QUESTION 2 (14 marks; 28 minutes)

(Source: ODT300 Exam 2016, Question 7)

RUOK Incorporated

You are a third-year trainee accountant at RUOK Incorporated (RUOK), a medium

sized audit firm situated in Pretoria. The firm has 4 partners, 7 audit managers,
43 trainees and 9 administrative staff. The client base of the firm is diverse with the
majority of the clients in the manufacturing and retail industry.

Brick Builders Limited (Brick Builders) is one of the firm’s clients and you are involved
in the company’s audit for the financial year ended 30 September 2023.

Brick Builders

You are familiar with the following background information regarding

Brick Builders. Brick Builders is a listed company that develops and
manufactures educational toys. The company’s head office is
situated in Johannesburg and there are 15 shops spread around the major centres
across South Africa.

Audit of Brick Builders

RUOK was re-appointed as the auditors of Brick Builders for the 2016 financial year
audit during the annual general meeting. This will be the third year that RUOK will be
performing the audit of Brick Builders. The previous audit partner and manager have
established strong relationships with the management of Brick Builders.

Working papers

You and the other staff members on the audit team prepared, amongst others, the
following working papers during the audit.

Working paper reference Description

W105 Inventory

13
GOA 200
Faculty of Economic and Management Sciences
 2024 University of Pretoria
Client: Brick Builders Year-end: 30/09/2023
Prepared by: A Clerk
Reviewed by:
Date: 15/10/2023
Date:
W-105
(1 of 2)
Subject: Inventory

Inventory

Brick Builders uses a computerised perpetual inventory system to record all inventory
and inventory movement.

Only Noah Tembala makes the adjustments required to the recorded inventory on the
computer inventory system.

To have enough Lego inventory available for the Brick Builders fair, Brick Builders
entered into an agreement with the supplier to supply the increased volume of
inventory on a once off consignment basis. This specific shipment was shipped in a
large shipping container and the container was delivered to the temporary Brick
Builders shop at the Pretoria Mall. Only inventory from the container was sold at the
fair.

In terms of the agreement, the supplier agreed that as an incentive for the increase in
sales due to the fair, they will carry the currency risk. Inventory sold at the fair were
therefore invoiced in SA Rands and not US Dollars as the normal business practice. A
consignment inventory rapport that indicated the SA Rands tariff that includes all the
transportation and import duties, and other costs incurred in bringing the inventories
to its current condition and location was done by Noah. Brick Builders also have the
option to either purchase the remaining items or to return them to the supplier, at the
end of the fair.

The fair significantly increased the inventory turnover of the company. Since the fair
ended on the financial year end of the company, the audit team attended the inventory
count at the temporary shop and observed the counting of the inventory. The inventory
that Brick Builders decided to keep was taken out of the container and kept separate
in a secure designated area, where it was counted. The inventory that will be returned
to the supplier was left in the container. Two separate counting sheets were prepared.
After the count, Noah used the count sheets to prepare two consignment inventory
lists. List A was for the inventory that Brick Builders were keeping and List B was for
the inventory that should be returned to the supplier. Noah added the cost of the items
from the detail Supplier Consignment report to the lists and calculated the total value
of the inventory per list.

The audit team also attended the inventory count at the head office, but the internal
audit function assisted the audit team with the counting of inventory at the different
shops.

14
GOA 200
Faculty of Economic and Management Sciences
 2024 University of Pretoria
 Client: Brick Builders Year-end: 30/09/2023
Prepared by: A Clerk
Reviewed by:
Date: 15/10/2023
Date:
W-105
(2 of 2)
Subject: Inventory

Inventory

Noah indicated to the audit team that they did not update the consignment inventory
records at the fair on a daily basis. He, however, performed the following detailed
reconciliation of the consignment inventory straight after the fair.

