External auditors usually calculate inventory turnover (cost of goods sold for the year divided by average inventory)

Question:

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.

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 beconducted.

External auditors usually calculate inventory turnover (cost of goods sold

Inventory Turnover Ratio
Inventory Turnover RatioThe inventory turnover ratio is a ratio of cost of goods sold to its average inventory. It is measured in times with respect to the cost of goods sold in a year normally. Inventory Turnover Ratio FormulaWhere,... Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...