Consider each of the following situations, which are independent of each other.I

Question

Consider each of the following situations, which are independent of each other.In each case:

1. Identify the possible effect in relation to inventory if tests of control indicate a low control risk in relation to inventory

2. Describe what additional procedures you would complete at year end

a) While observing your client’s stocktake in progress you notice that the ‘count team’ and the ‘checking team’ are working together, ie. the counting team counts the stock and the checking team records the details on the stock tag and then signs off as having checked the count. When asked to explain the reason for this approach the staff indicate that it makes the stocktake go twice as fast and they are hoping to finish early and go down to the pub to watch the cricket.

b) Your client proposes to conduct the stocktake one month before year end and wishes to discuss the impact this will have on your audit.

c) Your client is a manufacturing business who expects to receive a large order from a government department for items that they do not normally produce. As such, they have purchased large amounts of raw materials on the assumption that they will receive the order. Manufacturing of the items for the expected order has already commenced and a significant amount of WIP exists.

Explanation / Answer

1;Test of control and inventory:

In every inventory management there is a repelnishment cycle, minimum order of inventory etc. Test of control value is significant in understanding the quality of inventory in stock. If this falls under the permissible limit then inventory is under control. There should be lower control value and upper control value for the quality checks which ensures the sufficient inventory that can be processed or shipped.

2:Count and checkling team ensures the count of inventory in the stock and also the quality of inventory in stock. The both team has to work in a sychronised platform to ensure the inventory availability, to call out any inventory shortage or discrepencies. The multiple verification is the right approach as they can validate with the count of inventory they recieved from the ' count team' and can document the same. Client proposes a monthly cycle count of inventory so that in the financial year or log book of inventory this will reflect on the right place. This can be ensured by creating a cycle count inventory dates on every month to be followed by the particualr team and should send the report based on that. The checking team can valdate the stock in the same time line to double check or cross verify the results shown by count team. Thus periodical stock of inventory can be managed properly and efficiently. This will help the demand planning team and sales team to analyse the requirement and can co-ordinate with the suppliers or production team to work on the required gaps.

WIP : Work in Progress is a class of inventory which is aqlready on the pipeline of process. The firm has anticipated a big order from government agencies and they are very particular about the service line for the same. The large amount of raw materials they have already purchased which will have impact on their inventory carrying value. To keep the momentum of production and demand there should be more data validation and proper demand planning to ensure no inventories are procured unnecessarily. Accountable WIP and their count also to be included in the seperate log which can be incorporated in the net Inventory in stock and how much more required to fulfil the demand. Proper audit check and co-ordination with sales team is required to calculate the accurate inventory level tom be maintained.

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