Your firm has been approached by Wexford Co to provide the annual audit. Wexford Co operates a chain of bookshops across the country. The shops sell stationery such as diaries and calendars, as well as new books.

The financial year will end on 31 July 2011, and this will be the first year that an audit is required, as previously the company was exempt from audit due to its small size.

The potential audit engagement partner, Wendy Kwan, recently attended a meeting with Ravi Shah, managing director of Wexford Co regarding the audit appointment. In this meeting, Ravi made the following comments:

‘Wexford Co is a small, owner-managed business. I run the company, along with my sister, Rita, and we employ a part-qualified accountant to do the bookkeeping and prepare the annual accounts. The accountant prepares management accounts at the end of every quarter, but Rita and I rarely do more than quickly review the sales figures.

We understand that due to the company’s size, we now need to have the accounts audited. It would make sense if your firm could prepare the accounts and do the audit at the same time. We don’t want a cash flow statement prepared, as it is not required for tax purposes, and would not be used by us.

Next year we are planning to acquire another company, one of our competitors, which I believe is an existing audit client of your firm. For this reason, we require that your audit procedures do not include reading the minutes of board meetings, as we have been discussing some confidential matters regarding this potential acquisition.’

Wexford Co’s financial statements for the year ended 31 July 2010 included the following balances:

Profit before tax $50,000
Inventory $25,000
Total assets $350,000

The inventory comprised stocks of books, diaries, calendars and greetings cards.

Required:

In relation to opening balances where the financial statements for the prior period were not audited:

Explain the audit procedures required by ISA 510 Initial Audit Engagements – Opening Balances, and recommend the specific audit procedures to be applied to Wexford Co’s opening balance of inventory. (8 marks)