The book inventory at year-end is $10,258,329. After counting and pricing the inventory according to FIFO, the cost assigned to the inventory is $9,438,637. The cost of the inventory according to LIFO pricing is $8,571,284. Answer the following questions regarding the inventory.
a. Describe three errors and three fraudulent actions that could have caused the discrepancy reported between the book inventory value and the FIFO inventory value according to the physical count.
b. What audit evidence would you gather to determine whether the misstatements were caused by the specific errors and fraudulent actions that you suggested?
c. Prepare the journal entry to record the adjustment to the book inventory needed assuming the client uses FIFO cost valuation.
d. Assume that the company keeps its books based on FIFO inventory valuation and prepares a journal entry at the end of each year to adjust inventory to the LIFO valuation. Prepare the journal entry to record the adjustment to the book inventory needed to value the inventory using the LIFO valuation, assuming that the LIFO allowance account has a $200,000 credit balance before adjustment.
e. How will the inventory appear on the company’s financial statements? What disclosures related to inventory will the company prepare?