QUESTION 2

Boss Ltd sell a full range of Thanksgiving dinnerware and decorations. They are a small to medium sized family business who have grown substantially over the last decade. You are the audit supervisor involved in the audit of Boss, who has a year end of 31 December 2022

Boss performs a full inventory count only at the year-end. The company maintains up-to-date computerised records to account for its inventory during the year.

Where the company delivers goods to customers, a deposit is taken from the customer and customers are invoiced for the balance after the delivery. Some goods that are in stock at the year-end have already been paid for in full - customers who collect goods themselves pay by cash or credit card at the point of collection.

The year-end inventory count is performed by staff based in the warehouse and shop. The shop and warehouse are open seven days a week except for two public holidays during the year, one of which is 1 January. The company is very busy in the week prior to the stock count but the shop will close at 16.00 hours on 30 December and staff will work until 19.00 hours to prepare the stock for counting. The company has a high turnover of staff.

The inventory count is scheduled for 31 December 2022 commencing at 06.00 hours. No movement of inventory will take place on that day. The count is supervised by John, the inventory controller. All staff are provided with pre-printed, pre-numbered inventory counting sheets that are produced by the computerised system. Mr John is responsible for issuing all inventory counting sheets out and for collecting them in at the end of the count. Due to low staff numbers, counters work individually rather than in pairs. They are all supervised by Mr Boss as well as Zet, an experienced shop manager who makes checks on the work performed by counters. Staff count inventory with which they are most familiar in order to ensure that the count is completed as quickly and efficiently as possible. All inventory items counted have a piece of paper attached to them that shows that they have been counted.

During the inventory account, Zet noted that 20 pallets of finished goods, were defective. The goods have a value of 160,000. Boss's finance director still believes that these goods are saleable, but at a discount of 15%.

One of Boss's customers, Harry Co. is alleging that Boss has consistently failed to deliver goods in a saleable condition and according to the agreed delivery schedule. Harry Co. has started legal action against Boss with a claim for loss of profits.

Required:

Write a report to the audit partner which:

a) Analyses the weaknesses in Boss's inventory counting instructions and explain why these weaknesses are difficult to overcome.

b) Evaluates the substantive procedures which should be performed on the legal action being brought against Boss by Harry Co.

Format

Black LLP are the auditors of Park Pl who are a company listed in the UK. Park manufacture and sells 100% clothes. The company has a year end of 30 June. Park farms the wool in Australia, transports it for weaving to Turkey and imports the finished goods to the UK for distribution across the globe. Both the Australia and Turkish operations are performed by Park's subsidiary companies. Unfortunately, Black LLP are a UK based audit firm and do not have any offices outside of the UK. They will therefore have to rely upon other firms of auditors to perform the audit work on the subsidiaries.

Required:

c) Evaluate why Black LLP are required to review the work of the auditors of the subsidiaries not audited by them before producing Park's group audit report.

d) Outline the principal audit procedures that Black LLP would carry out in performing such a review on the subsidiaries in Australia and Turkey.