SCI makes clothes under its own labels, and also makes clothes to order under the labels of several large retailers. The large retailers usually order goods to be manufactured and held by SCI until the time comes when they are ready to put them in their stores. These large retailers pay SCI 50% of the invoice cost when SCI notifies them that the goods have been manufactured and are available, and they pay the balance when the goods are shipped to their stores. To postpone tax, SCI recognizes revenue on the retail sales when the goods are shipped. SCI’s inventory is a highly material amount, making up about 55% of its total assets. Materiality has been set at $300,000 for the purpose of planning and performing the SCI audit.

Required:

a. Describe in detail the testing you would perform during the inventory count, and describe the audit objective(s) of each test.

b. Provide three different ways of stratifying the selection of inventory items for sampling. Explain why you would stratify the inventory in each listed way.

c. During the inventory count, a truck arrives at the warehouse to pick up a rush customer order, and the sales manager commands all the employees to stop working on the count and load the truck. What risks does this event give rise to, and how would these risks affect your audit procedures?

d. One of the inventory items you selected to test count is a quantity of 5,000 silk dresses at a cost of $80 each. The employees are unable to locate this inventory, so the sales manager is called over to help. He orders you to select a different item to test. When you explain that you must verify the item you have selected, he accuses you of stealing the inventory and threatens to call the police unless you leave immediately. Discuss your professional responsibilities in this situation and what actions you would take.