Back-to-childhood Ltd (BL) is a large importer and retailer of soft toys. It operates a retail outlet in a shopping centre in suburban Christchurch, and also sells its products on-line. Its bankers have asked that the financial statements be audited as a condition for continued financial support. In your audit planning you have identified inventory as a significant audit risk, not only because of the direct effect inventory has on the profit of a trading organisation, but also because your preliminary analytical review indicated significant changes in certain key ratios as follows: 31/3/2023 31/3/2022 31/3/2021 Sales ($) 1,000,000 850,000 820,000 Closing inventory ($) 180,000 100,000 100,000 Inventory turnover (times) 7.1 8.5 8.6 Gross profit percentage 23% 18% 18% You are aware that in previous years a particular soft toy for which BL had the exclusive New Zealand licence had been very popular. However, with the sudden popularity of Hot Wheels, sales of soft toys have declined. BL stores most of its stock in its retail premises and in a warehouse it owns in Lyttleton. At year end there is also usually a certain amount of goods in transit from its suppliers in China (purchased Free on Board (FOB), so title so title to these goods has passed to BL). BL also provides some inventory on consignment to some of its larger customers. Although BL runs a computerised perpetual stock system, no stocktakes or spot checks are undertaken except at year end. If variances between the physical and the computer stock levels are noted during the year, the computer balances are simply adjusted by journal entry to match the actual stock on hand without any further investigation. Mid-Year Examinations, 2023 ACCT346-23S1 (C) Page 6 of 9 REQUIRED: (a) Based on the above information, provide and discuss TWO reasons why an auditor might decide to adopt a fully substantive approach to the audit of BL's inventories, rather than placing reliance on internal controls. (6 Marks) (b) For each of the following financial statement assertion categories, list and discuss a key substantive audit procedure you could use when auditing BL's inventory: (i) Existence (ii) Valuation (iii) Completeness