Course: Auditing

ABC Inc. ("ABC") is a toy retailer with stores located in Toronto, Mississauga, London (ON), Ottawa and Kingston. ABC has been in business for five years and has had a growth strategy of adding one new store per year. The year-end of ABC is December 31, and the company follows ASPE.

The ABC head office and central warehouse is located in Mississauga, Ontario. All inventory purchases are made centrally and are held in the Mississauga warehouse; they are then dispatched around to the different stores as needed. Details of inventory movements are recorded on a perpetual inventory system and ABC carries out year-end inventory counts at all locations. To save staff costs, inventory counts are completed by part time employees hired to complete the count and to assist with increased sales over the Christmas holidays. These staff members are employed a total of 3 weeks and are mostly high school and university students on school break.

You are the auditor of ABC and are planning the audit of the inventory count that is about to take place. You have established the following from your planning procedures:

• An inventory report will be produced from the inventory system for each store and the warehouse. The report gives details of inventory code, item description, units held, and unit selling price. The report also gives a breakdown of where inventory items are held and the total value of items held at each location.
• A sales movement report is also produced that gives details of inventory code, unit descriptions, units purchased for the period and their cost price, and units sold in the period.
• The largest shop is in Toronto and 35% of all inventory is held there.
• The Kingston shop has suffered significant levels of inventory shrinkage recently.
• To facilitate the inventory count, an additional report is produced that includes only the inventory code and description. Inventory counters use this report to indicate the units of inventory held at the time of the count.

You are on the ABC audit. The audit partner has asked you to prepare a memorandum for her that describes the issues that you foresee regarding the audit of the toy inventory and the impact on other financial statement accounts. The partner reminds you that you need to always consider RMM and assertions and that your response should be complete, practical (procedures if applicable) and relevant.