Grocery Stores Inc. (GSI) is a regional chain of grocery stores operating in southern Ontario.

GSI stores are strategically spread throughout the province, outside major metropolitan areas.

The great distances between the stores and the head office make them difficult to manage and

control. For some time GSI has been tackling a variety of efficiency and image problems, hoping

to find a way to improve its stable but lackluster performance and attract additional capital.

One improvement that is to be implemented is the upgrading of the point-of-sale (POS) computer

systems. Currently, each store uses old stand-alone cash registers with stand-alone credit/debit

card systems. There is no tie-in to the inventory systems. Ted Bear, GSI's vice-president of store

operations, believes that several benefits will occur with the new systems. He wants to improve

the stores' image not only with customers but also with potential investors.

He wants to hold the line on expanding existing store facilities or hiring more checkout

personnel by increasing the flow through capacity at existing locations. In addition, he believes

that the information provided by the on-line, real-time capture of sales and inventory data will

improve GSI's management of inventory, reduce carrying costs and out-of-stock conditions,

while helping to reduce the alarming amount of waste and pilferage that GSI experiences, which

is above industry averages.

Mike Jones is the new audit senior assigned to the coming financial statement audit of GSI. Nina

Ng, the previous audit senior, has left the firm and joined GSI. Her job title is assistant

controller, but as GSI does not have an internal audit department, she will also be responsible for

assessing efficiency and effectiveness of GSI's operations. Nina's first task will be to conduct an

operational audit of GSI's sales and inventory management systems so that any needed

improvements can be implemented as part of the coming information systems upgrade.

Nina reports to GSI's corporate controller, who continues to be the liaison with the financial

statement auditors. The controller hopes that the audit fee for the current year will go down,

because Nina can prepare some of the working papers for the audit. Nina will have an incentive

to reduce costs, as she has been given stock options and will have a bonus tied to administrative cost reduction.

Mike's firm will be assigning Mike and two new employees to GSI's audit. The new employees

have just completed their university degree and will not have any time for additional training

before starting the GSI audit. Mike is counting on Nina to help these two staff, since her

knowledge of auditing will compensate for their lack of training. Since there has been no change

in risks, Mike plans on conducting the audit the same way this year as last year.

Just prior to the commencement of the audit, two months prior to the year end, GSI informed

your firm that it has acquired a competing chain of regional grocery stores, NAS (New Age

Stores), that has six stores. These stores are larger than GSI stores and have a somewhat

different type of product focus. NAS has a broad selection of local produce as well as locally

manufactured and packaged products. Many of these are cottage industry products such as

organic sauces and jams, dehydrated fruits and vegetables, and locally butchered meats.

NAS has a higher profit margin on these products, but is having trouble managing inventory

from so many suppliers. It has a larger than normal waste percentage as it must discard products

that expire - many organic and locally produced products do not have preservatives and have a

shorter shelf life.

Required:

A. Use the definition of auditing to assess Nina's operational audit of the sales systems.

B. Assess whether Mike's plans for the financial statement audit violate GAAS. Justify your

response.

C. Provide five specific quality control actions that Mike or his firm could take that would

address any GAAS violations you discovered in Part C. Match the actions taken to the GAAS

violation.

D. Use the eight phases of the financial statement audit process to describe actions that the

auditor should take in the current year's financial statement audit that address changes to the

risks in the engagement from the prior year.

E. Provide five specific balance-related audit objectives for the audit of NAS inventory that

address the risks associated with NAS inventories described in the case. State the general

audit objective associated with each specific balance-related audit objective.