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Chobad Industries

You are the audit manager from Dube and Associates assigned to the audit of the financial statements of

your client ,Chobad industries for the year ended 31 December 2012. Chobad Industries is a

manufacturer of carbonated soft drinks. The client has indicated that they are ready for the audit and

would like you to come in for the audit within the next 2 weeks. You immediately set up a meeting withthe client at which you are given a file containing schedules for all aspects of the financial statements

including inventory.

Upon studying the file, you notice the following issues in regards to inventory:

1. There was no one present from your firm at the inventory count. Upon enquiring from the auditsenior , you learn that notice of the inventory count was communicated on the actual day of the

count and by the time the audit team arrive at the warehouses, the count was over and they

were only availed copies of the count sheets.

2. Chobad had inventories of both raw materials and finished drinks that are stored in the garageof a nearby sister company .There are no count sheets available for any of the inventory held at

this different location.

3. The stores assistant responsible for issuing items from inventory issued some crates of softdrinks to an administrative assistant for the year end party which was held on the same day as

the inventory count. There was no goods dispatch note issued and therefore nobody can

remember how many crates were actually issued.

4. The inventory is valued at cost. The soft drinks produced by Chobad are very popular on themarket and sell at a profit of 50% above cost.

5. Work in progress has been classified as raw materials. This is a new practice that has only beenintroduced in the year under review on recommendation by the Sales Director who is also the

brother to the owner of the company. His justification is that it is easier to just have two

categories of inventory, finished goods and raw materials. The Sales Director has also been

acting as Finance Director for most of 2012 due to the illness of the Finance Director. He has no

accounting qualification but worked as an accounts clerk 20 years ago.

It is now 4th

January 2013.

Required

a) Identify the audit risks associated with the Inventory of Chobad and explain them. (8 Marks)b) What procedures would you use to verify the inventory figure as reported in the financial

statements in light of the above issues? (12 Marks)

c) Explain the correct procedures to be followed when conducting an inventory count. (5 Marks)d) What are the implications on the audit report of the classification of work in progress as raw

materials? (5 Marks)

e) What ethical issues arise from this scenario? (5 Marks)

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