For each issue mentioned above, describe issues the auditor should consider when determining which locations to visit to physically observe the client’s inventory count.
The determination of the ideal location to engage an auditing process would involve fetching guidance from the internal audits and the engaged auditing standards. In the case of Valentine Jewelry, only 60% of the inventory is located in a decentralized model. A selection of the ideal location to visit for auditing would involve the determination of the possible weight associated with the stored inventory and the implications from the information gathered in the books of account (Glover et al., 2016). In the case of Digital East, the elemental area of interest worth a visit would be the storage warehouse over the point of assembly since the revenue generation remains defined by the products sold to Delia Computers. In the case of Electroniks, the interest of the auditor would involve examining the centralized purchase order history and the inventory damage records since the products are client-tailored. In the case of Bisco, the lack of an integrated inventory implies the need for the auditor to visit both jjama and Laimaicai groceries for the auditing tasks.
How would you determine which locations your team should visit?
The determination of the location worth visiting would result from an evaluation of the engagement activities and the subsequent need to ensure the weight of the inventory remains appreciated. Also, the decision would integrate inputs from embraced auditing standards and regulations.
How does the type of inventory held by your client pose potential risks of material misstatements in the inventory balances?
The four clients hold inventory in different models comprising finished goods, cycle inventory, raw materials, and anticipatory inventory, among others. There is a prospect of confusion regarding the engaged inventory through misrepresentation (Simunic et al., 2017). For example, Digital East and Electroniks have inventories of both raw materials and finished goods. Possibilities of their misrepresentation may manifest during the documentation of their input in revenue generation.
How might your teams address the risks noted in part c.
Addressing the risks of inventory misrepresentation would involve examining the registered entries from a revenue generation perspective and the demands of the clients. Aligning the inventories in accordance with the revenue generation potential and the principles of accounting would allow the mitigation of possible incidences of misrepresentation (Earley et al., 2016).
Earley, C. E., Hooks, K. L., Joe, J. R., Polinski, P. W., Rezaee, Z., Roush, P. B., … & Wu, Y. J. (2016). The Auditing Standards Committee of the Auditing Section of the American Accounting Association’s Response to the International Auditing and Assurance Standard’s Board’s Invitation to Comment: Enhancing Audit Quality in the Public Interest. Current Issues in Auditing, 11(1), C1-C25.
Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current practices and challenges in auditing fair value measurements and complex estimates: Implications for auditing standards and the academy. Auditing: A Journal of Practice & Theory, 36(1), 63-84.
Simunic, D. A., Ye, M., & Zhang, P. (2017). The joint effects of multiple legal system characteristics on auditing standards and auditor behavior. Contemporary Accounting Research, 34(1), 7-38.
We’ll write everything from scratch
You are the audit senior at Zhang Zi Zi Associates. Below are issues faced by your audit teams:
- Valentine Creativity is a bespoke designer label located throughout China. 40% of the inventory can be found in warehouses in Wuxi and Guangzhou. The rest of the is found in all their 300 stores across China, Hongkong and Macau. The high value consists of designer pearls can only be found in Beijing, Hongkong and Shanghai. Special strong vaults are built in those stores to keep the pearls.
- Delia Computers practices the vender managed inventory system with their vendors. Digital East, your client, is one of their hard disc suppliers for their Shenzhen plant. Your client will assemble the hard discs in Wuxi and ship the hard discs to Delia’s warehouse in Shenzhen. Delia will pull from the inventory in the Shenzhen warehouse if they need to use the discs in Wuxi and will pay for the pull.
- Elektroniks is a contract manufacturer in Xiamen manufacturing on behalf of few Korean smartphone companies. Electroniks make smartphone touch screens. The screens are made exclusively for each customer and cannot be used interchangeable. Due to patent issues any excess stock and scrap material must be destroyed.
- Bisco is an international hypermarket chain. They have just opened up shop in China by taking over two local groceries chains, Laimaicai and Jiama. Bisco have yet to integrate the inventory systems used by Laimaicai and Jiama to a common platform.
- For each issue mentioned above, describe issues the auditor should consider when determining which locations to visit to physically observe the client’s inventory count.
- How would you determine which locations your team should visit?
- How does the type of inventory held by your client pose potential risks of material misstatements in the inventory balances?
- How might your teams address the risks noted in part c.