Reference no: EM133039790

QUESTION - You are a junior internal auditor at Caterers Limited. The company's financial year[1]end is 31 July 2020. In late June you are informed by your internal audit manager, that you will be part of the audit team attending the inventory count and that you will assist with certain other aspects of the inventory audit.

The internal audit team has gathered the following information:

a) The company's head office is located on the West Rand, but the inventory outlet is a single, very large "warehouse-type" space in a shopping centre on the East Rand. The space consists of a showroom and an adjoining warehouse. The internal control process is sound.

b) The company sells a large range of general catering equipment and kitchen appliances. Large quantities of inventory are held.

c) A well-designed computerised perpetual inventory system is maintained and physical control over the inventory is efficient, the only weakness being, in the internal audit team's opinion, that cycle counts are not conducted. Other than fridges, stoves, etc on the shop floor, inventory is kept in its original packaging. The warehouse is well laid out, with different appliances being kept in designated areas and stacked by make and model. Despite the sound controls, inventory does get damaged and dented and there are always items which do not sell as well as expected.

d) The year-end inventory count is planned for the close of business (4.00 pm) on 31 July 2020.

e) The directors are anxious that the financial situation of the company be presented as favourably as possible.

f) The company holds an extensive line of expensive cooking pots on consignment for Modernpots CC. It does not sell any other cooking pots.

g) The method for counting inventory will be as follows: Sequenced inventory count sheets will be printed from the inventory Masterfile, but will reveal only the inventory item number, description and location of the inventory. The theoretical quantity on hand will not be shown.

The warehouse will be divided into 10 designated areas, with 10 teams of two people performing the count per area.

As each item is counted, the first person will attach a bright pink label to it and the second person will record the quantity of the items counted on the inventory sheet.

Once the count is completed, the counting teams will return the inventory count sheets to Freddie Sithole the warehouse manager, who will oversee the count.

While the counting teams have a break, the quantities recorded on the inventory count sheets will be compared to the quantities recorded on the inventory masterfile (using a simple software programme), and a list of differences will be printed out. The counting teams will then recount/follow up on items for which there are differences. Where there are actual quantity errors, they will be corrected on the inventory count sheets so that by the end of the count, Freddie Sithole will be satisfied that the inventory count sheets accurately represent the physical inventory on hand.

h) After the inventory count, any quantity differences resulting from errors in the perpetual inventory records will be investigated and the masterfile will be amended accordingly. Once this has been done, the final inventory count sheets will be produced and the value of the inventory will be calculated from the inventory masterfile.

i) Around mid-July, the counting teams will be provided with the written count information and instructions from Freddie Sithole.

REQUIRED -

1. Identify 8 pre-engagement procedures you would recommend the audit senior carry out prior to the year-end inventory audit.

2. Describe 8 audit engagement procedures the internal audit team will conduct when attending the 31 July 2020 inventory count.