Bill is a PA working on the financial statement audit of MEM-2 Inc., a company that manufactures computer memory devices for sale in Canada, England, and Europe. He reviewed the internal controls over purchasing, as well as background information on the client’s industry, and made the following notes:
• The purchasing clerk receives materials requests from the inventory control clerk, initialled by the manufacturing manager indicating approval.
• The purchasing clerk looks up the part number and prepares the purchase order (P.O.) for the requested items, noting the authorized vendor number on the P.O.
• The purchasing manager verifies the vendor number and initials the P.O. to approve the purchase.
• The company occasionally purchases excess inventory from a related company in the United States.
• There are 22 authorized vendors in Canada, three in England, and four in China.
• Inventory may be overstated due to being obsolete, as technology for memory devices is changing rapidly.
• MEM-2 allows large retail stores to return unsold goods after a six-month holding period. The accounting manager will provide calculations for her estimate of goods that may be returned after year-end.
• Existing controls have been in place for one-and-a-half years. Control risk was high last year due to a change in accounting systems.
• Results of random sampling of purchase orders found no control deviations.
Bill assessed both control risk and inherent risk as low for purchasing and inventory based on his notes.
REQUIRED
a. State whether you agree with Bill’s assessment of control risk, and explain your answer.
b. State whether you agree with Bill’s assessment of inherent risk, and explain your answer.