Discuss how substantive testing of MaxSecurity’s cost of sales expense would relate to substantive testing of the inventory account on its balance sheet.

MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associations (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated personnel carriers. MaxSecurity often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialised and MaxSecurity only does business with nations that have a recognised, democratically elected government.

MaxSecurity maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients.

In September 2016, MaxSecurity installed an off-the-shelf costing system to support the highly sophisticated and cost-sensitive nature of its product designs. The new system replaced a system that had been developed in-house as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements such as purchases, sales, wastage and damaged stock losses.

MaxSecurity’s end of financial year is 30 June.