Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized, and Securimax does business only with nations that have a recognized, democratically elected government. Securimax maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients.

In September 2023, Securimax installed an off-the-shelf costing system to support the highly sophisticated and cost-sensitive nature of its product designs. The new system replaced a system that had been developed in-house, as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements, such as purchases, sales, wastage, and damaged inventory losses.

Securimax’s financial year end is December 31.

Source: Adapted from the Institute of Chartered Accountants Australia’s CA Program’s Audit and Assurance Exam, May 2008. Provided courtesy of Chartered Accountants Australia and New Zealand.

Required

a. What inventory items would you expect to see in Securimax’s accounts? How would the cost of each item be calculated?

b. Suggest some substantive procedures that you would use in the audit of inventory for Securimax.

Justify your choices with respect to the risk assessment.