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Hello sir, i have several questions relating to audit risks and the auditor’s response to them. I would be grateful if you could answer them. What is the audit risk and audit response to these questions,
1)The auditor present during the year-end inventory count raised the concerns that during the count there were movements of goods in and out of the warehouse.
2)In July, there was a fire in one of the stores and goods worth Rs 800,000 were destroyed so that the scrap value of damaged inventory is worth of only Rs 100,000. An insurance claim has been submitted for Rs 700,000 [difference in value] and no reply has been received from the insurance company. The claim of Rs 700,000 has been included in the statement of profit and loss as well as in the balance sheet.
3)The new finance director has also informed the audit partner that since the year end there has been an increase in number of sales returns. For the month of September 2015, sales returns totaled Rs 400,000.
Thanks
I’m not just going to answer these for you. You should suggest some audit risks: this shouldn’t be hard as the questions are designed to make these fairly obvious. Then we can think about how the risks could be countered.
1) movement of goods in and out during inventory count
2) No warrant from insurance company
3) overstatement of sales
i hope you can help me with the audit responses
thanks.
1 Correct
2 Correct
3 Correct – but see point on inventory value below.Responses:
1
Inspect at GRNs and Despatch notes issued during the stocktake. It should be possible to adjust for many of these. It might even turn out that the stock movements were immaterial.
Look at how perpetual. inventory records are maintained and see if some reliance can be placed on these.
2
The insurance company is being treated a a debtor, so you should be able to make some suggestions yourself.
3
Look at all sales return in the month after year-end and assess which relate to before year-end: those are the sales that need to be reversed.
Look at the reason for returns. If it is because of faulty goods, then lots in the warehouse at year end might also be faulty. Work will have to be done to see which goods are affected and a write down should be considered.
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