Reconciliation of consignment inventory for the Brick Builders fair on

30 September 2023

Description Note R
Inventory sold at the fair at cost 1 4 579 919
Inventory that will be kept (List A) 1 666 521
Inventory that will be returned to the supplier 2 358 780
(List B)
Inventory that could not be accounted for that 2 28 780
will be paid to supplier (Balancing figure)
Total inventory for the fair 8 634 000

Inventory per the detail Supplier Consignment 8 634 000

report (Detailing quantities and prices and
quantities were confirmed at delivery)

Note 1: The gross profit percentage for the fair was 20%.
Note 2: This difference was noted when Noah prepared the reconciliation, and it is
presumed that the inventory was stolen.

REQUIRED:

Refer to the information contained in working paper W105, Inventory.

Formulate the substantive procedures RUOK will need to perform to verify that the
consignment inventory transactions were recorded correctly in the records of Brick
Builders Limited for the financial year ended 30 September 2023. (14)

Note: Assume that all procedures relating to the inventory count were completed and
documented.

15
GOA 200
Faculty of Economic and Management Sciences
 2024 University of Pretoria
 University of Pretoria
Department of Auditing
GOVERNANCE AND ASSURANCE 200

ASSESSMENT: Study Pack Question 2 for LA 5

MARKS: 14 TIME: 28 minutes

SUGGESTED SOLUTION

QUESTION 2

SUBSTANTIVE PROCEDURES ON RECORDING OF THE CONSIGNMENT

INVENTORY AT THE BRICK BUILDERS FAIR

 Recalculate the reconciliation obtained from Noah to ensure that it is

accurate. (1)
 Inspect the reconciliation and the inventory lists for any unusual amounts,
such as negative amounts on the inventory lists. (1)
 Enquire from management as to the process followed to assign the other
costs to the inventory and also what they did then differences were
identified. (1)
 Obtain the agreement between Brick Builders and the supplier and inspect
it for the following terms and conditions:
o Inventory for the fair will be invoiced in SA Rands. (1)
o All related costs to inventory are included in the SA Rands tariff to
ensure that no additional costs should be included. (1)
o The inventory will be delivered on consignment for the fair to ensure
that the ownership is not transferred. (1)
o That Brick Builders have the option to keep the inventory or to return
the inventory after the fair. (1)
o That Brick Builders are liable for any stock losses. (1)

For the total amount from the supplier (Cost per unit will be calculated based
on the cost from the supplier and also other costs incurred)
 Obtain the original Supplier Consignment report and recalculate the total
value of the report as well as the total value of the specific deliveries by
multiplying the quantities with the price, to ensure it was done correctly
(Cast and cross cast). (1)
 Agree the amount per the Supplier Consignment report to the amount
included in the reconciliation. (1)
 Inspect the original supplier invoice that it is denominated in SA Rand and
agree the amount per unit to the amounts used on the report. (1)
 Inspect the supporting documentation for the other costs incurred and add
it all together. (1)
 o Divide the amount calculated to determine the cost to be assigned
to each unit and agree that amount to amount used in the report. (1)
 Recalculate the unit price for units by adding the supplier cost and the other
cost. (1)

For inventory sold at the fair

 Accumulate the daily sales of the fair from the sales journal (1)
 Recalculate the cost of sales using the 20% gross profit percentage and
agree the amount to the amount on the reconciliation. (1)

For List A and B

 Select a sample of items from both lists and agree the prices per unit to the
Supplier Consignment report prices used. (1)
o And agree the quantities on the lists to the respective count sheets. (1)
 Recalculate the price x quantities and also the total for the list. (Cast and
cross cast) (1)

 Agree the total amount of List A and List B to the amounts on the
reconciliation for inventory bought and inventory returned. (Will also be
awarded if only 1 list is mentioned, but only once.) (1)
 Inspect the inventory records at year end to determine that the inventory on
list A is included in the records and that inventory on list B is excluded. (1)
 Inspect the adjusting journal for the write off of the inventory that could not
be accounted for to ensure that it is correctly debited to inventory write-off/
cost of sales and credited to the creditor. (1)

mark allocation: 1 marks per aspect, unless indicated otherwise available 22

maximum 14