Advanced Auditing
Test 2: 2019
Paper 2
Question 1
You are the audit manager at Smith and Dlamini Incorporated (S&D Inc.), a firm of registered auditors
and accountants based in Durban.
You are currently assigned to the audit of BlueFin Boats (Pty) Ltd (BlueFin). Your firm has been the
appointed auditor of BlueFin for the last 15 years. The company was formed in 1995, by Mr John Dory
who was an ex ship captain and identified the need for custom made boats (commercial and
recreational) as well as fishing trawlers. The company has grown significantly over the last two
decades. The head office and head production plant is situated at the Durban Harbour and the
company has other production plants in Richards Bay, Cape Town, Port Elizabeth and East London.
Although there is a range of standard boats, the majority of boats sold are custom-made to the client’s
specifications.
The year-end of BlueFin is 30 June 2019 and your firm has just completed the interim audit for the
period ending 30 April 2019. Mr John Dory has indicated that his suppliers require the audited
financials by the 15th July 2019 in order to retain the company’s existing credit facilities. In order to
meet these reporting deadlines the lead engagement partner, Mr Stephen Dlamini, decided to make
use of interim testing.
The following working papers, which relate to the audit of inventory, were prepared by the trainees
during the interim audit.
Client:
BlueFin Boats (Pty) Ltd
WP Ref
Year End:
30 June 2019
I100
Prepared by:
Trainee 1
Reviewed by:
Manager
Audit approach for inventory
1. A combined approach will be followed incorporating tests of controls and substantive
procedures.
2. We will place reliance on the results of control testing done in previous years. Due to our
tight deadline we will not be able to perform any tests of control and we have to place
reliance on these tests.
3. Internal controls relating to the purchasing cycle were last tested in 2015. Because no
deficiencies were identified and there have been no changes to these controls, we can rely
on the results of these tests as well and we will not test them in the current year.
4. Internal controls relating to the approval of the inventory adjustment forms were tested in
2017. No deficiencies were identified and as a result we can rely on these controls and we
will not test them in the current year.
5. We will also rely on the results of the tests of controls performed on the internal controls
relating to the weekly cycle counts. These controls were tested in 2018 and no deficiencies
were identified. Accordingly, we will not test them this year.
6. Because of time, we will only audit inventory at the Durban plant. If the findings are correct
then we will assume that the values of stock at the other plants are correctly valued.
Description of the system
1. The inventory system automatically generates purchase orders based on re-order levels as
per the inventory Masterfile. BlueFin uses several suppliers for parts and materials and uses
Electronic Data Interchange (EDI) to communicate with these suppliers. The automatically
generated purchase orders are sent electronically to the suppliers. The production
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Advanced Auditing
Test 2: 2019
2.
3.
4.
5.
Paper 2
manager, Mr Fred Fish, does random checks on these purchase orders to ensure that details
are correct and parts are, in fact, required.
BlueFin’s internal audit department, together with the warehouse staff, conduct weekly
cycle counts and physical inventory is reconciled to theoretical inventory on the inventory
Masterfile. Ms Sally Shark is the warehouse clerk who is responsible for the weekly counts.
After each cycle count, Sally prepares a sequentially numbered inventory adjustment form
and details any count discrepancies and she follows up on these discrepancies.
Mr Michael Marlin, the warehouse manager, reviews the inventory adjustment form and
signs it as proof of review. Mr Marlin indicated that he should review all forms but because
of the increased demand during the latter part of the year, he was unable to review all
forms and now only reviews them if he gets a chance.
Sally Shark takes the authorised inventory adjustment form to the inventory-processing
clerk, Barry Bass, for the capturing of the adjustments on the inventory master file. Barry
files the adjustment forms numerically. On a monthly basis, Michael Marlin, does a
sequence check on the forms to identify any missing forms.
During a cycle count in April 2019, Sally Shark identified several empty boxes, which were
supposed to contain parts. These boxes were not recorded as empty in previous cycle
counts during the year. After Mr John Dory was made aware of this, he ordered an
investigation into the matter. It was established that the inventory had been stolen and the
inventory Masterfile was fraudulently amended to conceal the theft.
