Question

During the audit of Marcella Stores, the auditors determine that internal controls over inventory security are weak. What should the auditors do?

1) The auditors should rely less on internal controls and adopt a substantive approach.
2) The auditors should not adopt a reliance on controls approach and should perform less extensive substantive testing.
3) The auditors should perform extensive additional tests of controls.
4) The auditors should adopt a reliance on controls approach and perform less extensive substantive testing.

Answer 1

When auditors find weak internal controls over inventory, they should adopt a substantive approach, performing more extensive substantive testing rather than relying on internal controls.

Step-by-step explanation:

If auditors determine that internal controls over inventory security are weak during an audit, they should take action that reflects the strength of those controls. Given the situation with Marcella Stores, the correct action would be for the auditors to rely less on internal controls and instead adopt a substantive approach. This would involve performing more extensive substantive testing to gain sufficient assurance about the accuracy of the inventory amounts reported in the financial statements.

The other options presented in the question are not appropriate given the context:

• Option 2 is incorrect because when controls are weak, auditors need to perform more substantive testing, not less.
• Option 3 is only relevant when there is a plan to rely on the effectiveness of controls. Here, because the controls are weak, performing additional tests of controls may not be a cost-effective approach.
• Option 4 assumes that the auditors can rely on controls, which is contradicted by the weak internal controls observed in this case.

Therefore, the appropriate action is for the auditors to perform more substantive tests, usually involving detailed inspections and verifications of inventory records, to compensate for the weak controls.