Acc 456 - Big Rock Brewery Ltd Case Analysis

...

The total inventory of the company increased approximately 30% in 2015. Since the company has not been profitable for the past a couple of years, there is a possibility that the company overstates the total value of inventory, to increase current assets. By vouching, which is tracing from the account records to a source document, the auditor can find evidence of completeness and detect errors of overstatements. The auditor can take a sample of suppliers’ invoices and compare it to the inventory account records and general ledger. In addition to that, appraising the general condition of the inventory is highly recommended in order to detect any damaged, obsolete, and slow moving items. The auditor can take a sample of one batch per product type and test for any damaged, obsolete, or slow moving items within those batches. We will also ask management how they account for damaged or obsolete goods in their financial statements, and what procedures they take to ensure no obsolete goods exist within their inventory during the count. From year 2014 to 2015, inventories of consignment products and dry goods store increased dramatically (363% and 166% respectively) ("About Big Rock Brewery," n.d.). Hence, substantive procedures need to be performed in order to ensure the existence of the goods and the valuations of inventories are correct. In order to ensure that the numbers of goods on consignment are actually on consignment, we can check the shipping documents from Big Rock Brewery to the individual retailers to ensure the quantity of goods on consignment are accurate. The audit team can also call the individual retailers to see if they actually have Big Rock Brewery’s goods on hand. Although the company has its own internal control system, according to management, the internal controls are not as effective as expected; therefore an attendance at an inventory count for their dry goods store would be necessary. While observing inventory, an auditor should take a sample and make sure if inventory tags are properly controlled and no empty containers are counted as inventory. Another substantive test could be a test on raw material and glass containers. The amount of the RM and glass containers increased by 32% and 18% yearly since 2013 ("About Big Rock Brewery," n.d.). In order to validate the amount of raw material supplied from suppliers, we should verify with the suppliers to see how much they have supplied to Big Rock Brewery and compare with purchases recorded. As auditors, we can also check the purchase requisition, purchase order, the receiving report, and invoices. Since Big Rock is a brewery, their RM is mostly grains such as malts and hops, as it is hard to measure the right amount and therefore easy to overstate the value. To ensure those grains are valued correctly (not overstated), the auditor should attend an inventory count with a specialist. While observing inventory, the auditor should take a sample and make sure if grains are identified and price tagged correctly, since each grade of grain may have a different value. The auditor should also make sure if the right units of the measure is used for each type of grains. For glass containers, the auditor should be aware of the existence of empty containers and empty spaces between containers which could lead to overstatement of inventory. Although their raw material consists mainly of dry goods, there still remains a possibility of spoilage, so as auditors, we should also be checking for expiration dates or date of production on the raw materials.

As a result of a 100-hectolitre batch of Dark Cherry Abbey Ale having a possibility of contamination, the audit team will have to check the rest of their inventory of it to make sure the other batches were not in risk of contamination either, ensure all their inventory was not spoiled. We would have to include testing of whether or not the company had written down inventory due to this batch of Dark Cherry Abbey Ale being spoiled for accuracy assertion. Not only will this affect the inventory count balance on their financial statements, it will also affect their goods on consignment balance, as goods have been returned by the retailers. Since the company had incurred many expenses this year in opening a branch in BC, and their net income has been on the low side since 2014, they may have an incentive to improperly revalue or not even make an adjustment to their inventory balance in order to make their current assets seem larger than it actually is ("About Big Rock Brewery," n.d.). For the remaining 150 bottles, these may have already been sold to customers and would have to be recalled from individual customers or they may face a huge impact on their company image by selling spoiled goods. Since the company needs to recall products from individual customers, we should also include in the audit plan a negative confirmation with the individual customers seeing if the company had indeed recalled those bottles, if not there may be a risk that the company is overstating its sales revenue by including the sale of the contaminated bottles as revenue. In order to check if the company has adjusted its revenue, we can also include in the audit plan a substantive procedure such as tracing what the company does after they recall the bottles from customers; answering the questions of what the company does to the recalled batch, do they dispose of it or do they try and amend it, and how do they adjust for the recall on an accounting basis. The main assertion at hand would be the valuation. In addition since the cause of this risk of contamination for the batch of Dark Cherry Abbey Ale roots from the failure during the pasteurization process, as auditors, we should ask management what actions they have taken to ensure there will be no recurrence of the same scenario, and what expenses they have incurred to fix their pasteurization process, such as the cost of hiring a specialist in to give recommendations on how to improve the process, or cost of buying new equipment if the equipment was the cause of the failure of the pasteurization process. Then we should adjust our audit plan into ensuring that management had followed appropriate steps to record their expenses to follow up on this incident.

Note: For Appendices A through C, and F all numbers were obtained from the quarterly and annual financial statements from Big Rock Brewery and Sedar, unless otherwise stated.

---------------------------------------------------------------

Appendix A

Table 1. Analytical Review (Comparison)

Big Rock Brewery - 2014/2015 Comparison on Income Statement(in thousands)

2015