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During the taking of physical inventory, the controller intentionally withheld several inventory tags from the employees responsible for the physical count. After the auditor left the client's premises at the completion of the inventory observation, the controller recorded nonexistent inventory on the tags and thereby significantly overstated earnings. How could the auditor have uncovered the misstatement, assuming that there are no perpetual records?

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Solution Summary

The solution explains how auditors could have uncovered a physical inventory misstatement, assuming there are no perpetual inventory records.

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The auditor could have done several things. The auditor left after the observation of inventory was complete, but there is no further information of any substantial testing of the inventory from the auditor. He/she should have checked all inventory tags to be sure that all tags are present and ...

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