As the partner in charge of the audit of Sama Sama Berhad, you are reviewing the work performed by the audit team for inventory. The financial year end of the client was 30 June 2021.

(i) The movement in the Cost of Goods Sold Account is as follows:

Opening inventory: 150,520
Purchases: 4,351,200
Total (Opening inventory + Purchases ): 4,501,720

Ending inventory: (134,520)
Cost of goods sold: 4,367,200

The inventory turnover ratio for the previous year was 40 times.

(ii) Before you sign off on the audit, you need to determine that sufficient audit work was performed to ensure that the inventory account is not materially misstated. Inventory is a major account, representing 43% of the client’s total assets, and if the balances for inventory and cost of goods sold are materially misstated, the financial statements will be materially misstated.

Question:

(a) Based on the information provided in the Cost of Goods Sold Account, explain the possible misstatements that could cause the difference in the inventory turnover ratios between current year and prior year, and the consequences of misstating the Cost of Goods Sold Account on the Statement of Profit or Loss and Statement of Financial Position.

(b) Based on the audit partner’s review of the work performed by the audit team on inventory,

(i) Describe the key audit procedures that the audit partner would expect the audit team to perform relating to the most important management assertions for inventory.

(ii) Explain how the audit partner would know that the audit team has adequately addressed the risk of material misstatement for inventory during the audit, and the alternative course of action available to the auditor if the audit evidence indicates that the inventory account is materially misstated.