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WOOD’R’US Ltd imports timber from Indonesia and sells to commercial and domestic customers. Imports are landed at Queen Elizabeth Dock in Hull, stored there and transported to WOOD’R’US Ltd’s warehouse only when there is enough storage capacity.
WOOD’R’US Ltd’s purchases are recorded in a goods received logbook and sales are recorded on sequentially numbered dispatch notes. WOOD’R’US Ltd also treats and sorts timbers for other merchants. Each merchant is charged a fee by WOOD’R’US Ltd based on the quantity of timbers treated and sorted.
An annual stock-take is carried out at the year end to ascertain the inventory quantities for the financial statements. This is conducted by an independent firm of consultants who calculate the volume of inventories for each grade.
You have just been appointed the audit engagement partner in your firm and appreciate that your predecessor qualified the audit report last year due to uncertainty over the inventory figure because, subsequent to the count, different grades of timbers had been mixed accidentally and the firm of consultants had treated them as one grade.
Question: Identify the potential audit risks in respect of the inventory quantities; and explain the necessary steps to address any problems associated with the arrangements for the inventory count.
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