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.