ACCA F8 - Audit and Assurance Revision Kit 2016

Suitable Controls
Damaged/obsolete goods are moved to a
designated area for inspection, but left on the
sheets. They are provided against if necessary.
Movements of inventory are not allowed into or out
of the area being counted during inventory counts.
A sample of independent checks of the counts
carried out by a separate team. Items to be checked
are determined after the first count has been
completed.
As a separate exercise after the counts of items on
the sheets, teams check a sample of items that are
physically present are correctly included on the
sheets.
Inventory count sheets are compared to the
inventory records after the count. Where
adjustments are needed, the reason for them is
investigated and they are processed on a timely
basis by appropriate personnel.
Explanation
Rather than removing damaged/obsolete items
from the sheet (and losing the audit trail), they
should be written down or provided against to
ensure that they are included at the lower of cost
and NRV. A member of the finance team should
make the assessment as to what needs writing
down.
Allowing movements in and out of inventory during
counts could result in double counting, or inventory
not being counted at all. Therefore such movements
should be stopped during the count.
By counting a sample of inventory lines again this
should help to ensure completeness and accuracy
of the counts, and act as an incentive for the first
team to carry out counts more accurately initially.
A count performed from the records to the
warehouse will only test for existence or
overstatement of inventory line quantities.
Testing for completeness requires a different
approach where inventory in the warehouse is
compared to the records to identify goods
physically present but not recorded.
Only authorised individuals should be able to
amend the records in which year end inventory will
be based. On a periodic basis, senior finance team
members should review the types and levels of
adjustments for indications of fraud.
Top tip: You may have come up with other valid controls here. As long as they meet the control objective for the
assertions specified in the question, and are adequately explained, you will have gained marks for these. Other valid
controls include the monitoring of timetabling of the counts to ensure all areas are covered at least once a year.
(d)
Substantive procedures to confirm:
(i)
(ii)
Valuation of inventory
Verify the cost of imported paint and materials to produce manufactured paint to supplier invoice
costs (for a statistical sample)
Confirm that the recorded inventory costs do not exceed the NRV by comparing the costs with the
value of paint sales made after the year end
Review aged inventory reports and investigate older items to ensure they are valued at the lower of
NRV or are already provided against.
Completeness of provisions/contingent liabilities
Discuss with management the reason for not providing for or disclosing a potential payment to the
director for unfair dismissal and corroborate the responses with documentary evidence where
possible
Review correspondence with the old financial director and the company's lawyers to help assess the
likelihood of a claim being successful and to try and assess whether a reliable estimate of any
potential payment is possible.
Answers 103