Inventory Observation

A new hire is scheduled to be present for the inventory observation of one of the manufacturing audit clients. During the observation, auditor noticed the following:

• Some of the employees who were counting the inventory stopped to load a truck for shipment.
• During test counts, the auditor noticed that the expiration date of a large bin of items was two years old. When the auditor questioned the client, the inventory manager told the auditor that he/she felt the company could still sell the items.
• At the end of the day, a large shipment was received. It was not included in the count.

1. Please explain the procedures the new hire auditor should perform before going on-site for the inventory observation.2.
2. Based on this preliminary review of the client's inventory, the auditor determine that there is a significant risk of material misstatement and/or fraud. Please explain what changes you will make to the normal observation process based on this information.
3. Please explain the procedures the auditor will take to address each of the issues noted during the observation.