(a) Audit tests on ‘PureTrack’ system during the year
There are two main aspects to the audit of the PureTrack system; those relating to quantities and those relating to costs. In order to rely on the system as a basis for the figure in the financial statements I would need to ensure that management had a system for ensuring that:

• the system was accurate and up-to-date;
• errors were investigated and corrected on a regular basis; and
• each item of inventory was counted at least once a year (in practice items are likely to be counted more often than this as such systems are often relied on to produce figures for management accounts).

I would ask management about the procedures for inventory counting and review the related documentation, including inventory counting instructions, and form a view as to whether the system was adequate in principle. I would also review the results of any internal audit work on the system design (assuming that I considered the internal audit function to be adequate).

I would need to obtain evidence relating to the three items noted in (i) above. I would therefore visit the warehouses during the year, possibly on a rotational basis, to ensure that the system was being operated in the manner prescribed.

I would perform certain preliminary analytical procedures to establish which warehouses to visit (such as those where the records indicated that large volumes of inventories were held, warehouses that were experiencing problems or had experienced problems in the past, or warehouses that were considered high risk for other reasons). I might use different offices of my own firm for these purposes, and/or I would enlist the help of internal audit. I would review the results of the work already performed by internal audit.

I would ask local staff about the procedures performed, especially about any variations from the procedures prescribed. I would observe procedures being performed.

I would test check records of goods received and goods despatched and trace them through the PureTrack system to ensure that records were accurate and input on a timely basis. I would ensure that the correct corresponding entries for costs had been made in the purchases and sales systems.

I would perform my own test checks of inventory and trace my counts through the PureTrack, sales and purchases systems.

I would consider using ATTs (automated audit techniques), such as test data and audit software to establish whether, for example, the system is rejecting entries outside certain pre-determined parameters (cost per unit for example), and that the system highlights any old inventory, or any exceptions such as negative inventory quantities.

I would review all exception reports produced by the system to see if there were any recurring or old items and to ensure that all errors and exceptions were being dealt with on a timely basis.

(b) Audit tests on records at year end
I would analytically review the year-end records to establish the overall quantities and costs of inventories and costs of raw materials and finished goods.

I would ask management about any problems experienced with the system at, or close to, the period-end and about how they had been dealt with to ensure that they had been appropriately resolved.

I would also ask management about the likely level of write-down of either raw materials or finished goods (inventory being of inadequate quality or spoiled, for example). I would compare this with prior years and form an opinion as to its appropriateness. I would check the calculation of the allowance for damaged inventory and review exception reports close to the period-end.

I would obtain schedules of the costs and quantities to be included in the financial statements and trace these back to the output of the PureTrack system noting and substantiating any significant adjustments.

I would enquire as to how accurate cut-off had been achieved. I would perform cut-off tests on the records by tracing samples of goods received and despatch notes just before and just after the year-end to the PureTrack, sales and purchases systems in order to ensure that costs had been correctly allocated to the correct accounting period. I would also perform this test in reverse, from the PureTrack, sales and purchases systems through to goods received and despatch notes.

I would ensure that the valuation method used by Nexis Beverages was in accordance with IAS 2 Inventories and that, for example, the system was adequate to ensure that finished goods included an appropriate element of labour and overhead costs.