Case 3

Antiock Hardware: An Inventory Case Study

This case study presents a scenario where an error in the inventory valuation, that may prove to be significant, was found by the external auditor of a large wholesale hardware distributor during the course of their audit. Since the objective of all audit clients is to obtain an unqualified opinion, the case focuses on the ability of the client to correct the error to the extent possible and the procedures the external auditor must perform in order to determine that the corrected inventory valuation is not materially incorrect. The case also addresses the impact the detection of the error has on the external auditors opinion on internal control and the implications it has on the rest of the audit process.

You are assigned as the audit manager for a large wholesale distributor of hardware called Antiock Hardware. Your audit team has been in the field for the year-end fieldwork for about a week. The audit staff performing the inventory cost testing found a significant error in the calculation for average cost, the cost methodology that the company uses to value its inventory.

The in-charge accountant has looked into the matter and the program change documentation indicates that the program that calculates average cost has not been modified since June of the year under audit. The change should not have included a change to the calculation for average cost, but it may have been inadvertently changed at that time. Regardless of when it was changed, it appears it has been that way for at least seven months. It was also determined that the client can recreate the inventory file as of October 31 of the year under audit and apply all of the inventory transactions for November and December. It has also been determined that they do not have any transaction history prior to that date in their data base. You have also spoken with the controller who has ensured you that you will have access to any resources she has at her disposal in order for this to have a successful conclusion.

Your in-charge auditor has also provided you information about the clients inventory for the last three years to help you decide what the audit team should do to address the problem identified and to determine if they can perform sufficient audit work to attest to the valuation of the year-end inventory.

Required: You, the audit manager, have informed the audit partner of the potential problem that exists at Antiock Hardware. She requested that you prepare a memo to her after you have fully analyzed the situation.

1- What the most important element you will probably to consider in your report to show the impact of inventory in your decisions? Explain

2- What type of opinion you likely to give if the client refuse to provide you sufficient data?