Brett Baker is the owner of three brake speciality shops in Brisbane city, Toowoomba and Ipswich. His stores are called Baker Brakes. The stores carry speciality brakes, oils and brake seals. Brett wants to expand with another store on the Gold Coast and he approached the Bower Bank to borrow $250,000 to establish the new store. The bank has requested that he provides audited figures of his inventory at 30/10/2023.

 

Stan South is the purchasing officer. He maintains a central store of inventory in a secure room at the Ipswich store. Staff at the Brisbane city and Toowoomba stores email him their weekly sales figures for the prior week on Monday morning. Colin then sends out stock to replace the stock sold in the previous week, on Monday afternoon. Hence, the stock held at each store is constant at the start of each week. Frank checks the shipments of brake kits, filters and oils when they are received. When brake kits, filters and oils are received from suppliers a bar code is attached and the brake kits, filters and oils are then stored in the storeroom. A perpetual inventory system is used for all stock. A stocktake is conducted at the end of the financial year.

 

Brett states sales are in the order of $3.809 million. Sales are expected to be a 100% markup on cost of goods.

 

 

Question 1: Outline the risks of misstatement in the balance sheet value of inventory in the context of Baker Brakes.

 

Question 2: Explain how the risks identified in 1. above will influence the audit strategy in terms of the mix between control, substantive and analytical tests.