5. (f) From the 1st January 20X1 ThoughtPad Co will introduce a new inventory system, explain THREE audit tests that should be performed in order to ensure the auditors understand the system and that it is working effectively. [6 marks]

Question 1 You are the audit senior of Jo and Partners and are planning the audit of ThoughtPad and Co for the year ended 30 December 20X0. The company produces laptops and tablets and has been a client of your firm for four years. You have begun planning for the audit and found out the following information. In 20X0 they implemented a number of initiatives to try to improve results. This included introducing a generous sales-related bonus scheme for their salesmen, a high profile advertising campaign and extending the credit period offered to customers. Additional overheads have been included in inventory this year as they are considered to be production related. Financial Statement extracts from the year ended 31 December DRAFT ACTUAL 20x0 2019 m m Revenue 46.0 36.0 Cost of Sales (22.0) (20.0) Gross profit 24.0 16.0 Operating expenses (15.0) (8.0) Profit before interest and taxation 9.0 8.0 Inventory 4.2 3.2 Receivables 9.0 6.0 Cash 4.6 Trade payables 3.2 2.4 Overdraft 1.8