Risks with physically accounting for inventory
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You are responsible for auditing a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and in two public warehouses. An electronic inventory file is maintained on a computer disk, and at the end of each business day the file is updated. How would you tackle the challenge of the physical inventory observation? List the risks that you see the auditor will face and how they would manage those risks.
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Solution Summary
This is a solution that explains risks and challenges of physical inventories conducted by auditors.
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Business Sampling & Auditing
Business Auditors are people or sometimes groups of people that conducts audits in an organization or any type of entity. The rationale for doing audits is to test, examine, evaluate, and verify record keeping, inventory control, reporting methods, financial accuracy, and so forth. Another purpose of an audit is to add credibility to an organizations operational processes and procedures. The sampling and auditing methods are generally managed based on the agreed rules and norms of the entity being audited.
Physical Inventory Observation
There are many auditing methods that an auditor can use to verify physical inventory. In this study, we will explore three of the many sampling and auditing methodologies of physical inventory observations.
1. Cutoff Analysis - This is when the auditor will stop all incoming and outgoing inventory during the time the physical inventory is being ...
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