(c) Carter Retail is a family-owned company which retails beds, mattresses and other bedroom furniture items. The company’s year-end is 31 December. The only full inventory count takes place at the year end. The company maintains up-to-date computerised inventory records.
Where the company delivers goods to customers, a deposit is taken from the customer and customers are invoiced for the balance after the delivery. Some goods that are in inventory at the year-end have already been paid for in full – customers who collect goods themselves pay by cash or credit card.
Staff at the company’s warehouse and shop will conduct the year end count. The shop and warehouse are open seven days a week except for two important public holidays during the year, one of which is 1 January. The company is very busy in the week prior to the inventory count but the shops will close at 15.00 hours on 31 December and staff will work until 17.00 hours to prepare the inventory for counting. The company has a high turnover of staff. The following inventory counting instructions have been provided to staff at Carter Retail.
(i) The inventory count will take place on 1 January 20X5 commencing at 03/00 hours. No movement of inventory will take place on that day.
(ii) The count will be supervised by Mr Baker, the inventory controller. All staff will be provided with pre-printed, pre-numbered inventory counting sheets that are produced by the computerised system. Mr Baker will ensure that all sheets are issued, and that all are collected at the end of the count.
(iii) Counters will work on their own, because there are insufficient staff for them to work in pairs, but they will be supervised by Mr Baker and Mrs Wilson, an experienced shop manager who will make checks on the work performed by counters. Staff will count inventory with which they are most familiar in order to ensure that the count is completed as quickly and efficiently as possible.
(iv) Any inventory that is known to be old, slow-moving or already sold will be highlighted on the sheets. Staff are required to highlight any inventory that appears to be soiled or damaged.
(v) All inventory items counted will have a piece of paper attached to them that wil show that they have been counted.
(vi) All inventory that has been delivered to customers but that has not yet been paid for in full will be added back to the inventory quantities by Mr Baker.
Required:
Describe the deficiencies in Carter Retail’s inventory counting instructions and explain why these deficiencies are difficult to overcome.
(d) Where inventory is held by third parties auditors will need to obtain external confirmation of such inventory.
Describe the audit evidence provided by such confirmation, the practical difficulties in obtaining it and the alternative audit evidence available when such confirmation is not provided.
