While observing an entity's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record
A) Purchase discounts.
B) Purchase returns.
C) Sales.
D) Sales returns.

Question

Quizplus · Accepted Answer

If the test counts were higher than the recorded quantities in the perpetual records, it means that the entity has not recorded the returns from customers. This could lead to an overstatement of inventory and a misstatement of the financial statements. Therefore, choice D, sales returns, is the best choice.

While Observing an Entity's Annual Physical Inventory, an Auditor Recorded