56 Nsoah
You are an audit manager in David & Co. One of your audit clients, Nsoah, is a specialist supplier of crime fiction with over 120,000 customers. The company owns one large warehouse, which contains at any one time about 1 million books of up to 80,000 different titles. Customers place orders for books either over the Internet or by mail order. Books are despatched on the day of receipt of the order. Returns are allowed up to 30 days from the despatch date provided the books look new and unread.
Due to the high inventory turnover, Nsoah maintains a perpetual inventory system using standard ‘off the shelf software. David & Co has audited the system for the last five years and has found no errors within the software.
Continuous inventory checking is carried out by Nsoah’s internal audit function.
You are currently reviewing the continuous inventory checking system with an audit junior. The junior needs experience in auditing continuous inventory checking systems and some basic knowledge on IESBA’s International Code of Ethics for Professional Accountants.
Required
(a) Explain the advantages of using a perpetual inventory system. (4 marks)
(b) List the audit procedures you should perform to confirm the accuracy of the continuous inventory checking at Nsoah. For each procedure, explain the reason for carrying out that procedure. (6 marks)
(c) Explain the fundamental principles set out in IESBA’s International Code of Ethics for Professional Accountants of integrity, objectivity and independence to accountants. (6 marks)
(d) During your preliminary audit planning you note that the engagement letter has been returned un-signed by the directors of Nsoah. When asked to explain their action, the directors indicate that they cannot allow you access to information on the company’s new website development as this contains various trade secrets. You will not, therefore, be able to perform audit procedures on the research and development expenditure incurred on the website and included in non-current assets.
Briefly explain the actions you should take as a result of the directors not signing the engagement letter. (4 marks)