Client:
BlueFin Boats (Pty) Ltd
WP Ref
Year End:
30 June 2019
I200
Prepared by:
Trainee 1
Reviewed by:
Manager
Inventory
BlueFin accounts for its inventory using the FIFO method and any obsolete or damaged inventory is
sold as scrap materials or to smaller fishing charter companies who can possibly refurbish the parts
and use them for their boats.
After all adjustments are made to inventory sheets after inventory counts, these sheets are filed.
The system is also able to produce reports detailing movements of inventory for any period and
these inventory movement reports are printed monthly.
Interim audit work findings
The interim audit included both test of controls and substantive procedures. Substantive
procedures were performed for the 10-month period ended 30 April 2019. The information below
details some of the important findings from the procedures performed:
1. The value of each boat manufactured includes raw materials (engines, parts, and
consumables), labour and overheads. There is generally a high quantity of raw materials on
hand, as parts and consumables are constantly needed for production, and the company
likes to maintain sufficient quantities.
2. As each boat is generally a custom order, before the boat is manufactured, an engineer and
cost accountant produce a cost budget detailing the specific costs of each boat. The cost
budget is used by the production department for production purposes. This budget also
serves as a basis for determining the selling price of boats. Included in this budget are the
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Advanced Auditing
Test 2: 2019
3.
4.
5.
6.
7.
8.
9.
10.
Paper 2
estimated costs of raw materials and the estimated labour charge. An estimate of
overheads is also included.
BlueFin has a strict policy that requires customers to sign a sales contract before production
can commence. The contract stipulates the price to be charged and there will be no changes
to price irrespective of changes in the market.
When manufacturing commences, a separate job card is kept for each boat produced. The
job card has three different sections:
a. Engines and raw materials (parts and consumables)
b. Labour
c. Overheads
When raw materials (engines, parts, consumables) are acquired, they are recorded in the
raw materials general ledger account. When production commences, the costs of raw
materials are transferred to the work-in-progress general ledger account as and when they
are consumed. Before a transfer can be made, it must be authorised on a transfer
requisition form. The job cards are updated accordingly to account for all transfers.
Labour schedules are also kept which detail the number of employees, hours worked and
rate of pay per employee. The costs of labour incurred are capitalised to the job cards and
work-in-progress ledger account every month.
Overheads are allocated to the cost of the boats at the end of the year. Overheads are
allocated on the basis of labour hours worked. The cost accountant prepares schedules and
details the workings on how overheads are allocated. The job card and the work in progress
(WIP) ledger account is updated annually with overheads.
Once the production process is complete and the boat passes all inspections, the total cost
as per the job card is transferred to the finished goods ledger account from the WIP ledger
account. The boat can only be sold once it passes all inspections and tests. As a result a boat
may sit in WIP for a number of months until all tests and safety checks are finalised. This is
because if it fails any safety tests it may require additional costs to get it ready.
All engines used in the boats are imported from a Japanese supplier. As a result of the high
demand for boats during the year, orders are placed quite frequently. A detailed schedule
of engines acquired can be extracted from the system. This schedule has the details of the
cost, job card number, serial number and a description of the boat that the engine is used
in. This data is kept on the system as Bluefin has a specific contract with the suppliers
detailing the warranty terms, because if there is a problem this info is needed to claim.
All purchases of engines are recorded in the general ledger at the spot rate at transaction
date and is transferred to WIP at the same rate. No forward exchange contracts are used.
Inventory count
We attended the weekly inventory count at the Durban plant on 30 April 2019. We were happy
about the quantities that were reflected in the inventory records for raw materials. However we
did not perform any procedures on work in progress and finished goods. Damaged and obsolete
stock was also identified. The audit partner decided that no other stock counts would be done for
this audit as we will not have time to plan. We have taken the amended final stock sheets at 30
April 2019 to place in the current year audit file.
At the end of the year, the company had 50 boats as WIP and 30 boats as finished goods. These were
located at all four of the production facilities, and each facility keeps raw materials as well. Separate
lists of WIP and finished goods are prepared for control purposes at the end of each month. Each list
contains customer name, boat location and current costs incurred to date for WIP and the total cost
of the boat for finished goods.
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