Introduction and client background

You are an audit senior in Riskam and Co and you are commencing the planning of the audit

of CariBev Co for the year ending 31 August 2020.

CariBev Co is a drinks manufacturer and has been trading for over 20 years, it operates from

one central site, which includes the production facility, warehouse and administration offices.

CariBev sells all of its goods to large retail stores, with 60% being to one large chain store

FoodForAll.

The company has a one year contract to be the sole supplier of drinks to FoodForAll. It

secured the contract through significantly reducing prices and offering a four-month credit

period, the companys normal credit period is one month.

Goods in/purchases

In recent years, CariBev has reduced the level of goods directly manufactured and instead

started to import drinks from South Asia. Approximately 60% is imported and 40%

manufactured.

Within the production facility is a large amount of old plant and equipment that is now

redundant and has minimal scrap value. Purchase orders for overseas drinks are made six

months in advance and goods can be in transit for up to two months. CariBev accounts for the

inventory when it receives the goods.

To avoid the disruption of a year end inventory count, CariBev has this year introduced a

continuous/perpetual inventory counting system. The warehouse has been divided into 12

areas and these are each to be counted once over the year.

The counting team includes a member of the internal audit department and a warehouse staff

member. The following procedures have been adopted;

1. The team prints the inventory quantities and descriptions from the system and these

records are then compared to the inventory physically present.

2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any

items not listed on the sheets but present in the warehouse area.

3. Any damaged or old items are noted and they are removed from the inventory sheets.

4. The sheets are then passed to the finance department for adjustments to be made to the

records when the count has finished.

5. During the counts there will continue to be inventory movements with goods arriving and

leaving the warehouse.

At the year end it is proposed that the inventory will be based on the underlying records.

Traditionally CariBev has maintained an inventory provision based on 1% of the inventory

value, but management feels that as inventory is being reviewed more regularly it no longer

needs this provision.

Finance Director

In May 2020 CariBev had a dispute with its finance director and he immediately left the

company. The company has temporarily asked the financial controller to take over the role

while they recruit a permanent replacement.

The former finance director has notified CariBev that he intends to sue for unfair dismissal.

The company is not proposing to make any provision or disclosures for this, as they are

confident the claim has no merit.

Required:

When Riskam and Co. accepted the engagement from CariBev Co, Riskam was required to tour the clients plant facilities. Discuss the ways in which Riskams observations made during the course of the plant tour will be of help in planning and conducting the audit. (20 marks)

Attention should be paid to what activities should be performed in planning and conducting the audit and the reasons for carrying out these activities. In addition, how the results of this activity would contribute to the audit planning process. Students should at least identify 5 ways