You Are Conducting the Audit of Files R Us Inc

question 30

Essay

You are conducting the audit of Files R Us Inc. (FRI), a family-owned business that manufactures a variety of different wooden and metal file cabinets. In business for over twenty years, FRI has a reputation for providing high-quality products on time or even ahead of schedule. FRI does not sell to the public, but only to fine furniture stores and to a variety of office supply chains.
As of the current year-end, the company has a total of $6.3 million in assets. Inventory information is as follows:
Raw materials (metals and supplies) $ 400 000
Raw materials (wood products) 450 000
Work in progress 1 350 000
Finished goods 250 000
$2 450 000
Finished goods consists of:
Material 48%
Direct labour 22
Overhead 30
100%
File cabinet production is intensely competitive, primarily due to imports from Asia and Mexico. To help manage costs, FRI uses a job-order, standard cost system. Standard costs are assessed quarterly. Each job is costed and compared to standard. Inventory is counted only at the end of the year. There is no perpetual inventory system.
Due to problems with raw material quality and new staff, losses have been incurred in the last six months of the year. Your review of last year's audit file indicated that there were numerous inventory adjustments required last year.
Required:
Using the audit risk model, assess the risks associated with the audit of inventory.

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Definitions:

Internal Control Problems

Weaknesses or failures in a company’s system of policies and procedures that govern its operations and financial reporting.

Gaps

Refers to missing elements or disparities in data, knowledge, or performance that need to be addressed.

Slow Payments

Payments made by a debtor that are consistently made later than agreed upon terms, leading to delayed receipt of funds by the creditor.

Days' Cash

The average number of days a company takes to collect cash from its sales.