Question

Cartwright enterprises is being audited by glowbright external auditors. The lead partner on the audit engagement has assigned the task of auditing the inventory accounts to a senior manager employed by the audit firm. After conversations with the internal audit staff, the senior manager is concerned about the client's net realizable value of inventory on hand, and has decided to employ an ADA (Audit Data Analytics) procedure to investigate any items of inventory that may be taking unusually long to sell. In this context, the best application of an ADA risk assessment procedure would be?

1) Analyzing the client's financial statements
2) Reviewing the client's internal control procedures
3) Performing a physical count of the inventory
4) Comparing the client's inventory turnover ratio to industry benchmarks
5) Using statistical sampling to test the accuracy of the inventory records

Answer 1

1) Analyzing the client's financial statements The best application of an ADA (Audit Data Analytics) risk assessment procedure in this context is comparing the client's inventory turnover ratio to industry benchmarks.

Step-by-step explanation:

The best application of an ADA (Audit Data Analytics) risk assessment procedure in this context would be comparing the client's inventory turnover ratio to industry benchmarks. By doing so, the auditor can identify any items of inventory that may be taking unusually long to sell, which could indicate potential issues with the net realizable value of the inventory on hand.This procedure allows the auditor to assess how efficient Cartwright Enterprises is in selling its inventory compared to similar companies in the industry. By comparing the inventory turnover ratio, the auditor can identify any items of inventory that may be taking unusually long to sell, which could indicate potential issues with the net realizable value of the inventory on hand.

An inventory turnover ratio measures the number of times a company sells and replaces its inventory within a specific period. Comparing this ratio to industry benchmarks helps to identify any deviations from the norm, allowing auditors to focus their investigation on inventory items that may be at risk of being overvalued or obsolete.

The other options listed are not as directly related to assessing inventory risk. Analyzing financial statements, reviewing internal control procedures, and performing a physical count of inventory are important audit procedures, but they do not specifically address the concern of inventory items taking unusually long to sell. Using statistical sampling to test the accuracy of inventory records could be helpful, but it does not directly address the concern of the net realizable value of inventory on hand.