Your client, a distiller of alcohol, suggests that it is not necessary for you to observe the taking of physical inventories at his plants. The client points out that the Treasury Department's Alcohol Tax Unit checks regularly on the inventories of raw materials, work-in-process, finished product, and revenue stamps. Procedures followed by the Tax Unit's agents include auditing of production, sales, and other reports and the taking of physical inventories at unannounced intervals. Your client maintains perpetual inventory records. Assuming that you agree to the client's suggested restriction of the scope of your audit, answer the following two questions. (In each case, your answer should include a discussion of the specific effects of this restriction on your standard report.)

1. Your review of such of the records of the tax audits as are available and your appraisal of the procedures employed in such audits convince you that the client's record of inventory quantities can be relied upon. Would you be justified in accepting the work of a governmental agency in lieu of your own observation and in consequently giving an unqualified opinion? Discuss.

2. Your review of the tax audit records and procedures does not satisfy you that you would be justified in relying solely on those quantities. What effects would your omission of observation procedures have on your standard report? Discuss.