AQ

a. You are the audit manager in charge of the audit of Lau Limited, which assembles electronic products from parts purchased from over 100 suppliers. On the day of the inventory count, you attended the Shatin Warehouse. You observed the following activities:

1. Pre-numbered inventory count sheets were being issued to clients staff carrying out the count. The count sheets showed the inventory ledger balances for checking against physical inventory.

2. All inventory count staff were drawn from the warehouse and were counting in teams of two.

3. Three counting teams were allocated to each area of the warehouse to count, although the teams were allowed to decide which pair of staff counted which inventory within each area. Staff were warned that they had to remember which inventory had been counted.

4. Information was recorded on the inventory count sheets in pencil so that amendments could be made easily as required.

5. Any inventory not located on the pre-numbered inventory count sheets was recorded on separate inventory count sheets - which were numbered by staff as they were used.

6. At the end of the count, all inventory count sheets were collected and the numeric sequence of the inventory count sheets checked; the inventory count sheets were not signed.

Required:

b. List the weaknesses in the control system for counting inventory at the Shatin Warehouse. For each weakness, explain why it is a weakness and state how that weakness can be overcome.

You are the audit manager of a Hong Kong CPA firm, Lam and Co (Lam). Your firm has recently been engaged as the auditor of BBC Gold Limited (BBC) and is currently in charge of the audit of BBC for the year ended 31 December 2016.

BBC is a company incorporated in Hong Kong. It engages in the manufacturing and trading of a wide range of gold products. BBC's products are mainly sold to local customers and tourists in Hong Kong. BBC was previously audited by another CPA firm run by a sole proprietor, who died in a car accident last year. Your firm was then appointed as the auditor of BBC.

Required:

Determine the procedures your team would perform on the opening balances of BBCs financial statements at 1 January 2016.

c. Inventories are often significant to an entity, including manufacturing companies and retailing companies. While inventories are traded or moved in the operation and some of their attributes, say quantity, quality or condition and value are not incorporated in the double entry system. These attributes are usually the auditors concerns and the auditor often arranges physical inventory counting at year-end to ascertain the quantity and condition of an entitys inventories on hand.

Required:

Give two practical reason that justify for the auditor to conduct attendance of physical inventory counting at a date other than year-end. Under such situations, what audit procedures, in addition to the normal audit procedures, should the auditor perform?