问题：Introduction and client background
　　You are an audit senior in Staple and Co and you are commencing the planning of the audit of Smooth brush Paints Co for the year ending 31 August 2010.
　　Smooth brush Paints Co is a paint manufacturer and has been trading for over 50 years, it operates from one central site, which includes the production facility, warehouse and administration offices.
　　Smooth brush sells all of its goods to large home improvement stores, with 60% being to one large chain store Homewares. The company has a one year contract to be the sole supplier of paint to Homewares. It secured the contract through significantly reducing prices and offering a four-month credit period, the company’s normal credit period is one month.
　　Goods in/purchases
　　In recent years, Smooth brush has reduced the level of goods directly manufactured and instead started to import paint from South Asia. Approximately 60% is imported and 40% manufactured. Within the production facility is a large amount of old plant and equipment that is now redundant and has minimal scrap value. Purchase orders for overseas paint are made six months in advance and goods can be in transit for up to two months. Smooth brush accounts for the inventory when it receives the goods.
　　To avoid the disruption of a year end inventory count, Smooth brush has this year introduced a continuous/perpetual inventory counting system. The warehouse has been divided into 12 areas and these are each to be counted once over the year. The counting team includes a member of the internal audit department and a warehouse staff member. The following procedures have been adopted;
　　1. The team prints the inventory quantities and descriptions from the system and these records are then compared to the inventory physically present.
　　2. Any discrepancies in relation to quantities are noted on the inventory sheets, including any items not listed on the sheets but present in the warehouse area.
　　3. Any damaged or old items are noted and they are removed from the inventory sheets.
　　4. The sheets are then passed to the finance department for adjustments to be made to the records when the count has finished.
　　5. During the counts there will continue to be inventory movements with goods arriving and leaving the warehouse.
　　At the year end it is proposed that the inventory will be based on the underlying records. Traditionally Smooth brush has maintained an inventory provision based on 1% of the inventory value, but management feels that as inventory is being reviewed more regularly it no longer needs this provision.
　　Finance Director
　　In May 2010 Smoothbrush had a dispute with its finance director (FD) and he immediately left the company. The company has temporarily asked the financial controller to take over the role while they recruit a permanent replacement. The old FD has notified Smoothbrush that he intends to sue for unfair dismissal. The company is not proposing to make any provision or disclosures for this, as they are confident the claim has no merit.
　　(a) Identify and explain the audit risks identified at the planning stage of the audit of Smooth brush Paints Co.
　　解析：1(a) Identification of risk
　　Smoothbrush supplies 60% of its goods to Homewares at a significantly reduced selling price, hence inventory may be overvalued.
　　Recoverability of receivable balances as credit period extended.
　　Valuation of plant and equipment.
　　Cut-off of purchases and inventory may not be accurate.
　　New inventory system introduced in the year. This could result in inventory balances being misstated.
　　Inventory may be overstated as Smoothbrush no longer has a slow moving provision.
　　Provisions/contingent liability disclosures may not be complete.
　　Inherent risk is higher due to the changes in the finance department.
　　Inventory may be over or understated if the perpetual inventory counts are not complete and accurate.
　　Explanation of risk
　　Per IAS 2 Inventories, inventory should be stated at the lower of cost and net realizable value (NRV). Therefore, as selling prices are much lower for goods sold to Homewares, there is a risk that the NRV of some inventory items may be lower than cost and hence that inventory could be overvalued.
　　Smoothbrush has extended its credit terms to Homewares from one month to four months. Hence there is an increased risk as balances outstanding become older, that they may become irrecoverable.
　　The production facility has a large amount of unused plant and equipment. As per IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets, this plant and equipment should be stated at the lower of its carrying value and recoverable amount, which may be at scrap value depending on its age and condition.
　　Smoothbrush imports goods from South Asia and the paint can be in transit for up to two months. The company accounts for goods when they receive them. Therefore at the year end only goods that have been received into the warehouse should be included in the inventory balance and a respective payables balance recognised.
　　Smoothbrush has introduced a continuous/perpetual inventory counting system in the year. These records will be used for recording inventory at the year end.If the records and new system have not initially been set up correctly then there is a risk that the year end balances may not be fairly stated.
　　Previously Smoothbrush maintained an inventory provision of 1%, however, this year it has decided to remove this. Unless all slow moving/obsolete items are identified at the year end and their value adjusted, there is a risk that the overall value of inventory may be overstated.
　　The company’s finance director (FD) has left and is intending to sue Smoothbrush for unfair dismissal. However, the company does not intend to make any provision/disclosures for sums due to the FD.
　　Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if there is a present obligation, a probable outflow of resources to settle the obligation and a reliable estimate can be made of the obligation then a provision should be recognised.
　　If the obligation is only possible, or if there is a present obligation but it is not recognised as there is not a probable outflow of resources, or the amount of the obligation cannot be measured with sufficient reliability then a contingent liability should be disclosed, unless the likelihood of payment is remote.
　　The financial controller has been appointed as temporary FD and this lack of experience could result in an increased risk of errors arising in the financial statements. In addition the previous FD is not available to help the finance or audit team.
　　The inventory counts are to cover all of the inventory lines. If any areas of the warehouse are not counted then this will need to be done at the year end.
　　In addition inventory adjustments arising from the counts must be verified and updated by an appropriate member of the finance team to ensure that the records are accurate.
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