Assume that you are auditing Hobart Wholesale Supply Co. and that you have decided to use data analytics to test the inventory. Specifically, you would like to identify 

(1) Excess and overvalued items in inventory (e.g., possibly obsolete, quantities well over needed) and 

(2) Unusual transactions. From your discussions with management and your review of overall balances, you have determined that the company strives to maintain inventory levels at no more than 60 days sales. Management also requires a minimum of 15 percent gross margin on all products. To perform your tests, assume you have the following four accounting data files.

a. Describe how you can join (or relate) the files 1–3 so as to allow you to design tests of inventory using the data in all three of them.
b. Describe two different data analytic tests that might be used to identify
(1) Excess quantities of inventory items.
(2) Unusual transactions.

Transcribed Image Text:

1. Inventory Master File at Year-End Item part no. Item description Quantity on hand Quantity on order Preferred vendor no. Preferred vendor name Average item cost 3. Sales File for the Year Date shipped Customer no. Customer name Sales order Shipping order Item part no. Item description Quantity sold Sales price Shipping cost 2. Purchases File for the Year Date received Item part no. Item description Number of items Cost per item Total cost Vendor no. 4. Related Parties Name Relationship with company