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Warren Kim, a young CA has recently joined Martin and Mathews Associates (MMA), a mid-tier accounting firm. Warren has been assigned to draft a report on the reliability of internal control (IC) system of an audit client, Moor Electricals Limited (Moor). Moor has been audited by MMA for the last three years. The report on the reliability of IC system will be used as a part of a due diligence assurance engagement for Moor’s prospectus. Moor expected to be listed in Australian Stock Exchange (ASX) next year.
In carrying out the review, Warren finds a number of matters that he believes are weaknesses of the IC system. Some of the weaknesses are the related with inventories. There were several customer complaints about delays in deliveries; wrong deliveries; and cancellation of customer orders. Further, the inventory recording system does not show the values or the age of inventories. As a result, the year-end inventory valuations are based on estimates. Also, Warren has found that some inventories are obsolete and without valid manufacturer warranties.
Warren completes his report with details of his findings: poor IC system of inventories and its impact on financial statements. In reviewing the report, Martin, an audit partner at MMA, has not considered Warren’s findings. Martin has redrafted the report with a summary of internal controls of Moor and conclude that internal controls are reliable and effective.
Warren is disappointed and thinking to make an appointment with Martin to discuss his concerns. However, he is worried about how he should initiate the discussion and defend his viewpoints.