Background - The Auditor and the Audit Client

Infinity Auditors are Certified Practicing Accountants who are registered company auditors. They service a broad range of clients across Australia however they are known for their work within the medical and pharmaceutical industries. Established in 1986 the firm consists of 8 partners, 50 audit staff and 10 administration staff. You have been an audit senior with Infinity Auditors for 3 years. Infinity Auditors have two offices located in Adelaide and Brisbane.

During the year Infinity Auditors was approached by Medical Services Group Limited (MSG) to complete their 2020 financial year audit. Their financial year ends June 30 and the previous auditor was ABC Auditors. MSG supplies medical equipment to hospitals and doctor surgeries including medical diagnostic testing units, disposable products for surgery and medical safety equipment. They sell a total of 230 stock items ranging from $50 an item to $50,000 an item. They have warehouses in Sydney, Melbourne and Adelaide but ship their products all over Australia. Recently MSG opened another warehouse in Brisbane bringing the total number of warehouses to four. The head office is in Adelaide, and this is where most of the administration staff are located.

MSG use a perpetual inventory system which updates the stock levels every time an item is bought or sold. On year end, the manager prints out a full stock list for each location showing:

Stock code

Quantity on hand

Location of stock

Cost per unit

At year end, a physical stocktake was carried out by MSG staff at the four MSG locations. All physical inventory items are checked against the inventory system printouts and any discrepancies are noted and provided to the warehouse manager who updates the stock levels in the accounting system.

On June 30, the inventory on hand in the accounting system shows total inventory cost over the four locations is $23,500,000. The physical stocktake shows a physical inventory count of $23,100,000, the level of materiality set for inventory is 3%.

a. You are to gather sufficient and appropriate evidence regarding the existence and completeness for inventory. Describe the type of tests you would carry out for each of these assertions.

b. Discuss how you would select a sample size for testing the existence and completeness assertions. You must support your reasoning with the available literature.