Sheffield plc manufactures cutlery (knives, spoons, forks etc.). Quantities recorded at the year end inventory count (stock
Question:
Sheffield plc manufactures cutlery (knives, spoons, forks etc.). Quantities recorded at the year end inventory count (stock taking) are used to correct the quantities shown by the company’s computerised system. For raw materials and work in progress, sheets for the count showing the product descriptions and codes are printed from the computer system. The quantities recorded on the sheets at the count in the factory are then manually keyed into the computer system by the production controller.
For finished goods the bar codes on boxes of cutlery in the warehouse are recorded with hand held scanners and the quantities from each scanner uploaded to the computer system in the IT department. As a member of the external audit team you attended a year end inventory count (stock taking).
Instructions for the inventory count were issued to the staff carrying out the count (and to you) on the morning of the count. The count was carried out quickly so the business could close for a public holiday the next day. The same types of product and material were found in several locations and labelling of the inventory to be counted had not been completed before the count began. In the warehouse some boxes were dirty and damaged which made the bar codes difficult to scan.
Sheffield plc Finance Director has found that a comparison of the computerised inventory record to the data from the count showed an unusually large number of differences.
Required:
(a) Advise the Finance Director why inventory (stock) valuation and the year end inventory count are important to the audit of financial statements and what alternatives there are to an annual year end inventory count.
(b) Advise the Finance Director of possible causes for the differences between quantities shown by a computerised inventory record and the quantities from an inventory count.
(c) Advise the Finance Director of controls over the inventory count which could minimise errors in quantities derived from the count.
(d) What actions should the auditor take with regard to those boxes which were dirty or damaged?