March 2022 – Q2
Risks
Revenue
A risk of overstatement as the overall revenue
experienced an increase of 5.2% which is
attributed to:
 7.4% increase in pets sales;
 12.9% increase in accessories;
 4.2% decline in pet foods
Average revenue per store increased from
$1,183k to $1,245k.
GPM has deteriorated from 45% to 41.3% due
to the penny sale promotion
A change of EPOS system during the year and
this increases the chance of errors in recording
due to:
 Inadequate training provided to the
staff members;
 Corruption of data during the
migration;
 Systematic deficiencies were identified
with the new EPOS system where cash
sales was overstated
Prior to the changeover which only completed
at the year-end, manual over-riding of prices
due to the penny sale promotion increases the
chance of errors in recording.
Inventories
Inventory has increased by 16.8% driven by:
 32.3% increase in accessories
suggesting an overstatement due to the
12.9% increase in sales
 12.5% increase in pet foods indicates
an overstatement due to a decline of
4.2% in sales; and
Procedures
 Compare monthly sales to identify
anomalies
 Review post year-end management
accounts to ascertain if sales is
abnormally low
 Evaluate and test the controls over
revenue recording in respect of the
EPOS system
 Enquire with management whether a
parallel run was conducted and read
the report to ascertain the functionality
of the new system
 Discuss with the staff involved on the
functionality of the system
 Ascertain from management on the
remedial actions taken on the
deficiencies with the new EPOS system
 Consider hiring IT expert
 Obtain the last few transactions before
and after the year-end and match to its
sales invoices ensuring it is accrued into
the correct accounting period
 On a sample basis, vouch entries in the
ledger to the sales invoices
 Trace sales invoices into the sales
ledger
 Ascertain the reasons for the increase
in revenue and consider the
appropriateness based on our
understanding of the business
 Compare margins by store and
products
 On a sample basis, confirm if the
discounts for the penny sale promotion
has been appropriately recorded
 Attend the inventory count on live
animals and undertake two way tests:
o Floor to register;
o Register to floor
o Confirm if the count has been
conducted in accordance with
the instruction list
  stagnant for pets which is unlikely as
the count has not been undertaken and
7.4% increase in the sales figure for this
product suggesting an understatement
This is inconsistent with the 12.2% increase in
cost of sales.
Inventory days have increased significantly
from 42.8 days to 44.6 days
Inventory may include slow-moving / expired
goods especially for pet foods
Dependent on the EPOS system which
experienced a systematic issue with cash
overstatement
Establishing the cost of animals bred is difficult
and is subjective and judgemental
Unreliable integration system would result in
errors in recording
Pets are not included within the inventory
management system.
 Compare the count sheet to the
inventory records and investigate any
material differences
 On a sample basis for pet food and
accessories, vouch the cost to
suppliers’ invoices
 Compare to post year-end selling price
to ascertain the NRV
 Discuss with management on the basis
of ascertaining slow-moving / obsolete
inventories
 Challenge the basis used by comparing
to industry practices
 Obtain the ageing inventory report to
identify slow-moving / obsolete
inventories
 Obtain written representation from
management on:
o Basis used is to their best
knowledge
o Disclosed all information and
explanations to us
 Evaluate and test the controls over
inventory recording
 Identify from the inventory ageing
report any goods with negative margins
 Enquire with the staff involved on the
actions taken on the differences
between the count and records in
respect of pet food and accessories
 Ascertain the reasons from
management on the increase in
inventory and consider its
appropriateness based on our
understanding of the business
 Test the operating effectiveness of the
inventory and integrated system
 Ascertain the reasons as to why there is
no movement in the inventory of pets
 Discuss the basis used by management
in establishing the cost of live animals
 Challenge the basis used by comparing
to industry norms
2 Count and valuation

Issues Practical solutions

Animals will be moving around and this  Cage the animals during the count (set
increases the chance of double counting or fail a pre-fixed number of animals within a
to count which will result in errors in the cage) and count the number of cages
quantity

Smaller pets are harder to count when they are  Contain them into smaller area
moving around

Valuation of live animals are subjective and  Review post year-end selling price to
based on market forces ascertain NRV

Breeding animals are not part of inventory  Ensure these are not included into the
inventory ledger

Valuation of animals are dependent on many  Hire an expert

factors such as gender, weight, breed

Difficult to establish the cost of live animals  Implement a standard costing system

3. Audit report

In accordance with the solicitor’s opinion, there is a probable chance that FAS would have to make a
material compensation to the affected employees

This should therefore be provided into the FS as the condition would have existed before the year-
end

Modify the audit report on the basis of material misstatement as the management refuses to
provide and disclose the issue into the FS

If it is not pervasive, a qualified opinion would be appropriate.

Conversely, if it is deemed pervasive, an adverse opinion should be issued

Explanation together with its impact should be included after the opinion paragraph under the
heading “Basis of Qualified / Adverse Opinion” respectively.

In the situation of an adverse opinion, we should further state that the FS is not true and fair.