QUESTION TWO $[25]$

Inventory and Production Cycle

Mkhululi Textiles $($Pty$)$ Ltd$,$ a large textile manufacturing company in South Africa, maintains

significant inventory levels across multiple locations nationwide. The company recently faced

challenges with inventory management, including discrepancies between physical inventory

counts and the records, obsolete inventory not being identified promptly, and issues with the

valuation of work$-$in$-$progress $($WIP$).$ The management is concerned that these issues may

lead to financial misstatements.

Developed September $2024$

Required:

$2\mathrm{.}1$ Identify and discuss three key audit risks associated with the inventory and production

cycle at Mkhululi Textiles $($Pty$)$ Ltd$.$ Provide specific examples from the scenario to

illustrate how these risks could impact the financial statements. $(12)$

$2\mathrm{.}2$ Describe three audit procedures you would perform to address the risks identified in

part $($a$).$ Explain how each procedure would help you obtain sufficient and appropriate

audit evidence to support your conclusions on the inventory balances. $(13)$