Question - Jing Yun is conducting the audit of Computer Parts Inc. (CPI), a company that specializes in the distribution of various computer parts and peripherals. Its major products include hard drives, wireless routers, varying types of small business software, monitors, keyboards, and so on. CPI has three main distribution warehouses, which are located in Toronto, Montreal, and Vancouver. As a result of the economic downturn in the preceding two years, CPI (consistent with the industry) experienced declining sales. In the current year (the year under audit), the economic recovery has spurred most small businesses to replenish technology assets, and as a result, the industry has experienced an overall increase in sales. However, due to the high levels of competition in the industry, overall industry gross margins have declined slightly in the current year.
Required -
a. Indicate three procedures that Jing could perform in order to develop an understanding of any major changes in products sold by CPI and of the competition that exists for similar products.
b. Given the nature of the inventory that CPI holds, there is a high risk of inventory obsolescence. Describe five audit procedures (substantive or analytical procedures) that the auditor could use in order to search for slow-moving or potentially obsolete inventory in the client's year-end inventory.
c. Describe two analytical procedures that Jing could perform in the planning phase of the audit with respect to the inventory balance. Explain how the results of the procedures would affect the conduct of the audit.
d. Assume that CPI uses FIFO for inventory valuation and has verified the accuracy of the quantity held by way of an annual physical inventory count. What procedure could Jing perform to obtain evidence to support the inventory valuation?