Final answer:
Auditors analyze inventory turnover rates to check the existence, completeness, valuation, and allocation of inventory, ensuring the accuracy of financial statements. Analyzing these rates helps spot potential errors or misstatements and contributes to inventory management efficiency evaluation.
Step-by-step explanation:
An auditor would most likely analyze inventory turnover rates to obtain evidence concerning assertions related to the existence, completeness, valuation, and allocation of inventory. Inventory turnover is critical because it measures how quickly a company sells its inventory over a period. A higher turnover indicates efficient management and a fresher inventory, while a lower turnover may suggest overstocking or obsolescence.
By analyzing turnover rates, an auditor is looking for red flags that might indicate financial statement errors or possible misstatements. For example, an unusually low turnover rate may suggest that inventory is overvalued or not moving as expected, which could affect the accuracy of financial statements. On the other hand, a high turnover rate might suggest a risk of stockouts or inadequate inventory, which could lead to lost sales and revenue.
Therefore, investigating inventory turnover rates is an important part of the audit process. It helps auditors ensure that the inventory balances reported on the balance sheet are fairly stated and that the cost of goods sold reflected in the income statement is accurate, ultimately contributing to the reliability of financial reporting.