You are an audit senior at Scarlet & Co and are in the process of reviewing the inventory system documentation for your longstanding audit client, Texas Co (Texas) which manufactures computer equipment. The companys factory and warehouse are based on one large site and their year end is 30 June 2020. Texas is planning to undertake a full inventory count at the year end of its raw materials, work in progress and finished goods and you will be attending this count. In preparation, you have been reviewing the inventory count instructions for finished goods, provided by Texas.

The count will be undertaken by 8 teams of 2 counters from the warehouse department with Texas financial controller providing overall supervision. Each team of two is allocated a number of bays within the warehouse to count and they are provided with sequentially numbered inventory sheets. The inventory sheets contain product codes and quantities extracted from the inventory records. The counters move through each allocated bay counting the inventory and confirming that it agrees with the inventory sheets. Where a discrepancy is found, this note this on the sheet.

The warehouse is large and approximately 20% of the bays have been rented out to third parties with similar operations; these rented bays are scattered throughout the warehouse. For completeness, the counters have been asked to count the inventory for all bays noting the third-party inventories on separate blank inventory sheets, and the finance department will make any necessary adjustments.

Some of Texas finished goods are high in value and are stored in a locked area of the warehouse and all the counting teams will be given the code to access this area.

Scarlet & co has audited Texas for 25 years.

Required a) Outline the components of audit risk. (5 marks) b) Identify and explain five risk factors for the audit of Texas inventory. (10 marks) c) For each risk you have identified discuss what controls you would advise Texas to adopt and how would you test those controls once implemented. (10 marks) d) Explain what is meant by the familiarity threat (to independence). (5 marks)