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Area of study: ACCA Auditing

7. ChemEdge You are an aucit senior in Rudeka and Co and you are commencing the planning of the audit of ChemEdge Pastel Co ('ChemEdge') for the year ending 31 Aungust 200. ChemEdge is a paint manufacturer and has been trading for over 50 years. It operates from one central site which includes the production facility, warehouse and administration offices. ChemEdge sells all of its goods to large home improvement stores, with 60% being to one large chain store called Homewares. The company has a one year contract to be the sole supplier of paint to Homewares. If secured the contract through significantly reducing prices and offering a four-month credit peniod, the company's normal credit period is one month. Goods injpurchases In rocent years, ChemEdge has reduced the level of goods directly manufactured and instead sfarted to import paint from South Asia. Approximately 60% is imported and 40% manufactured. Within the production facilty is a large amount of old plant and equipment that is now redundant and has minimal scrap value. Purchase orders for overseas paint are made six months in advance and goods can be in transit for up to two manths. ChemEdge accounts for the itventory when it receives the goods. To avoid the disfuption of a year end inventory count, ChemEdge has this year introduced a continuous/perpetual inventary counting system. The warehouse has been divided into 12 areas and these are each to be counted ance ovor the year. The counting feam includes a member of the intemal audit department and a warehouse staff momber. The following procedures have been adopted; 1. The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present. 2. Any discrepancies in relation to quantities are noted on the inventory sheets. including ary items not listed on the sheets but present in the warehouse area. 3. Any damaged or old items are noted and they are removed from the inventory sheets. 4. The sheets are then passed to the finance department for adjustments to be made to the records when the count has finished. 5. During the counts there will cantinue to be inventory movements with goods arriving and leaving the warehouse. At the year end it is proposed that the imventory will be based an the underlying records. Traditionally ChemEdge has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision. Finance Director In May 200 ChemEdge had a dispute with its finance director (FD) and he immediately left the company. The company has temporanily asked the financial controller to take over the role while they recrut a permanent replacement. The old FD has notified ChemEdge that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confident the claim has no ment. Required (c) List and explain suitable controls that should operate over the continuous/perpetual inventory counting system, to ensure the completeness and accuracy of the existing inventory records at ChemEdge Pastel Co. (10 marks) (d) Describe THREE substantive procedures that the auditor of ChemEdge Pastel Co should perform at the year end in confirming each of the following: (i) The valuation of inventory; ( 3 marks) (ii) The completeness of provisions or contingent liabilities. ( 3 marks)