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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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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 ...

Solution Summary

This is a solution that explains risks and challenges of physical inventories conducted by auditors.

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1. Discuss the auditors' approach to the verification of liabilities and assets.

2. Which do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment or the issuance of check in payment of an invoice? Discuss.

3. Discuss how the auditors coordinate the year-end cutoff of accounts payable with their observation of the year-end physical inventory.

4. Discuss the purpose of the auditors' review of cash payments subsequent to the balance sheet date.

5. Discuss what kind of documentary evidence created outside the client's organization is particularly important to the auditors in verifying accrued property taxes.

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