Background of Roses

Roses is listed on the Johannesburg Stock Exchange (JSE) and has been a long-standing client of YDE Auditors. Roses employs over 350 employees.

Roses is a manufacturer and distributor of headsets. The Head Office is situated in Johannesburg. Distribution warehouses are located in the Western Cape, Mpumalanga, and the Eastern Cape. Roses plans to open more distribution warehouses in other provinces in the coming months.

Purchase cycle

During your audit procedures of the acquisition and payment cycles, you noted the following regarding the purchase and receipts of raw materials: Once raw materials reach the minimum inventory level, the Marketing Manager in the sales department prepares a purchase requisition which he also signs. He then forwards the purchase requisition to the Purchase Clerk in the purchasing department, who orders the inventory from suppliers (local or foreign), and the purchase price is negotiated telephonically. The details and rand value of the inventory are recorded on a pre-numbered order form with three carbon copies. This is provided to the Purchasing Manager for approval.

Once the Purchasing Manager receives the order form, he compares each order with the signed purchase requisition and checks the sequence of all the order numbers, after which he signs it. The original order form is kept in the purchasing department. One copy of the order form is sent to the appropriate supplier, whilst a second copy of the order form is provided to the inventory storeroom and a third copy is provided to the accounting department.

When the raw materials are delivered to Roses, a pre-numbered good received note (GRN) is prepared by the Storeman. The Storeman records the date, nature, quantity, and condition of the raw materials received on the GRN. After the Storeman compared the GRN with the appropriate order, he signs the GRN. If the Storeman is not busy, the raw materials are taken to the store by either the Purchasing Clerks or himself.

The Inventory Clerk records the GRNs and requisitions prepared in respect of raw materials received in the inventory records. As the company does not have a computer system at its disposal, the Accounting Clerk reconciles the inventory records to the inventory account in the general ledger every month. The Accountant signs the reconciliation as having performed the reconciliation correctly.

A perpetual inventory system is used. One of the benefits of the perpetual inventory system is that the accounting department has its theoretical inventory level at its disposal on a daily basis. The accuracy thereof must still be tested by performing a physical inventory count every three months by comparing the physical count to the inventory records.

Inventory

2020 2019

R000 R000

Raw Material 4 300 7 250

Work in Process 6 000 6 100

Finished goods 10 300 12 100

Consumables 1 400 900

Raw materials are used to manufacture headsets and are purchased from local and European suppliers. European suppliers invoice Roses in euros. Raw materials purchased from European suppliers are normally delivered by sea freight and smaller orders are delivered by plane. At the financial year-end, there was inventory to the value of R1 825 000 in-transit. This inventory was purchased free-on-board (FOB). Work in progress for the group on 28 February 2023 was valued by Rosess Production Manager based on the estimated stage of completion of each product. Work in progress consists of direct materials, direct labour, and allocated manufacturing overheads.

List any risks of material misstatement at assertion level relating to inventory for Roses Incorporated for the year ended February 2020. For each risk, provide the appropriate assertion.