Question

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably?

1) insist that the client perform physical counts of inventory items several times during the year
2) observe the client's inventory count at an interim date
3) increase the extent of tests of controls over inventory
4) request the client to schedule the physical inventory count at the end of the year

Answer 1

For a client with low control risk regarding inventory, an auditor would probably observe the inventory count at an interim date to take advantage of the client's reliable perpetual inventory system, rather than mandating multiple counts or scheduling it at year-end.

Step-by-step explanation:

When assessing inventory controls within an organization where the level of control risk is determined to be low, an auditor's strategy would adjust accordingly. If control risk is low, this suggests that the organization already has effective internal control systems in place regarding inventory management. Since the auditor has confidence in the client's control environment, they would likely opt to observe the client's inventory count at an interim date rather than during the busiest time at the end of the year or require multiple counts during the year. This decision takes advantage of the efficacy of the client's perpetual inventory system, which is expected to maintain accurate records consistently throughout the year.

For a client with low control risk regarding inventory, an auditor would probably observe the inventory count at an interim date to take advantage of the client's reliable perpetual inventory system, rather than mandating multiple counts or scheduling it at year-end.