During the audit at a manufacturing plant, the following facts relative to a particular raw material inventory
Question:
During the audit at a manufacturing plant, the following facts relative to a particular raw material inventory are disclosed:
1. The quantity on hand is equal to six months production requirements.
2. A recent large purchase of this raw material was made, causing the six-month supply to be on hand. Prior inventories were generally at the two month level.
3. The factory warehouse has sufficient space to store only two months' raw material needs; therefore, outside warehouse space was leased to store the remaining four months' supply.
4. The purchasing agent agreed that various suppliers had been satisfactorily delivering this raw material on a 30- day schedule but said he took advantage of one supplier's offer to reduce prices if six months' supply was purchased at that time.
Required:
Describe the approach you would take in your audit to determine whether the purchasing agent followed good business practice with this quantity purchase.
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