You are an audit senior of J&J CPAs LL.P. and are in the process of reviewing the inventory system documentation for your audit client, Emilia Technology (Emilia) which manufactures computer equipment. The company’s factory and warehouse are based on one large site, and their year end is 30 June 2017. Emilia 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 Emilia. The count will be undertaken by 15 teams of two counters from the warehouse department with Emilia’s 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 that 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, they note this on the sheet. The warehouse is large and approximately 10% of the bays have been rented out to third parties with similar operations; these 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 Emilia’s 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. 

There will be no despatches of inventory during the count and it is not anticipated that there will be any deliveries from suppliers. Each area is counted once by the allocated team; the sheets are completed in ink, signed by the team, and returned after each bay is counted. As no two teams are allocated the same bays, there will be no need to flag that an area has been counted. On completion of the count, the financial controller will confirm with each team that they have returned their inventory sheets. 

Required: 

In respect of the inventory count procedures for Emilia Technology

(i) Identify and explain FIVE deficiencies;

(ii) Recommend a control to address each of these deficiencies; and 

(iii) Describe a TEST OF CONTROL the external auditors would perform to assess if each of these controls if implemented, is operating effectively