Case$1.$ A company provides specialty items to chemical plants in a large metropolitan area. Inventory reorder decisions are based on quarterly sales reports and must be approved by the VP of Sales. The company has a highly motivated and well$-$paid sales force.

Often a good salesperson can earn more in commissions than from base salary. Salespeople use laptops and portable devices to enter orders while in the field. As sales orders are entered, all out$-$of$-$stock conditions are noted. Restocking orders are created whenever inventory levels fall below reorder points. The products handled by the company are subject to rapid obsolescence and have little scrap value once obsolescence is reached. The annual inventory count is performed by an inventory audit service $($outsourced$)$ using professional team of counters. All count information is given to the company for entry and balancing. Over the past several years, the company has experienced unusually large write$-$offs as a result of its annual physical inventory.

The company hires you, the internal auditor, with an engagement to determine the cause of inventory shortages shown by the physical inventories.

$1.$ Do you think reviewing the count sheets inventory printouts, and memos from the last inventory count is sufficient to address your audit objective? Why or why not?

$2.$ How would you collect your evidences? Choose from the manual procedures we discussed in class, such as inquiry, examination, confirmation, etc., then briefly explain the activities of each, for instance, if you perform examination, what would you examine?

$3.$ During interviews with the inventory management personnel, you learned that salespeople often order inventory for stock without receiving the approval of the VP of Sales. Which of the following evidence is corroborative evidence that corroborate $($relevant to$)$ your evidence from interviewing? $($Please highlight your selection$)$

a$.$ Detail testing showed that freight costs are not included in some of the high$-$value items$$ inventory costs.

b$.$ Confirmation received from vendor confirmed that the company purchased all items they have in inventory.

c$.$ Cutoff analysis showed that the inventories in transit were not included in inventory report.

d$.$ Detail testing showed that there are no written approvals on purchase orders for replacement parts.