An auditor is examining the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and in two public warehouses. An electronic inventory file is maintained on a computer disk, and at the end of each business day the file is updated. Each record of the inventory file contains the following data:

• Item number.

• Location of item.

• Description of item.

• Quantity on hand.

• Cost per item.

• Date of last purchase.

• Date of last sale.

• Quantity sold during year.

The auditor plans to observe the distributor’s physical count of inventory as of a given date. The auditor will have available a computer tape of the data on the inventory file on the date of the physical count and a generalized audit software package.

Required: 

The auditor is planning to perform basic inventory- auditing procedures. Identify the basic inventory-auditing procedures and describe how the use of the generalized audit software package and the tape of the inventory file data might help the auditor perform such auditing procedures. Organize your answer as follows:

Basic Inventory- Auditing Procedure

1. Observation of the physical count, making and recording test counts where applicable

How a Generalized Audit Software Package and Tape of the Inventory File Data Might Be Helpful 

1. By determining which items are to be test counted by selecting a random sample of a representative number of items from the inventory file as of the date of the physical count?