An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
A) Increase the extent of tests of controls for the inventory cycle.
B) Request that the entity schedule the physical inventory count at the end of the year.
C) Insist that the entity perform physical counts of inventory items several times during the year.
D) Apply gross profit tests to ascertain the reasonableness of the physical counts.

Question

Quizplus · Accepted Answer

If the assessed level of control risk is high, the auditor would likely request that the entity schedule the physical inventory count at the end of the year as a way to gather more reliable evidence about the existence and accuracy of inventory quantities and valuation. This approach would provide better assurance regarding the completeness and accuracy of the inventory balances, a key concern in such situations. Increasing the extent of tests of controls or relying on gross profit tests may not address the underlying control deficiencies that are leading to the higher assessed level of control risk in the first place. Similarly, requiring several physical counts during the year may be impractical or costly for the entity without necessarily providing better evidence of inventory accuracy than a single year-end count.

An Entity Maintains Perpetual Inventory Records in Both Quantities and Dollars