Fizzipop Ltd

Fizzipop manufactures and distributes soft drinks. Its inventories are controlled using a real$-$time system which provides accurate records of quantities and costs of inventories held at any point in time. This system is known within the company as the 'Stockpop' system and it is integrated with the purchases and sales system. Fizzipop has an internal audit department whose activities encompass inventories. No year$-$end inventory audit takes place. Inventories are held in several large warehouses where non$-$stop production takes place.

Your firm is the external auditor to Fizzipop and you have been asked to perform the audit of inventories. Inventories include finished goods and raw materials $($water$,$ sugar, sweeteners, carbonating materials, flavourings, cans, bottles, bottle tops, fastenings and packaging materials$).$

Your firm, which has several offices wishes to rely on the 'Stockpop' system to provide the basis of the figure to be included in the financial statements for inventories. Your firm does not wish to ask the company to conduct a year$-$end inventory count.

Required

$($a$)$ Describe the principal audit risks associated with the financial statement assertions relating to inventory.

$($b$)$ Describe the audit tests that you would perform on the 'Stockpop' system $($test of control$)$ during the year in order to determine whether to rely on it as a basis for the raw materials and finished goods figures to be included in the financial statements.

$($c$)$ Describe the audit tests you would perform on the records $($Substantive test$)$ held by Fizzipop at the year end to ensure that raw materials and finished goods are fairly stated in the financial statements.