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Bafu Ltd., a private limited company, manufactures a wide range of bathroom fittings. These fittings are made from steel components which are chromed in small...

      

Bafu Ltd., a private limited company, manufactures a wide range of bathroom fittings. These fittings are made from steel components which are chromed in small vats. The steel components are sourced from outside suppliers. The year end stock mainly consists of these steel components and finished items. As at 31 October 2004, the total stock was valued at Sh. 6,048,000 out of total assets of Sh. 19,200,000. This stock figure was obtained by a physical count as at 31 October 2004, and valuation by reference to purchase invoices and manufacturing cost estimates.

Required:
With reference to each of the matters listed below, state the work you would do to conclude whether the amount attributed to stock is fairly stated.
(a) Quantities
(b) Identification of stock items
(c) Condition of stock items
(d) Cut-off procedures
(e) Valuation of stock

  

Answers


Wilfred
a) Quantities
- Obtain copies of count sheets used at the stock take.
- Ensure the stock sheet include the specific date when stock count was actually carried out.
- Check whether there were any post-count adjustments made to quantities of stock recorded in the count sheets.
- Ensure no repetitions of stock counts. This would be done by making sure no stock item appears more than once in any count sheet, hence count sheets should be indexed as well.
- Check with management in case there are some items of stock in the count
- sheets that are not physically present in the store at the time of audit test.
- Verify that steel components were not mistakenly counted as finished items.

b) Identification of stock items
- Comparing stock items in the stock sheets with the items of stock in the shelves/store.
- Verifying that stock items‘ description in the stock sheet match the actual stock item (as per given code) in the store.
- Ensure there is a clear distinction between finished units and steel components and that work-in-progress, if any is clearly identified.
- Verify that stock-in-transit is not included in stock count since it‘s not present at the store. This is recorded in purchases journal.

c) Condition of Stock Item
- Verify that stock whose value is given is in good condition i.e. there are no defects of any sort.
- Ensure that items identified as damaged or obsolete during the count have been treated as such.
- Obtain details of damaged/obsolete stock and the extent of damage as taken during the stock take

d) Cut-off Procedures
- Verify that the value of stock as given is not inclusive of previous year‘s closing stock. This would entail ascertaining the value of opening stock (if any) and subtracting from this, the value of units produced in the current year.
- Check that no sales figure for finished goods (awaiting collection) is included into stock.
- Ensure that steel components ordered for, but not yet delivered (in-transit) from the suppliers, are recorded in the purchases journal in the appropriate period, and not as part of closing stock.
- From the duplicate book of stores ledger cards, obtain the last few (may be five) stores receipt forms recorded immediately before year end and trace to invoice to ensure the invoice is dated before year end.
- Verify that own material is not included as stock.

e) Valuation of Stock
- Check that the stock sheets used during the count are the ones used as the basis of valuation.
- Compare valuation sheets with copies of stock count sheets to ensure that no alterations were made or if so, this is reflected in valuation.
- Ensure costs allocated do not exceed net realizable value.
- Ensure costs allocated do not exceed net realizable value.
- Ensure items treated as damaged/obsolete in valuation really are damaged/obsolete.
- Check calculation of scrap on Net Realisable value and compare this with cost in respect of damaged/obsolete stock.
- Check for consistency in valuation method
Wilfykil answered the question on February 22, 2019 at 11:17


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