@Mega Cheap Ltd (MCL) is a listed company that manufactures and retails budget-p

ID: 2329786 • Letter: #

Question

@Mega Cheap Ltd (MCL) is a listed company that manufactures and retails budget-priced car parts and accessories to the public. The company has 30 stores across New Zealand, and three warehouses, two in North Island and one in South Island.

You are part of the audit team for the period ending 30 September 2017.

While attending the Auckland stock-take and performing test counts, you note the following:

i) On three occasions, goods were counted correctly but recorded under the incorrect stock code. In each case, the incorrect stock code used related to a more expensive item than the good actually counted.

ii) A large amount of stock was transferred from Auckland to the Wellington and Christchurch warehouses on the day of the stock-take. The items transferred have been recorded on inventory in Auckland and also at the locations received.

Required:

a) Identify the key audit assertion at risk of material misstatement in relation to the inventory account balance; and (3 marks)

b) Briefly explain why you believe this assertion is at risk. (3 marks)

Explanation / Answer

(a)

key audit assertion at risk of material misstatement in relation to the inventory account balance;

Assertions Inventory balance

Existence inventory recognised in the books has been exixtence at that

Period

Completeness Any inventory that is kept at the third party on behalf of

Audit entity has been recorded

Righrs&Obligations Any inventory held by the audit entity has not been recordedby

the audit entity.Audit entity owns control over that inventory

shown in financials

Valuation Audit entity has valued the inventory at cost or NRV whichever is lower by following AS -2.and also not adding unneccesary costs

(b)

It is found that, On three occasions, goods were counted correctly but recorded under the incorrect stock code. In each case, the incorrect stock code used related to a more expensive item than the good actually counted. It showns that it has been intensionally done by the management inorder to overstates the profits which misleads the users of financial statements and also overriding AS -2 principle

It has also found that the same inventory has been recorded in the both the books this may due to following reasons

(a)The transferred stock may be damaged but shown in the books as inventory instead of writing off

(b)Also since it has been recorded in the both books it will also lead to overstating of the profit

Conclusion

By Considering the above facts,

All the situations happening are against the assertions made by the auditor ,it may ultimately lead to the increase the risk