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You are an audit senior of Hadi & Co and
are in the process of reviewing the inventory system documentation for
your client, Sohar Company which manufactures computer equipment. The
company’s factory and warehouse are based on one large site, and their
year-end is 30th June 2016. The Company is planning to undertake a full
inventory count at the yearend of its raw materials, work in progress
and finished goods and you will be attending this count. In preparation
you have been reviewing the inventory count instructions for finished
goods provided by Sohar Co. The count will be undertaken by 15 teams of
two counters from the warehouse department with Sohar’s financial
controller providing overall supervision. Each team of two is allocated a
number of bays within the warehouse to count and they are provided with
sequentially numbered inventory sheets which contain product codes and
quantities extracted from the inventory records. The counters move
through each allocated bay counting the inventory and confirming that it
agrees with the inventory sheets. Where a discrepancy is found, they
note this on the sheet. The warehouse is large and approximately 10% of
the bays have been rented out to third parties with similar operations;
these are scattered throughout the warehouse. For completeness, the
counters have been asked to count the inventory for all bays noting the
third party inventories on separate blank inventory sheets, and the
finance department will make any necessary adjustments. Some of Sohar’s
finished goods are high in value and are stored in a locked area of the
warehouse and all the counting teams will be given the code to access
this area. There will be no dispatches of inventory during the count and
it is not anticipated that there will be any deliveries from suppliers.
Each area is counted once by the allocated team; the sheets are
completed in ink, signed by the team and returned after each bay is
counted. As no two teams are allocated the same bays, there will be no
need to flag that an area has been counted. On completion of the count,
the financial controller will confirm with each team that they have
returned their inventory sheets.

As part of your audit assignment, you are asked to write a report to your audit senior in which you are required to:

In respect of the inventory count procedures for Sohar Co:

Additionally, following three matters have also been brought to your attention.

company’s profit before tax for the year ended 31 December 2016 is RO
163m and total assets as at that date are RO 668m. You attended a
meeting with your audit manager where the following matters were

Trade payables and accruals

purchases its raw materials from a large number of suppliers. The
company’s policy is to close the purchase ledger just after the year end
and the financial controller is responsible for identifying goods which
were received pre year-end but for which no invoice has yet been
received. An accrual is calculated for goods received but not yet
invoiced (GRNI) and is included within trade payables and accruals. The
audit strategy has identified a risk over the completeness of trade
payables and accruals. The audit team will utilise computer assisted
audit techniques (CAATs), in the form of audit software while auditing
trade payables and accruals.

Bank overdraft and savings accounts

draft financial statements include a bank overdraft of RO 26m, which
relates to the company’s main current account. In addition, Sohar
maintains a number of savings accounts. The savings account balances are
classified as cash and cash equivalents and are included in current
assets. All accounts have been reconciled at the year end.

Directors’ remuneration

board is comprised of eight directors. Their overall remuneration
consists of two elements: an annual salary, paid monthly; and a
significant annual discretionary bonus, which is paid in a separate
payment run on 20 December. All remuneration paid to directors is
included within wages and salaries. Local legislation requires
disclosure of the overall total of directors’ remuneration broken down
by element and by director.

You are also required to include in your report the following:

Grading Criteria:

The grading of the Written Report will be based on:

The report will be assessed according to the criteria given below:

  • Information and Research Completion of Tasks
  • Understanding of Issues
  • Application and Analysis
  • Presentation and structure
  • References

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