Kaplan kit question 220-Silver co

This scenario relates to two requirements.
It is 1 July 20X5. You are an audit senior with Golden & Co and you are in the process of
reviewing the inventory count arrangements for your audit client, Silver Co, in preparation
for attendance at the full year?end inventory count on 30 September 20X5. The company
manufactures household furniture such as tables, sofas and beds and has a factory and a
large warehouse which are located on a single site.
Inventory count arrangements
The company manufactures goods 24 hours a day, seven days a week to meet customers’
demands. Production will still be continuing during the inventory count as it is not possible
for the company to stop producing goods. Movements of goods in and out of the factory and
warehouse will also have to continue for operational reasons.
The count will be undertaken by 20 teams of two counters from the warehouse, and the
warehouse supervisor will be overseeing the inventory count. Each team will be given a
specific area of the warehouse to count using sequentially numbered inventory sheets which
detail the items of inventory together with quantities held at the date of the count as per the
inventory system. It has been left to the individuals within each team to decide how to
allocate the responsibilities between them.
All goods present in the warehouse on 30 September 20X5 will be allocated into separate
warehouse bays (designated areas of the warehouse) in preparation for counting. When a
warehouse bay has been counted, it is crossed out on the warehouse map which is held in
the office by the warehouse supervisor. The warehouse supervisor is confident that the 20
teams are familiar with the warehouse and the location of the inventory and concluded that
that each bay only needs to be counted by one team. One area of the warehouse, which
includes a large quantity of spare parts left over from production, will be segregated so that
this inventory will not be counted, as the warehouse supervisor has stated that these items
are unusable.
A numerical sequence check of the sheets will be carried out by the warehouse supervisor
once the count is finished. The inventory sheets will then be passed to a warehouse assistant
to update the inventory records to reflect the inventory physically present as per the
inventory sheets.
Work in progress valuations have previously been carried out by an external inventory valuer.
However, the warehouse supervisor has offered to undertake this valuation this year due to
being having a detailed knowledge of the company’s products. The directors have agreed to
this on the basis that it will save costs.
Last week the company agreed to store 30 sofas belonging to a third party in its warehouse
for the next four months as the third party’s storage facilities became flooded. For
convenience, these sofas have been stored alongside similar products which belong to Silver
Co.

A, -The likelihood of a material misstatement in the financial statements.
-The susceptibility of a transaction,account balance or a disclosure in the financial statements.
-The interaction of one control deficiency with other control deficiencies.
-The subjectivity of a material transaction in the financial statements.

B,
Control deficiency Control recommendation
It has been left to the individuals within each team to decide how to
allocate the responsibilities between them.
The Individuals may mis-allocate responsibilities between them as one member of the team should count the inventory and another member should take note of the Inventory leading to possibilities of wrong counts.
This can lead to the under/overstatement of Inventory in the financial statements. The warehouse supervisor should ensure that the individuals in the team allocate their responsibilities in a way that one member counts the Inventory and another member takes note of the Inventory to ensure that the inventory count is correct and accurate enough.
The warehouse supervisor is confident that the 20
teams are familiar with the warehouse and the location of the inventory.
The teams who are not familiar with the warehouse and the location of the Inventory have not been assigned as they will count the items correctly,accurately and impartially.
This can lead to the overstatement of Inventory in the financial statements. The warehouse supervisor should ensure that teams from other departments of the entity are involved in the inventory count so that the inventory count is correct and accurate enough.
a large quantity of spare parts left over from production, will be segregated so that
this inventory will not be counted as they are unusable.
Any damaged inventory should be written off at its net realizable value in accordance with IAS 2 which has not been done so.
This can lead to the overstatement of Inventory in the financial statements. The warehouse supervisor should ensure that any spare parts that are damaged are identified,segregated and counted as appropriate by the team members and further written off to their net realizable value by an external,independent valuer to ensure inventory is not overstated.
The inventory sheets will then be passed to a warehouse assistant
to update the inventory records to reflect the inventory physically present as per the
inventory sheets.
The warehouse assistant does not cross check the items on the inventory sheets with the Inventory that is physically present meaning that some of the inventory that is physically present may be omitted from the sheets leading to lack of completeness. The warehouse assistant should cross check the items present in the Inventory sheet with the items physically present in the entity’s warehouse to ensure that all the items have been included in the inventory sheet.
Work in progress valuations have previously been carried out by an external inventory valuer.
The external valuer may not be an independent and objective person as the valuer may lack knowledge as per IAS 2.This can lead to the work in progress valuations in the financial statements to be overstated.
The warehouse manager should first obtain an understanding of the work done by the external valuer before hiring the external valuer to ensure that the valuer is independent and objective so that the WIP valuations are accurate enough.
the warehouse supervisor has offered to undertake this valuation this year.The warehouse supervisor may not value the inventory independently and objectively as the warehouse supervisor may undertake the valuation in favour of the entity whose valuation may lead to the intentional overstatement of the entity’s inventory in the financial statements. The warehouse supervisor should not be involved in undertaking the valuation.An external valuer from an independent organization,who is objective enough should be hired to undertake the valuation to ensure that the valuation of Inventory is accurate enough.
Last week the company agreed to store 30 sofas belonging to a third party in its warehouse.
Third party’s inventory is not identified and segregated separately but is rather mixed up with the entity’s inventory leading to the overstatement of the entity’s inventory in the financial statements.
The company should ensure that any third party’s inventory is identified and segregated separately to ensure that the third party’s Inventory is not mixed up with the entity’s inventory to ensure that the entity’s inventory is not overstated in the financial statements.
the third party’s storage facilities became flooded.
The storage facilities are not given protection from floods e.g glass shields and also not kept in safe locations.
This can lead to inventory damage as well as customer dissatidfaction as goods may not be dispatched on time due to the flooded storage facilities. The company should ensure that the third party’s storage facilities is given adequate protection from any natural calamities such as floods by installing glass shields to the storage facilities and storing them in a safe location so that they are adequately protected.