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Inventories & Cost of Goods Sold

Ace Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse, but uses statistical sampling instead to estimate the year-end inventory. Ace maintains a perpetual inventory record of parts and supplies and believes that statistical sampling is highly effective in determining inventory values and is sufficiently reliable so as to make a physical count of each item of inventory unnecessary.

a. Identify the audit procedures that should be used by the independent auditor that change or are in addition to normal required audit procedures when a client utilizes statistical sampling to determine inventory value and does not conduct a 100 percent annual physical count of inventory items.
b. List at least 10 normal audit procedures that should be performed to verify physical quantities whenever a client conducts a periodic physical count of all or part of its inventory.

Solution Preview

Identify the audit procedures that should be used by the independent auditor that change or are in addition to normal required audit procedures when a client utilizes statistical sampling to determine inventory value and does not conduct a 100 percent annual physical count of inventory items.

Auditor has to ascertain following things:
1. To ensure that samples are representative of whole lot. The appropriateness of assumptions of the procedure should be verified from the available record of material and how the samples were taken from that material.
2. The statistical parameters are ...

Solution Summary

This solution identifies the audit procedures and explains four things an auditor must ascertain and ten things an auditor must do. Full explanations are included and specific tasks are explained.

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