You are an audit senior of Hadi & Co and are in the process of reviewing the inventory system documentation for your client, Sohar Company which manufactures computer equipment. The company’s factory and warehouse are based on one large site, and their year-end is 30th June 2016. The Company is planning to undertake a full inventory count at the yearend 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 Sohar Co. The count will be undertaken by 15 teams of two counters from the warehouse department with Sohar’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 which 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 Sohar’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 dispatches 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.
As part of your audit assignment, you are asked to write a report to your audit senior in which you are required to:
In respect of the inventory count procedures for Sohar Co:
Additionally, following three matters have also been brought to your attention.
The company’s profit before tax for the year ended 31 December 2016 is RO 163m and total assets as at that date are RO 668m. You attended a meeting with your audit manager where the following matters were discussed:
Trade payables and accruals
Sohar purchases its raw materials from a large number of suppliers. The company’s policy is to close the purchase ledger just after the year end and the financial controller is responsible for identifying goods which were received pre year-end but for which no invoice has yet been received. An accrual is calculated for goods received but not yet invoiced (GRNI) and is included within trade payables and accruals. The audit strategy has identified a risk over the completeness of trade payables and accruals. The audit team will utilise computer assisted audit techniques (CAATs), in the form of audit software while auditing trade payables and accruals.
Bank overdraft and savings accounts
Sohar’s draft financial statements include a bank overdraft of RO 26m, which relates to the company’s main current account. In addition, Sohar maintains a number of savings accounts. The savings account balances are classified as cash and cash equivalents and are included in current assets. All accounts have been reconciled at the year end.
Sohar’s board is comprised of eight directors. Their overall remuneration consists of two elements: an annual salary, paid monthly; and a significant annual discretionary bonus, which is paid in a separate payment run on 20 December. All remuneration paid to directors is included within wages and salaries. Local legislation requires disclosure of the overall total of directors’ remuneration broken down by element and by director.
You are also required to include in your report the following:
The grading of the Written Report will be based on:
The report will be assessed according to the criteria given below:
Information and Research Completion of Tasks
Understanding of Issues
Application and Analysis
Presentation and structure
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