Question

While observing a client's annual physical inventory, an auditor recorded test count for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

Answer 1

The auditor's observation of higher physical test counts than recorded could result from unrecorded purchase receipts or administrative errors. Investigating these discrepancies is crucial for accurate financial records during an audit.

Step-by-step explanation:

The situation described in the student's question, where an auditor finds the physical test counts of inventory items to be higher than the recorded amounts in the client's perpetual records, could result from the client's failure to record certain transactions accurately. This discrepancy may indicate problems such as theft, loss, or administrative errors in the inventory management system. Another possibility is that there might be unrecorded purchase receipts, which means that inventory was received and physically added to stock, but the transaction was not entered into the company's accounting records. In the context of an audit, it is crucial to investigate these variances to ensure the integrity and accuracy of financial information.