Question – Matters to be considered and audit evidence

For a question like this:

Comment on the matters to be considered and explain the audit evidence you would expect to find during your review of the audit working papers in relation to the issues identified.

Does our audit evidence have to 100% be linked to the matters to be considered ?

Context – OSIER CO

Cost of inventory
Inventory costs include all purchase costs and the costs of conversion of raw materials into finished goods. Conversion costs include direct labour costs and an allocation of production overheads. Direct labour costs are calculated based on the average production time per unit of inventory, which is estimated by the production manager, multiplied by the estimated labour cost per hour, which is calculated using the forecast annual wages of production staff divided by the annual scheduled hours of production. Production overheads are all fixed and are allocated based on the forecast annual units of production. At the year end, inventory was valued at $21 million (20X4 ? $20 million).

Comment on the matters to be considered and explain the audit evidence you would expect to find during your review of the audit working papers in relation to the issues identified.
i. Cost of inventory

My answer –

Matters to be considered

Inventory is (21m/1,919m) 1.1% of total assets and (21m/107m) 19.6% of profit before taxes. Therefore, inventory is highly material to both the statement of financial position and profit and loss.
The calculation of inventory seems to be highly complex. The complexity increases the risk of error in the calculation, which increases the risk of mistatement.

The calculation is also based on a number of estimates – average production time per unit, forecast annual wages of production, and annual scheuled hours of production. These increase the risk of both error and manipulation as it can have management bias.

Therefore, there is an increased risk that inventory can be mistated due to its subjective and complex nature of calculation.

Audit evidence

Evidence that the inventory figures have been recalculated by the audit team to confirm the arithmetical accuracy of management’s calculations.

Documentation of the results obtained when the audit firm disccused with management on the reasonabless and appropriateness of the method used to calculate inventory.

Documentation that inventory costs have been appropriately recorded accoriding to the relevant financial reporting standards.

Is my approach to the question wrong ?

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