Question

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:

Answer 1

Internal controls must be adequate to allow physical inventory counts to be taken prior to the year-end, ensuring that all transactions are recorded up to the balance sheet date.

Step-by-step explanation:

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and all inventory transactions during the intervening period are properly recorded. This process ensures the physical inventory count reflects all purchases and sales up to the balance sheet date. By maintaining strong internal controls, a company can efficiently and accurately keep track of inventory movements, thus allowing for this practice.

It is critical for the client to adjust the inventory records for any transactions that occur between the date of the count and the year-end to ensure the financial statements reflect the correct inventory balance. Internal controls such as segregation of duties, proper authorization, and reconciliation of inventory records with actual physical counts play a crucial role in enabling this practice.