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, GSIs 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 GSIs 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 GSIs operations. Ninas first task will be to conduct an operational audit of GSIs sales and inventory management systems so that any needed improvements can be implemented as part of the coming information systems upgrade.

Nina reports to GSIs 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.

Mikes firm will be assigning Mike and two new employees to GSIs 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:

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. (5 marks)