Tag (SQ): Consignment Inventory

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.