A processor of frozen foods carries an inventory of finished products consisting of 50 different types of items valued at approximately $2,000,000. About $750,000 of this value represents stock produced by the company and billed to customers prior to the audit date. This stock is being held for the customers at a monthly rental charge until they request shipment and is not separate from the company's inventory. The company maintains separate perpetual ledgers at the plant office for both stock owned and stock being held for customers. The cost department also maintains a perpetual record of stock owned. The above perpetual records reflect quantities only. The company does not take a complete physical inventory at any time during the year, since the temperature in the cold storage facilities is too low to allow one to spend more than 15 minutes inside at a time. It is not considered practical to move items outside or to defreeze the cold storage facilities for the purpose of taking a physical inventory. Because of these circumstances, it is impractical to test count quantities to the extent of completely counting specific items. The company considers as its inventory valuation at year-end the aggregate of the quantities reflected by the perpetual record of stock owned, maintained at the plant office, priced at the lower of cost or market.

1. What are the two principal problems facing the auditor in the audit of the inventory? Discuss briefly.

2. Outline the audit steps that you would take to enable you to render an unqualified opinion with respect to the inventory. (You may omit consideration of tests of unit prices and clerical accuracy.)