ACE Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but uses statistical sampling to estimate the year-end inventory. ACE maintains a perpetual inventory record of parts and supplies. Management believes that statistical sampling is highly effective in determining inventory values and is sufficiently reliable, making a physical count of each item of inventory unnecessary.

Required:

• List at least 10 normal audit procedures that should be performed to verify physical quantities whenever a client conducts a periodic physical count of all or part of its inventory. (See Appendix Exhibit 9B.1 for procedures.)
• Identify the audit procedures you should use that change or are in addition to normal required audit procedures [in addition to those listed in your solution to part (a)] when a client utilizes statistical sampling to determine inventory value and does not conduct a 100 percent annual physical count of inventory items.
• Discuss critical Internal Controls entity's should put in place regarding custody and security of Inventory.
• Why do you believe its important for Auditor's to physically be present during an entity's year-end physical inventory count?

APPENDIX EXHIBIT 9B.1

Audit Plan for Physical Inventory Observation

December 31, 2017.

Performed by. Ref.

1Obtain client's inventory-counting instructions and review for completeness.

2Tour facility before the inventory count looking for out-of-the-way items, obsolete items, and patterns of inventory flow.

3Observe client personnel taking inventory counts for compliance with instructions.

4Test count a selection of items throughout the facility, and record a sample of your test counts. Note description, stage of completion, counting unit, and condition.

5Obtain and record tag numbers used and ensure all tag numbers are accounted for.

6Select sample of used tags and trace them to the items on the floor.

7Record the last five receiving reports and last five shipping documents and the numbers of next five unused items in sequence. Vouch the recorded items to inventory count to determine that the item was appropriately included (or excluded) from the inventory count.

8Tour facilities to ensure all items have been counted.