You are currently planning the audit of Munchees Ltd, a manufacturing company which sells biscuits and snack foods to a large number of retailers nationally. You have turned your attention specifically to the audit of inventory, and have obtained the following information from client staff:

• Year-end inventory is expected to be as follows:

This represents 20 per cent of total assets.
• The company uses standard costing to value its stock, which consists of approximately 150 product lines. At year-end, relatively equal stock value of each of these lines will be held.
• The stock is stored in approximately 50 warehouses nationally. The company has a policy of taking out short-term leases on unused warehouse space, in order to minimise rental costs. Hence, the number of warehouses in use varies from time to time.
• Goods are manufactured centrally at the Bigtown factory, and then shipped out to the warehouses.
• The recent launch of a new biscuit, Tom Tam resulted in poorer than expected sales.
Consequently, the company has excess stock in finished goods, amounting to £200,000. Their use-by date is six weeks after balance date.
• Anew work in progress system was successfully introduced two months after the previous year-end. Staff have commented on how much better this system is than the old system.
• Raw materials largely comprise bulk stocks of flour, rice and potatoes. These are held in large storage bins at the Bigtown factory.
• Work in progress largely comprises biscuit dough, which is stored in several locations throughout the Bigtown factory:

— in large sealed vats, awaiting processing; and — in mixing bowls attached to the 10 different production lines.
• Asin prior years, all warehouses and the Bigtown factory will be closed at balance date, to allow a full stock-take to take place. A perpetual stock system is used.
• From your experience in prior years, you know that the company has a highly accurate budgeting system. Final figures rarely vary more than three per cent from budget.

Required

(a) Identify the key financial statement assertions for the audit of stock at Munchees Ltd.

(b) Identify and discuss specific issues to be considered in relation to the audit for the existence and the valuation and measurement assertions for Munchees’ stock balance.
Describe the audit procedures you would undertake to address these issues.

Transcribed Image Text:

Raw materials Work in progress Finished goods 000 850 525 1005 2380