Audit Procedures for Inventory Audit

Running Head: Professional Ethics in Auditing
Auditing Practices

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Table of Contents
Abstract:................................................................................................................ 2
Part A...................................................................................................................... 2
Introduction:....................................................................................................... 2
Ethical issues:..................................................................................................... 3
Courses of actions.............................................................................................. 4
Part B..................................................................................................................... 5
Introduction........................................................................................................ 5
Key Audit Assertions........................................................................................... 6
Audit procedures for Inventory Audit..................................................................7
Outcomes of the above audit procedure............................................................9
Further Audit implications................................................................................10
Conclusion:....................................................................................................... 11
Appendix.............................................................................................................. 12
References........................................................................................................... 27

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Abstract:
In this report, the professional ethics that are applicable on the member in practice of auditing
services are discussed. In part A of the report the ethical issues involved in soliciting the
client case by the firm of auditors have been observed and the possible courses of actions to
deal with those ethical issues are identified. In part B, the procedure of inventory audit which
is the significant part of overall audit of the company are set out. As in the given case it is not
possible for the auditor of GHT Ltd. to attend the physical count of the inventory as a part of
audit procedure, the various other alternative audit procedures that could be taken by the
auditor have been recognised. The stock sheet provided by the management of the company
is being critically analysed to form an audit opinion on the true and fair view of financial
statements of the company as at 31st March, 2018.
Part A
Introduction:
Andy, a well known auditor in the present case due to the personal and professional
competencies has failed to bring a considerable customer base for its firm which has two
other auditors. In order to secure his position in the firm of auditors, Andy is in search of
potential clients to provide auditing and assurance services. For the same purpose, the auditor
has responded to the tender of a large company named as Office Supplies Ltd. The company
was a supplier of products such as office furniture and technologies and has already
appointed an auditor to carry the overall audit of the company.

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While undertaking any auditing engagement, the engagement member must comply with the
fundamental principles of auditor such objectivity, independence, professional competency,
professional behaviour and integrity (Whittington & Pany, 2010). There principles are
necessary to be maintained by the auditor to respect the profession of auditing and to gain the
trust of general public in auditing profession. In complying with these basic principles the
auditor may have to face various threats such as threat of self-interest (APESB, 2010).
Ethical issues:
The ethical issues that are involved in the present case are as follows:
First of all, while responding to the tenders the auditor must make efforts to communicate
with the existing auditor of the proposed company to identify the reasons for which the
existing auditor is withdrawing from the audit engagement of the company. Without
communicating with the current auditor, the auditor would be held guilty of professional
misconduct if he accepts the audit in such case (Rossouw, Prozesky, du Plessis, Prinsloo,
2010). Moreover, charging an unreasonable fees excessively higher than that of the
competing auditing firms is also not an ethical practice on part of auditor. The auditor must
also not solicit the clients using the modes that are not generally open to the professional
auditors. In the current case, the relatives of the auditors i.e. his wife and the sister of his wife
are manipulating the employee (Silvya) in the organisation of proposed company to make
arrangements for the auditor’s appointment, which is not as per the ethical standards of the
professional auditors. Further, the auditor might take the help of Silvya to obtain the
appointment as the auditor in OS Ltd. by using unethical ways such as manipulation, bribing,
undue influence etc. whereas adoption of such ways is not ethical in any sense. In order to
secure the safe partnership in the firm of auditor, Andy might accept certain conditions of the
management of the company which are not ethically or professionally acceptable under the

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professional and ethical standards of auditing profession (Jackling, Cooper, Leung &
Dellaportas, 2007).
The wife of the auditor and her sister are under no obligation to comply with the ethical and
professional ethical standards of the auditing profession that are applied to Andy, being the
member in practice of institute. Therefore, their acts of interacting with Silvya and
demanding the memo of evaluation of managing director of the company are not
professionally unethical. However, Silvya’s act of communicating the important and sensitive
information regarding her managing director’s decision is not morally and professionally
correct due to the fact that the confidentiality of the company is getting affected through
Silvya’s actions.
It might also be possible that the independence of the firm of auditor’s will also be affected if
the appointment as the auditors of OS Ltd is accepted because the management of the
company may offer such appointment on certain conditions (Jackling, Cooper, Leung &
Dellaportas, 2007). The managing director may instruct the firm not to provide adverse or
qualified opinion on the true and fair view of financial statements of the company.
Courses of actions:
In the present case, the auditor must first of all communicate with the existing auditor with
the permission of the proposed company. The auditor must ask the existing auditor to provide
all the necessary information and facts which have become the grounds for his resignation
from the place of auditor. Further, the auditor must also disclose his relationship with the
employees of the company before being appointed as the auditor. The auditor must also
ensure that there is no ambiguity or confusion of work responsibilities between the auditor
and management of the company. For this purpose, the auditor make proper documentation
of everything that is being discussed between the company and auditor. Moreover, the auditor

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must not charge any unreasonable fees for the provision of auditing services. Also, the
auditor must ensure that the only such service that the auditors are competent and eligible to
provide, are provided by them to the new client. Furthermore, the auditor must ensure that the
principle of independence is not adversely affected by such appointment (Hoffman &
Zimbelman, 2009). The auditor must also not take his family relationships in between his
professional engagements. The company can sue the auditor and the assistant of the
managing director for indulging in the practices that are not in the interest of the company.
Moreover, if the auditor gains the appointment through the inappropriate modes or ways, the
company and other person who is affected by his behaviour can sue the auditor for which the
regulatory bodies can impose heavy penalties and fines (Brown, Stocks & Wilder, 2007).
Part B
Introduction
Inventories are the integral part of any business and hence they requires to be properly valued
in the financial statements of the company. The undervaluation and overvaluation of
inventory can adversely affect the true picture of company’s profitability and hence it can be
used as a tool to manipulate the profits of the company so as to mislead the users of financial
reports. Audit of the company is undertaken with the objective of providing the correct
opinion on the truthfulness and fairness of the financial statements. During the auditing
engagement, the auditor are required to obtain sufficient and appropriate audit evidences to
provide the reasonable level of assurance to the audit report users. Inventory audit is an
important element of overall audit process of the company which requires significant
attention of the auditor. Following are some of the key assertions of inventory audit: