Question

Lisa is auditing a private company that manufactures batteries for cell phones. While the company has good perpetual inventory records and careful inventory controls, Jennifer is concerned about reported problems with lithium-ion battery fires. It is not clear that the industry has solved these problems. The company has already noted a slowing in sales of one battery model. Which audit strategy or strategies is Lisa most likely to take?

I. Analytical approach
II. Substantive approach
III. Reliance approach
1) III only
2) II only
3) II and III
4) I only

Answer 1

Lisa is likely to use a substantive approach to audit the company, focusing on directly testing the inventory values, examining safety issues associated with the product, and reviewing sales and returns.

Step-by-step explanation:

Lisa is faced with concerns regarding inventory valuation and the potential for product liability issues due to the problems associated with lithium-ion battery fires. Since there are reported problems that could affect the valuation of the inventory and there's already a noted slowing in sales of one battery model, Lisa is likely to implement a substantive approach to directly test the inventory values. In a substantive approach, she would likely perform procedures such as physical inspection of the inventory, reviewing sales records, examining returns, and potentially consulting with engineers or product safety experts about the lithium-ion battery issues. Given the concern about the safety problems which have not been resolved industry-wide, Lisa might be less inclined towards a reliance approach, where the auditor places trust in the company's internal controls. Analytical procedures would not primarily address the specific concerns about the slow-moving inventory and safety issues. Therefore, the answer would be option 2) II only, which dictates that Lisa is most likely to take a substantive approach.