4) You are the audit manager completing planning for your client Stark Industrie

Question

4) You are the audit manager completing planning for your client Stark Industries
Incorporated (Stark). Stark is a market leader in the technology industry aimed at designing
and developing robots and robotics assistance for the home environment.
Stark formed in 1998 and after a number of loss-making years is now turning a substantial
profit in a very competitive market. The company spends considerable amounts on research
and development and prides itself on the success rate it has with new robotic designs.
Stark owns a number of very large warehouses in which inventory of small and large
robotics and electronic parts are held, along with vast stores of advanced computer technology. The robots and robotic parts are manufactured in another nearby security
warehouse.
Products are then sold to specialized retailers of home computer and electronics, often on
a consignment basis. Stark also has three customers for whom they design and manufacture
large custom made robotics processes for these customers own internal uses. These are
major contracts which often take nine or ten months to construct and worth millions of
dollars. Stark has adopted a percentage completion method of accounting for these
contracts.
For the last six months, Stark has also been making sales of their major product lines to a
few overseas customers. The CEO believes this could be a real growth area for the company
in the near future.
Stark has also recently implemented a new top-of-the-range computer inventory system to
help them track inventory stocks and individual product line performance in all divisions.
The new system was designed and developed by an external computer consultant company
and so far, has been working well with no major errors noted.
Required:
a) List two (2) accounts as a result of your preliminary planning where you would
concentrate audit effort for Stark. (2 marks)
b) For each account:
? State the most important audit assertion and explain why you chose the
particular assertion, and (4 marks)
? Recommend an audit procedure to perform, in order to gather audit
evidence for that assertion. (4 marks)

Explanation / Answer

a.) The 2 accounts as a result of our preliminary planning where more concentration will be given is

1. INVENTORY RECORD OF ROBOTICS

2. REVNUE RECOGNITION ( BOOKING OF INCOME)

b.) ASSERTION FOR INVENTORY ARE - Completeness, existence, accuracy,valuation, rights & obligations and presentation

The most important assertion for inventory is EXISTENCE since physical verification of inventory is must and inventory shown should actually exist as per books of accounts and if inventory is maintained at some third party site proper records should be reflected in the books of accounts.

ASSERTION FOR SALES/ REVENUE RECOGNITION ARE - existence, completness, accuracy, classification, timing, posting & summarisation

The most important assertion is COMPLETNESS, since revenue should be recognised only if sales are certain or complete.

AUDIT PROCEDURES TO CHECK EXISTENCE OF INVENTORY

1.) INVENTORY SHOULD BE PHYSICALLY VERIFIED EVERY 3 MONTHS SINCE IT IS A TECHNOLOGY DRIVEN COMPANY.

2.) EXTERNAL CONFIRMATION SHOULD BE TAKEN IF INVENTORY IS STORED AT SOME THIRD PARTY SITE.

3.) DESIGN IMPLEMENTATION AND MAINTAINANCE OF INTERNAL CONTROLS SHOULD BE CHECKED TO RECORD THE INVENTORY

AUDIT PROCEDURES TO CHECK COMPLETNESS OF SALES

1.) THE RISK AND OWNERSHIP SHOULD HAVE BEEN TRANSFERRED , ONLY THAN SALES SHOULD BE BOOKED AS INCOME. SINCE THE COMPANY IS FOLLOWING PERCENTAGE COMPLETION METHOD THEREFORE PROPER CALCULATION SHOULD BE MADE OF FINISHED WORK AND WORK IN PROGRESS AND ACCORDINGLY SALES SHOULD BE BOOKED,

2.) IF THERE IS UNCERTAINITY ABOUT REVENUES EVEN IF OWNERSHIP IS TRANSFERRED THAN INCOME SHOULD NOT BE BOOKED'

3.) PROPER TEST OF CONTROL AND SUBSTANTIVE PROCEDURES SHOULD BE PERFORMED ON CASH COLLECTIONS.

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