4.31 Audit risk components and materiality LO1, 2

Cathys Computers imports computer hardware and accessories from China, Japan, Korea and the United States. It has branches in every capital city and the main administration office and central warehouse is in Melbourne. There is a branch manager in each store plus a number (depending on the size of the store) of permanent staff. There are also several casual staff who work on weekends the stores are open both Saturday and Sunday. Either the branch manager or a senior member of the permanent staff is rostered on duty at all times to supervise the casual staff. Both casual and permanent staff members are required to attend periodic company training sessions covering product knowledge and inventories and cash handling requirements.

The inventories are held after their arrival from overseas at the central warehouse and distributed to each branch on receipt of an inventories transfer request authorised by the branch manager. The value of inventories items ranges from a few cents to several thousand dollars. Competition is fierce in the computer hardware industry. New products are continuously coming onto the market and large furniture and office supply discount retailers are heavy users of advertising and other promotions to win customers from specialists like Cathys Computers. Cathys Computers management has faced difficulty keeping costs of supply down and has started to use new suppliers for some computer accessories such as printers and ink.

Required

(a) Explain the inherent risks for inventories for Cathys Computers. How would these risks affect the accounts?

(b) What strengths and weaknesses in the inventories control system can you identify in the above case?

(c) Comment on materiality for inventories at Cathys Computers. Is inventories likely to be a material balance? Would all items of inventories be audited in the same way? Explain how the auditor would deal with these issues.