[Morganf]

I was told a story in my college Auditing class about a company who fraudulently overstated inventory. Apparently they were able to conceal this for years by shipping the inventory overnight between stores according to the audit schedule. I forgot the details, but the moral was not to tell the client the timing of observation of inventory. Similar stories support always mailing bank reconciliations and account receivable confirmations yourself.

Based on that, I answered the following question “C” by process of elimination. What do others think about this?

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

A: Timing of inventory observation procedures to be performed.

B: Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.

C: Procedures to be undertaken to discover litigation, claims, and assessments.

D: Pending legal matters to be included in the inquiry of the client’s attorney.

Wiley answer = A

Reasoning = Coordination is needed if the auditor wants to be there.

My disagreement = The counting of inventory happens when the auditor wants it to, and the company shouldn’t need advance notice.

BEC - 88
AUD - 69, 74, 93
FAR - 78
REG - 79

[rknight21]

you have taken AUD a few times now so by now you should know the correct answer to AUD questions will usually be the best of two…..

A: Timing of inventory observation procedures to be performed.

I understand your reasoning for not wanting to inform the client of inventory but it is a necessary to do so. Can you imagine going to view inventory, when the client isn't prepared. Nothing would be achieved. Also, noticed the answer says observe the inventory procedures, you are not counting inventory per say but viewing the controls around inventory. In some instances, unannounced visits are done but less often…at the end of the day, if there is going to be fraud there will be fraud as long as you do your due diligence you're fine

C: Procedures to be undertaken to discover litigation, claims, and assessments.

auditors doesn't discuss with the client procedures to be undertaken and if so procedures to discover litigation and claims are done closer to the end of the audit. Not during planning

Wiley answer = A

[Morganf]

Can you explain why nothing would be accomplished if you don't inform the client first? I have no audit experience but it seems simple to me:

perpetual inventory system — easily accessible list of what inventory is on hand

a storage room or warehouse — which they let you into when you show up

What modern businesses lack these 2 things? All I can anticipate is too much bureaucracy making people refuse to let you in, which could be solved with 1 phone call to an officer.

BEC - 88
AUD - 69, 74, 93
FAR - 78
REG - 79

[kandisjoy]

“Timing of inventory observation procedures”

This implies that the auditor would be observing the staff of the company performing their inventory observation procedures. The auditor isn't counting inventory at this time. The timing would have to be agreed upon because the staff would have to meet with the auditor so that the auditor could observe the staff.

FAR: 71, 77
BEC: 70, 82
AUD: 62, 78
REG: 71, 68, 85

CA Licensed 11/2011

[gns121584]

@Morgan – C because for the most part you usually do not go over exact procedures with the audit client, you do not want them to know exactly what you are going to be performing/asking in all cases (a level of suspense per se). That is why from year to year when auditing you want to change up some of your procedures.

For a physical they need to have staff that can walk around with you to count (in most cases), as mentioned above listings of inventory prepared, a lot of times they will have the inventory more organized, etc. This is just like in an audit when you go out for narratives and walkthroughs you have to set up a time with management so they can be prepared. Also, discussing the timing of when the engaegment team will begin the audit, etc.

Hope this helps.

AUD - PASSED - 84 -(11/21/11)
REG - PASSED - 83 -(1/17/12)
BEC - PASSED - 86 -(2/28/12)
FAR - PASSED - 84 -(5/14/12)
I AM DONE!!!!

[rknight21]

Ditto to the above post. The client needs to be prepared and organized. As the auditor you'll be recounting a sample of counts done by the worker, so there is still some amount of suspense.( client doesnt know what you will recount)….

and OP I understand your concerns. On my first engagement I was wondering why the senior was telling the client ahead of a meeting, the questions we were planning to ask. But can you imagine meeting with someone with questions and they not prepared, an entire meeting wasted.

[Author]

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