Question

Highnix Electronics Sdn Bhd develops and manufactures computer components and its year end was 31 December 2018 . The company has a large factory, and two warehouses, one of which is off-site. You are an audit supervisor of Tipah & Co and the final audit is due to commence shortly. Draft financial statements show total assets of RM23.2m and profit before tax of RM6.4m. The following three matters have been brought to your attention:

Inventory valuation

Your firm attended the year-end inventory count for Highnix Electronics and confirmed that the controls and processes for recording work in progress (WIP) and finished goods were acceptable. WIP and finished goods are both material to the financial statements and the audit team was able to confirm both the quantity and stage of completion of WIP.

Before goods are dispatched, they are inspected by the company’s quality control department. Just prior to the inventory count, it was noted that a batch of product line ‘Crocus’, which had been produced to meet a customer’s specific technical requirements, did not meet that customer’s quality and technical standards. This inventory had a production cost of RM450,000. Upon discussions with the production supervisor, the finance director believes that the inventory can still be sold to alternative customers at a discounted price of RM90,000.

Research and development

Highnix Electronics includes expenditure incurred in developing new products within intangible assets once the recognition criteria under MFRS138 Intangible Assets have been met. Intangible assets are amortised on a straight line basis over four years once production commences. The amortisation policy is based on past experience of the likely useful lives of the products. The opening balance of intangible assets is RM1.9m.

In the current year, Highnix Electronics spent RM0.8m developing three new products which are all at different stages of development.

Sales tax liability

Highnix Electronics is required by the relevant tax authority in the country in which it operates to charge sales tax at 10% on all products which it sells. This sales tax is payable to the tax authority. When purchasing raw materials and incurring expenses in the manufacturing process, the company pays 10% sales tax on any items purchased. The company is required to report the taxes charged and incurred by completing a tax return on a quarterly basis, and the net amount owing to the tax authority must be remitted within two months. The draft financial statements contain a RM1.1m liability for sales tax for the quarter ended 31 December 2018 .

Required:

Describe any SIX substantive procedures each, the auditor should perform to obtain sufficient and appropriate audit evidence in relation to

the VALUATION of Highnix ’s inventory.

Answer 1

1. Following six substantive procedures be pefofmed related to inventory-

a. Obtain samples and test that inventory value recorded matches to supplier Invoices and PO

b. Re-compute the value of inventory and compare

c. Re-perform net realisable value vs cost comparison

d. Ensure completeness of costs considered for computation of WIP valuation e.g. labor, overheads etc.

e. Perform cut-off analysis to ensure title is with the Company

f. Obtain agreement enteres with another customer for the sales of the rejected item at discount to obtain evidence of valuation of 90,000