Auditing

Basic Information

You are a partner in the firm of Dunning, Ko & Co. and you are responsible for conducting the final independent review of audits completed by the firm. Dunning, Ko & Co. is a full-service medium-sized public accounting firm that specializes in the audits of moderate-sized high-technology companies.

You are currently reviewing the audit working papers and a draft of the audited financial statements of Simply Electric Inc. (Simply Electric) for the year ended December 31, 2019, as well as the draft audit report (an unqualified opinion dated February 19, 2020) that was prepared by the engagement partner.

Dunning, Ko & Co. have been auditors since the companys inception. The 2019 audit fieldwork was performed by a senior auditor (who had not previously worked on the audit of this particular client) and two junior auditors, and the working papers were reviewed by a manager and the engagement partner.

Based on your review of the working papers, the draft financial statements, and the audit report, you have noted the following:

REAL INFORMATION

Inventory

The audit senior conducted the inventory count procedures. The following is an excerpt of the work performed at the count:

Inventory during the count was well organized and all items in the warehouse were appropriately tagged. Per the warehouse manager, all products with the inventory product quality issue had been set aside in a separate area of the warehouse. Inventory counters were working in pairs to ensure the accuracy of the count.

Inventory Test Counting

Selected a sample of 40 items from the inventory listing and performed a test count on each of these items. The following discrepancies were noted:

Product	Description	# of boxes per auditor	# of boxes per count
Product # 5267XYB	Electrical Wire (40 cm length, 100 per box)	30 boxes	34 boxes
Product # 645XMHN	5 mm screws (1000 screws per box)	10 boxes	9 boxes

Upon discussion with the warehouse manager these discrepancies are a result of one particular counter who was continuously making errors. The warehouse manager has since replaced this particular counter. No further audit work is required.

Selected a sample of 40 items from the inventory floor and performed a test count on each of these items. All items tested agreed to the count conducted by the counter.

QUESTION

List two (2) major deficiencies in the work performed in the testing of inventory and explain the nature of the deficiencies. Provide recommendations regarding further actions and/or audit procedures