Consider the following statement:

The audit of inventory is one of the riskiest areas of the audit. Management can manipulate the value of inventory through a variety of methods, such as through varying the provision for obsolescence or the method of valuation. It is therefore an area that can be “massaged” by management to achieve its required profit level.

Required

a. Evaluate the statement and illustrate by researching the corporate collapse of Australian retailer Harris Scarfe, where inventory manipulation allowed the company to report “profi ts” for a number of years.

b. Consider IAS 2 Inventories and the complementary auditing standard CAS 501. How is the issue of estimation in the recording of inventory considered, and what audit procedures should have prevented the Harris Scarfe manipulation of inventory figures?