Final answer:
The statement is False; auditors are generally required to observe inventory, even if stored at third-party warehouses, to ensure accuracy and completeness of financial statements. Option B
Step-by-step explanation:
The statement "The auditors need never observe inventories stored in legitimate public warehouses" is False. According to generally accepted auditing standards, auditors are required to obtain sufficient, appropriate evidence to provide a reasonable basis for their opinion regarding the financial statements.
This often includes observing the client's inventory to ensure it exists and is correctly valued, as inventory is typically a significant asset that affects the financial position and operating results.
Auditing standards suggest that wherever inventory is material to the financial statements, auditors should perform physical inspection of the inventory to verify its existence and condition. This applies even if the inventory is stored in third-party locations, such as legitimate public warehouses.
The auditors may use alternative procedures if it is impractical to observe the inventory, but these situations are exceptions rather than the rule.
To ensure the audit's reliability and the accuracy of financial statements, it's vital for auditors to verify the existence and state of inventories, wherever they are held. Option b