Below are four independent client scenarios:
1. Colburn Pharmacy, Inc., has 77 stores located in the New England area. Approximately 60 percent of the inventory recorded on the balance sheet for the consolidated company is located at one of two distribution warehouses, which are in Boston, MA, and Hartford, CT. The remainder of inventory is spread across the 77 stores. The high-dollar value items in the inventory consist of prescription drugs that are stored in secure areas both in the distribution centers and at the individual stores.
2. Zenith, Inc., manufactures high-end motorcycles in production facilities located in Pennsylvania and Wisconsin. During 2011, the company also opened major production facilities in India and Brazil. Each production facility receives raw materials that are then assembled into motorcycles. Manufactured motorcycles are stored at the production facilities until orders are received from dealers.
3. Texide Electronics manufactures component parts that are used in their customers’ computer and other electronic products. Given that customer products differ, each of Texide’s products is designed uniquely for each customer’s production process. Individual parts are quite small, and the interior components are not visible to the human eye. All inventory items are stored in Texide’s only manufacturing plant.
4. Food Giant is a regional grocery store chain located in the Pacific Northwest. Rather than operate a company-owned distribution center, Food Giant uses five different independent storage warehouse companies across the region to store most of its grocery inventory before shipping to the individual stores. Typically, about 75 percent of the inventory is located at the storage warehouses with the remaining inventory located at one of Food Giant’s 42 stores.

a. For each independent client scenario, describe issues the auditor should consider when determining which locations to visit to physically observe the client’s inventory count.
b. How would you determine which locations to visit?
c. For each scenario, how does the type of inventory create potential risks of material misstatements in the inventory balances?
d. How might the auditor address the risks noted in part c.

  • CreatedDecember 28, 2013
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