the individual components (e.g body and arms);
(b) Sewing the components together to form the finished garment;
(c) Cleaning, finishing, pressing and folding the garments;
(d) Packing the garments, ready for dispatch to the customer.

Trent Textiles does not have a perpetual inventory system, so the value of the stock in the accounts is found from the stock-take at the year-end. For management purposes, Trent Textiles carries out a full stock-take every three months.

Your permanent file of the company confirms that it has a single factory and no internal audit department.

You have been asked the manager in charge of the audit to suggest the work you will perform at the stages listed below.

(a) State the work you will carry out prior to the commencement of the stock-take.
(5 marks)
(b) State the procedures you will check during the stock-take to ensure the company‘s staff have accurately recorded the stock. (8 marks)
(c) State the work you will carry out and the matters you will record at the stock-take.
(7 marks)
(Total: 20 marks)

Tutor‟s hint: The audit of stock is an important subject in this paper. Remember that the stock-take attendance gives the auditor assurance of existence of stock, not ownership or value. In (a) think of the information the auditor needs, and then ask how it will be obtained. Key elements in (b) are supervision, who caries out the count, how the count is to be carried out and recorded, and special arrangements for certain stock.

(a) The work I will carry out prior to the commencement of the stock-take will be as follows:

i) Review previous year‘s audit working papers and discuss any developments in the year with management.

ii) Obtain and review a copy of the company‘s stock taking instructions.

iii) Arrange attendance at stock count planning meetings, with the consent of management.

iv) Gain an understanding of the nature of the stock and of any special stock taking problems this is likely to present, for example scrap in piles.

v) Consider whether specialist involvement is likely to be required as a result of any circumstances noted in (iv) above.

vi) Using the results of the above steps, plan for audit attendance appropriately experienced audit staff.

vii) Consider the impact of internal controls upon the nature and timing of the stock taking attendance.

viii) Discuss with the management the extent to which each garment is considered complete at each stage of the manufacturing process.

(b) The first step in checking that the company‘s staff have accurately recorded the stock will be to examine the stock taking instructions issued to stock taking staff. This will involve checking that the following procedures are in place:

i) Supervision of the planning and execution of the stock-take sufficient senior and qualified personnel drawn from various departments: at least some of the officials should not normally be involved with the custody of stocks.

ii) Tidying and marking stock to facilitate counting of items of stock. The whole of the stock taking area should be divided into sections for control purposes.

iii) The serial numbering and control of the issue and return of all the rough count records, and their retention.

iv) Systematic carrying out of counts to ensure coverage of the whole stock.

v) Arrangements for the count to be conducted at least two people, with one counting and the other primarily to check the count, or alternatively for tow independent counts to be carried out; and for any differences arising to be investigated and resolved.

vi) Stock sheets being complete in ink and being signed those who carried out and checked the count.

vii) Information to be recorded on the count records. (normally this will include the location and identity of the stock items, the unit of count, the quantity counted, the condition of the items and the stage reached in the production process).
viii) Restriction and control of the production process and stock movements during the count.

ix) Identification and segregation of damaged, obsolete, slow moving, third parties‘ stocks and returnable stocks, so that these can be properly accounted for and recorded.

x) Recording the quantity, condition and stage of production of all the work in progress for subsequent checking with the costing and stock records.

xi) Co-ordination of the count with cut off procedures so that documentation concerned with the flow of goods can be reconciled with the financial records. For this purpose, last numbers of goods inwards and outward records and of internal transfer records should be noted.

xii) Reconciliation with the stock records, if any and identification and correction of differences.

(c) The following work should be carried out at the stock-take:

i) Carry out a series of test counts between the stock and the count records and vice- versa. Attention should be given to high value stocks.

ii) Obtain information about the stock‘s condition, age, usage and, in the case of work in progress, its stage of completion.

iii) In order to ensure that cut-off stock is correct, the following procedures should be carried out:
1. Make a record during the stock taking attendance of all movement notes relating to the period, including:
– All inter-departmental requisition numbers;
– The last goods received note and dispatch note prior to the count;
– The first goods received note and dispatch note after the count.

2. Observe whether correct cut-off procedures are being followed in the dispatch and receiving areas. Discuss procedures with company staff performing the count to ensure they are understood.
3. Ensure that no goods finished on the day of the count are transferred to the warehouse.

(iv) Finally the auditors should:

1. Conclude whether the stock taking has been properly carried out and is sufficiently reliable as a basis for determining the existence of stock;
2. Consider where any amendment is necessary to their subsequent audit procedures; and
3. Try to gain from their observations an overall impression of the levels and values of stocks held so that they may, in due course, judge whether the figure for stocks appearing in the financial statements is reasonable.\

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