Greystone Co. is a retailer of women’s clothing and accessories. It operates in many countries around the world and has expanded steadily from its base in Canada. Its main market is 15- to 35-year-olds and its prices are mid to low range. The company’s year end is September 30, 2023.

In the past, the company has bulk-ordered its clothing and accessories twice a year. However, if the goods failed to meet the key fashion trends, this resulted in significant inventory writedowns. As a result, the company has recently introduced a just-in-time ordering system. The fashion buyers make an assessment nine months in advance as to what the key trends are likely to be. These goods are sourced from Greystone’s suppliers but only limited numbers are initially ordered.

Greystone has an internal audit department, but at present its only role is to perform regular inventory counts at the stores.

Ordering process Each country has a purchasing manager who decides on the initial inventory levels for each store; this is not done in conjunction with store or sales managers. These quantities are communicated to the central buying department at the head office in Canada. An ordering clerk amalgamates all country orders by specified regions such as Central Europe and North America, and passes them to the purchasing director to review and authorize.

As the goods are sold, it is the store manager’s responsibility to reorder the goods through the purchasing manager. The stores are prompted weekly to review inventory levels because, although the goods are just in time, it can still take up to four weeks for goods to be received in store.

It is not possible to order goods from other branches as all ordering must be undertaken through the purchasing manager. If a customer requests an item of clothing that is unavailable in a particular store, then the customer is provided with other branch telephone numbers or recommended to try the company website.

Goods received and invoicing To speed up the ordering to receipt of goods cycle, the goods are delivered directly from the suppliers to the individual stores. On receipt of goods, the quantities received are checked by a sales assistant against the supplier’s delivery note, and then the assistant produces a receiving report. This is done at quiet times of the day so as to maximize sales. The checked receiving reports are sent to head office for matching with purchase invoices.

As purchase invoices are received, they are manually matched to receiving reports from the stores.

This can be a very time-consuming process as some suppliers may have delivered to over 500 stores. Once the invoice has been agreed, it is sent to the purchasing director for authorization. It is at this stage that the invoice is entered onto the purchase journal.

Required

a. As the external auditors of Greystone Co., write a report to management in respect of the purchasing system that:

i. identifies and explains four deficiencies in that system ii. explains the possible implications of each deficiency iii. provides a recommendation to address each deficiency A covering letter is required.

b. Describe substantive procedures the auditor should perform on the year-end trade payables of Greystone Co.