The problem recognition step in assessing inventory control risk requires that the auditor consider the possible inventory errors or frauds that might occur which could affect the financial statements. For each of the types of inventory errors listed below indicate what would the possible effect be in the inventory and cost of sales accounts; indicate either overstated, understated, or no effect.

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NOTE TO STUDENTS:

Item $1,3$ and $6$: Assume book inventory has NOT been adjusted to agree with inventory counts

Item $2$: Assume the sale was not booked but COGS was booked

Items $4$ and $5$:$$ Assume book inventory HAS$$been adjusted to agree with inventory counts