Week 11 Unseen Question

Unseen Question 1 Toby Crimson is a veterinary surgeon, specialising in poultry. His customers are poultry farmers, large and small, throughout the state. To support his practice he also operates Feathers First Veterinary Supplies Pty Ltd (Feathers First), which supplies drugs and other supplies to poultry farmers. Most of the drugs can only be sold on a vet’s prescription , but the sale of other supplies is unrestricted (although there are safety issues surrounding the storage of some items). The drugs and other supplies are ordered in bulk from local and overseas suppliers . Most sales are made to farmers on the receipt of a telephoned purchase order. The sales order is taken by a clerk in the office and entered into the computer system . This generates a packing slip for the storeman , who then takes the supplies from the shelves and packages them for delivery . Often there are not sufficient supplies in stock to complete an order so that part of the order is held over until more supplies are obtained. Purchase orders are initiated by the storeman when stocks are running low . The storeman has to be careful not to hold too much stock because there are strict regulations regarding ‘use by’ dates for drugs . Sometimes an order of drugs and supplies is not received in full from the suppliers because they are waiting for delivery from the manufacturer. In this case, the storeman makes a note in his diary to follow up and obtain the missing items at a later date . Clients are often in a hurry to receive their drugs and Toby often takes drugs with him when he visits a farm. When he remembers, Toby leaves a note for the storeman explaining which drugs he has taken. Feathers First maintains a perpetual inventory system and the storeman is responsible for periodic stocktakes to confirm the accuracy of the inventory records. Required (a) What strengths and weaknesses can you identify in the inventory control system at Feathers First? Strengths: - Clerk utilises a computer system to record sales orders (electronic confirmation of the orders) – packing slip generated by the computer based on sales order is a strength - Periodic stock takes are conducted to confirm accuracy of inventory records - Maintains a perpetual inventory system - Sales orders received by Clerk which does not have warehouse access (in the office) - Variety of supplies Weaknesses: - Toby takes drugs with him personally and only leaves a note to verify drugs taken - Telephone purchase order may recorded incorrectly / weak form of document - Insufficient stock available to complete an order - No approval processes prior to accepting order - Insufficient separation of duties as the Storeman is in charge of generating purchase orders and also taking suppies and packing them

- Majority of stock is perishable with a high ‘used by date’ - Delivery orders are not received in full -> no process / control to ensure orders are received in full and complete and not accepted - Weak stock acceptance procedure, storeman merely writes a note in a diary to confirm missing items o No follow up procedures for incomplete sales orders - PO’s are iniciated by the storeman -> NO separation of duties - No segregation of duties –> done soley by the storemanager - No list of approved suppliers -> every company should have an approved supplier list - No system of recording back orders (No process to ensure what stock is on backorder / what needs to be ordered to fulfill incomplete orders) - No credit checks performed on customers (b) What substantive procedures would you recommend for purchases given your assessment of the control system ? Control over inventory - Key assertions -> Existence, Accuracy, Valuation & Allocation (Key 2) o Inventory exists and is valued correctly (high amount of perishable goods, are the medication that is out of date valued correctly?) - Cut-off test for Valuation & Allocation - Physical test for existence Purchases - Key assertions o Occurrence  Did the purchase occur? Does it belong to the entity - Substantive Tests: o Key test -> Cut-Off test to see if the purchases occurred in the correct period o Tracing  Take a sample of purchase invoices and trace it to inventory records o Compare -> Budget last year o Comparative ratio analysis -> compare entries to entries in payables sub ledger to creditor invoices o Verify physical movement o Examine payments for creditors -> match it with stock

Notes: - Recalculate - Analytical procedures - Check specific tests for each assertion ########### - Each assertion has a key test - Occurrence for Revenue Is the key Assertion… Find the key test for occurrence - Occurrence -> Determining if the revenue actually occurred as there is a clear risk of overstatement for performance bonuses…… - Vouching Test Completeness for Expenses is key - Client is likely to understate expenses -> Key Test - Tracing