External auditors usually calculate inventory turnover (cost of goods sold for the year divided by average inventory) and use the ratio as a broad indication of inventory age, obsolescence, or overstocking. External auditors are interested in evidence relating to the material accuracy of the financial statements taken as a whole. Internal auditors, on the other hand, calculate turnover by categories and classes of inventory to detect problem areas that might otherwise be overlooked. This kind of detailed analytical audit might point to conditions of buying errors, obsolescence, overstocking, and other matters that could be changed to save money.

The data shown in Exhibit D.47.1 are for turnover, cost of sales, and inventory investment for a series of four historical years and the current year. In each of the years, the external auditors did not recommend any adjustments to the inventory valuations.

Exhibit D.47.1: Inventory Data

NA means not applicable.
*Cost of materials transferred to Work-in-Process.
†Cost of materials, labor, and overhead transferred to Finished Goods.
‡Cost of goods transferred from Work-in-Process to Finished Product Inventories.
§Selling prices also were reduced and the gross margin declined.
Required:
Calculate the current-year inventory turnover ratios. Interpret the ratio trends and identify what conditions might exist. As an internal auditor, write a memo to the vice president for production explaining your findings, possible causes related to problems, and additional investigation that should be conducted?

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Current-Year Inventory ($000) Total inventory Materials and parts Work-in-process Finished products: 2014 2015 2016 2017 2.1 2.0 2.1 2. 4.0 4.1 4.3 4.5 12.0 12.5 11.5 11.7 Beginning $3,000 1,365 623 Ending $2,917 620 697 Computer games Flash drives Semiconductor parts Chargers and cables 6.0 7.0 10.0 24.0 8.0 7.2 7.7 8.5 4.0 3.5 4.5 7.0 3.0 2.5 2.0 1.9 380 64 80 488 500 300 400 400 Additional Information Current Year ($000) Transfers $3,970 7,988 Sales NA NA 2,320 $2,000 2,236 3,000 2,720 4,000 712 1,000 Cost of Goods Sold Gross Profit Compared to Prior Year Materials and parts Work-in-process Computer games Flash drives Semiconductor parts Chargers and cables NA NA $2,200 2,000 2,400 800 NA NA $200> 1,000 1.600 200 Sales volume declined 60% Sales volume increased 35% Sales volume increased 40% Sales volume declined 3%