Reference no: EM132821032
Question - You are planning the audit of Munchkin Bites Sdn. Bhd, a manufacturing company which sells biscuits and snack food to a large number of retailers nationally. You have turned your attention to the audit of inventory and have obtained the following information from client staff:
1. Year - end inventory is expected to be a s follows : Raw Material RM 850,000.00 Work in progress RM 525,000.00 Finished goods RM 1,005,000.00 ** The above figures represent 20% of total assets.
2. The company uses standard costing to value its inventory, which consists of approximately 150 product lines. At year-end, the relatively equal inventory value of each of these lines will be held.
3. The inventory is stored in approximately fifty warehouses nationally. The company has a policy of taking out short-term leases on unused warehouse space (to minimize rental costs), so the number of warehouses in use varies over time.
4. Goods are manufactured centrally at the BigHouse factory and then shipped out to the warehouses.
5. The recent launch of a new biscuit, Choco Bix, resulted in poorer than expected sales. Consequently, the company has excess inventory in finished goods, amounting to RM 200,000.00. Their expiry date is 6 weeks after the reporting date.
6. A new work-in-process system was successfully introduced 2 months after the previous year-end. Staffs have commented on how this system is a great improvement.
7. Work in process largely includes biscuits dough, which is stored in several locations throughout the BigHouse factory - Both in large sealed vats awaiting processing and in mixing bowls attached to the ten different production lines.
8. From your experience in previous years, you know that the company has a highly accurate budgeting system. Final figures rarely vary more than 3% from budget.
Required -
(a) Identify the key financial statements assertions for the audit of inventory at Munchkin Bites.
(b) Discuss specific issues to be considered in relation to the audit for the existence assertion and valuation assertion for Munchkin Bites' inventory balance. Describe 3 audit procedures for each assertion (existence and valuation) you would undertake to cover these issues.