Reference no: EM132606760

You are a trainee accountant in the audit department of Fawlty Bean & Co, a large regional accountancy practice based in Hull, East Yorkshire. The audit Manager (who is your line manager and supervisor) is Mr B Johnson. He is due to go on two weeks' holiday tomorrow with his fiancé and new baby son. In his absence he has asked you to look at some client work and prepare detailed responses ready to discuss with him on his return from vacation. He has also given you some file notes he has made on a competitor firm who are undertaking practices which he considers to be unethical and, as a trainee with up-to-date knowledge, he would like your observations. The following are summaries of the files:

File

Fruity Buns Lack Protein Limited (FBLP) is a producer of healthy eating snack products. Based in Hull it has easy access to fast delivery routes and supplies many convenience stores such as Corner Shop. The company operates a perpetual inventory system which is updated on a daily basis using goods received and goods despatched notes. Once the invoiced value for goods purchased is known then the perpetual records are updated to reflect the new purchase cost. Sales invoices are issued with the snacks as they are despatched.

The company's year-end is 30th November 2019 and the perpetual records valuation is to be used in the financial statements as the cost. As auditor you have checked the pricing used within the system and found it to be satisfactory.

Physical counts of the inventory are held on the third Saturday of every month and at this time the perpetual records are updated to actual and any variations are investigated by the warehouse manager. A written report is always produced for senior management to explain any adjustments.

One of your junior staff attended the last count of the year on 16th November 2019 and took test counts. No problems were noted at the count but the junior arrived late due to traffic and did not see the start of the proceedings.

Required

Question 1) Identify and suggest audit solutions to the audit problems that may arise due to the late arrival of the junior at the stock count.

Question 2) Describe in detail the control procedures that you would expect to see put in place by FBLP during the physical count of inventory.

Question 3) Describe the audit work which would need to be carried out in the following areas:

a) Cut off at 16th November 2019 and subsequent roll-forward;

b) Updating of the perpetual records at 16th November 2019.

Question 4) Evaluate the matters which you would consider before placing reliance on the perpetual system operated by FBLP Limited.