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Question $3(30$ marks$)$

You are working on the audit of Playboy $($Pty$)$ Ltd$,$ a company which wholesales

computer play stations such as Nintendo and Sony. The company$$s business

model is simple and effective. It imports four different types of play station; these

are stacked in their sealed boxes in four designated areas of the warehouse. As

orders come in from retailers, the play stations are promptly shipped out in their

sealed boxes. At year$-$end there were roughly fifteen thousand units on hand. Of

the fifteen thousand units held, approximately ten thousand were the expensive

Sony and Nintendo play stations, $($about five thousand of each make$)$ with the

balance being made up of the cheaper Creativ and Blaster play stations also in

approximately equal quantities. One of the procedures which your firm has carried

out each year at the annual inventory count has been to carefully open a small

sample of sealed boxes to confirm that each box contains a play station.

The box is then resealed. In prior years no instances of empty boxes had been

found; internal controls in the receiving and issuing of inventory and physical

controls over inventory are sound. The company has a strong control environment.

However, at the year$-$end inventory count which is currently underway the same

procedure identified a box stacked with the other boxes which was empty but had

been carefully resealed. This was the only empty box from a non$-$statistical sample

of thirty boxes randomly selected from the fifteen thousand units.

The members of the audit team are divided on what should be done about this.

The following conversation takes place:

Peter Dean: We can ignore it $$ one empty box in fifteen thousand hardly makes a

difference $$ it$$s not material.

Roy Sidhu: No$,$ I think we should open another thirty boxes and if we find no empty

boxes in that sample, we can ignore it$.$

Bob Boon: I agree with Peter, one out of thirty is a tolerable error rate.

Creedence Ndlovu: How can you have a tolerable error rate for a test like this?

Obviously there has been theft here which is serious. If we think there is theft, we

have to do something about it$.$ If it comes out later that there has been major theft,

the company can sue us for not picking it up$.$ If necessary, every box will have to

be checked.

Peter Dean: You know the warehouse manager is very fussy about us being

careful when opening the boxes so lets just record our finding and move on$.$

Source: T Naidoo. $(2023)$

REQUIRED:

$1.$ State the assertion to which the procedure of checking the contents of the

boxes relates. $(1)$

$2.$ Comment on the size of the sample selected for this procedure. $(7)$

$3.$ Comment on the opinions of the audit team based on the conversation

recorded above. $(12)$

$4.$ Comment on whether the warehouse manager should be notified of the empty

box or not. $(3)$

$5.$ Describe, giving reasons, how you would go about increasing your tests on

the contents of boxes. $(7)$

End of Question $3\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

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