(a) Advantages of perpetual inventory systems

There is no disruption caused by an annual inventory count.

There is more accurate and regular inventory counting, which enables errors and slow moving or damaged inventory to be identified earlier.

Actual inventory balances are known at any time, allowing re-ordering of bestselling books to take place on a timely basis. There will also be fewer causes of inventory reaching zero causing stock-outs with orders not being fulfilled.

Increased control over storekeepers because inventory is being reviewed regularly; this should decrease any pilferage.

Auditors can rely on the computerised inventory system, reducing substantive audit tests of inventory during the year and at the year end.

(b) Audit procedures

Audit procedure – Physical count

Arrange a meeting with the internal audit function. Discuss the procedures carried out and review working papers produced during the continuous inventory checks. For any errors identified, ensure that appropriate adjustments were made to the perpetual inventory system.

Reason for procedure

Determine the extent to which the work of the internal audit function can be used.

Visit the warehouse and:

Obtain a sample of inventory items already recorded on the perpetual inventory system and agree to the book inventory.

For a sample of books in the warehouse, obtain details and agree perpetual computer system records.

Review the condition of the books, taking details of any which appear to be old or damaged.

Form an opinion regarding the overall accuracy of the perpetual inventory system.

Ensure all inventory lines are counted at least once per year in discussion with the internal audit function.

(c) Fundamental ethical principles

Integrity

Integrity requires an accountant to be straightforward and honest in all professional and business relationships. Integrity involves fair dealing professionals and having the strength of character to act appropriately, even when truthfulness and having the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organisational consequences.

Acting appropriately involves standing one’s ground when confronted by dilemmas and difficult situations or challenging others as and when circumstances warrant, in a manner appropriate to the circumstances.

Objectivity

The principle of objectivity requires an accountant to exercise professional or business judgment without being compromised by bias, conflict of interest or undue influence of, or undue reliance on, individuals, organisations, technology or other factors.

Accountants have to be objective because many of the factors which make up an opinion on a set of financial statements relate to questions of judgement rather than fact. Accountants therefore need to be unbiased and impartial in making their decisions, especially where they may need to challenge assumptions already made by the directors.

Independence

Independence is freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity is either impaired or could be impaired. Independence is therefore related to and underpins objectivity.

Accountants will therefore not participate in any activity or relationship that may impair, or appear to impair, their judgement.

They will also not accept anything which may appear to impair their judgement.

(d) Actions in respect of the engagement letter not being signed

Discuss the matter again with the directors in an attempt to reach a suitable compromise.

Remind the directors that statutory audits require the directors to make all the necessary information and explanations available to the auditor.

Explain that lack of information on the website will result in a limitation in scope of the audit work.

Further explain that because the lack of evidence appears to relate to a material amount that the auditor’s report will have to be modified with an ‘except for’ qualification due to the lack of information and the possibility of misstatement of non-current assets.

Finally note that auditor may have to decline to work for Nsoah unless suitable terms of engagement can be agreed.