Your firm is responsible for auditing the financial statements of Hucknall Manufacturing Ltd for the year ended 31 May 2015. The company operates from a single site. Its sales are \($5\) million and the profit before tax is \($110,000\) . There are no inventory records, so the inventory counts at yearend will be used to value the inventory in the financial statements. Because Monday 31 May is a normal working day, it has been decided that the inventory count should take place on Sunday 30 May when there is no movement of inventory.

The company has produced the following schedule to determine the value of inventory at 31 May 2015 from that counted on 30 May 2015.

The company keeps basic accounting records on a microcomputer, using a standard software package. The following accounting procedures are used for sales, purchases and wages.

1. The shipping department raises dispatch notes when the goods are sent to customers. Sales invoices are produced from the dispatch notes. Sales invoices are input into the computer, which posts them to the accounts receivable ledger and the general ledger.

2. When goods are received, a receiving report is prepared. Purchase invoices are matched with the receiving reports and purchase orders, and authorised by the chief executive officer. After the purchase invoices have been authorised, they are input into the computer, which posts them to the accounts payable ledger and the general ledger.

3. For the wages system, the hours worked for each employee are input into the computer, which calculates the gross wage and deductions (e.g. for tax) and the net pay. All employees are paid weekly.

Required

a. Describe the audit procedures you should perform to verify the accuracy of the inventory count:

i. before the inventory count ii. on the day of the inventory count.

Include details of the matters you should record in your working papers for follow-up at the final audit.

b. Explain the substantive procedures you should perform to check the company's schedule (as shown above) that adjust the value of inventory at 30 May to that at the company's year-end of 31 May 2015. (You are required to verify only the total value of inventory of \($564\) 648 at 31 May 2015. You are not required to describe the procedures necessary to verify the accuracy of the individual values of raw materials, work in progress and finished goods.)

c. Describe the substantive procedures you should perform to check purchases cut-off at the yearend.

Transcribed Image Text:

Value of inventory counted at 30/5/15 Add Cost of goods received on 31/5/15 Production labour on 31/5/15 Overheads relating to labour at 120% Less Cost of sales on 31/5/15 Value of inventory at 31/5/15 $ $ 583 247 10 969 3 260 3 260 18 141 (36 740) 564 648