Reference no: EM133139560

Question - Introduction and client background - You are an audit senior in Riskam and Co and you are commencing the planning of the audit of CariBev Co for the year ending 31 August 2020.

CariBev Co is a drinks manufacturer and has been trading for over 20 years, it operates from one central site, which includes the production facility, warehouse and administration offices. CariBev sells all of its goods to large retail stores, with 60% being to one large chain store FoodForAll.

The company has a one year contract to be the sole supplier of drinks to FoodForAll. It secured the contract through significantly reducing prices and offering a four-month credit period, the company's normal credit period is one month.

Goods in/purchases - In recent years, CariBev has reduced the level of goods directly manufactured and instead started to import drinks from South Asia. Approximately 60% is imported and 40% manufactured.

Within the production facility is a large amount of old plant and equipment that is now redundant and has minimal scrap value. Purchase orders for overseas drinks are made six months in advance and goods can be in transit for up to two months. CariBev accounts for the inventory when it receives the goods.

To avoid the disruption of a year end inventory count, CariBev has this year introduced a continuous/perpetual inventory counting system. The warehouse has been divided into 12 areas and these are each to be counted once over the year.

The counting team includes a member of the internal audit department and a warehouse staff member. The following procedures have been adopted;

1. The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present.

2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not listed on the sheets but present in the warehouse area.

3. Any damaged or old items are noted and they are removed from the inventory sheets.

4. The sheets are then passed to the finance department for adjustments to be made to the records when the count has finished.

5. During the counts there will continue to be inventory movements with goods arriving and leaving the warehouse.

At the year-end it is proposed that the inventory will be based on the underlying records. Traditionally CariBev has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision.

Finance Director - In May 2020 CariBev had a dispute with its finance director and he immediately left the company. The company has temporarily asked the financial controller to take over the role while they recruit a permanent replacement.

The former finance director has notified CariBev that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confident the claim has no merit.

Required -

(a) Identify and explain the audit risks identified at the planning stage of the audit of CariBev Co.

(b) When Riskam and Co. accepted the engagement from CariBev Co, Riskam was required to tour the client's plant facilities. Discuss the ways in which Riskam's observations made during the course of the plant tour will be of help in planning and conducting the audit.

(c) Discuss the importance of assessing risks at the planning stage of an audit.