Rakhi Grande has been assigned to the audit of Pro¬ duce Distributors Inc. (PDI), a new client with his firm, Beaver & Jones, Chartered Accountants. The company is a wholesale distributor of produce, groceries, dry goods, and other related products to grocery store chains and independent grocers.

Rakhi's assistant, Charlie, who has limited experience with automated systems, has asked him for assistance in preparing a plan for the audit of PDFs year-end inventory. He specifically wants advice on which computer controls and what computer-generated information may be relied on and the audit procedures necessary to justify that reliance.

Charlie has prepared the following notes on the client's system and planned count procedures:

System Notes 1. The financial inventory system is automated and fully integrated with other financial accounting systems (e.g., order entry, general ledger). Automatic updates to the inventory records occur at the same time as the shipping documents are printed. The computer system recalculates average cost of inventory items when receipt of goods is recorded.

2. Stock-out reports are printed daily. Because the incidence of negative quantities has significantly decreased over the last year, the client believes a small book-to-physical adjustment will be required.

3. The warehouse supervisor has a special password, allowing him to access and change inventory information to take into account expired, broken, and damaged goods. An expired, broken, and damaged goods report is printed monthly.

4. Fresh produce is shipped directly from suppliers to grocers based on direct shipping instructions that PDI has transmitted to suppliers over telephone lines. All accounting records are updated by the computer system. A numeric control sequence is automatically assigned by the computer system and is used by accounting to control paper “flow.

5. PDI ships to several large grocery chains in response to purchase orders received over telephone lines. These orders are listed on a transfer report, and the shipping documents are then printed.

Count Procedures 1. Prenumbered count tags will be used. Product stock number, description, and location will be preprinted on the tags by the computer in both human-readable and machine-readable form. To record quantities counted, warehouse personnel will use optical scanning devices to read the preprinted information, and then manually enter the quantity counted into the computer system. Any changes to preprinted information such as change in location will also be entered manually.

2. Two discrepancy reports will be generated by the system: one identifying differences between quantities counted and perpetual records, and one listing missing count tags. The information will be followed up, and any changes to inventory records will be authorized by the warehouse supervisor.

Required What advice should Rakhi give to Charlie?