You are an audit manager at Hall & Partners and the audit of Abby Co is nearly complete. The draft financial statements currently show revenue of 70m and a profit before tax of 8.2 million for the financial year ended 30 June 20X0.

You have been informed that the marketing director left Abby Co on 31 May 20X0 and discovered that a legal case for unfair dismissal has been brought against Abby Co by the marketing director.

During a discussion with the Human Resources (HR) director of Abby Co, you established that the company received notice of the proposed legal claim on 2 July 20X6. The HR director told you that Abby Cos lawyers believe the maximum payout would be 200,000. However, the directors do not intend to make any adjustments or disclosures in the financial statements.

Which TWO of the following factors may indicate overvaluation of inventory at Abby Co?

A) A decrease in demand for Abby Cos goods, requiring a price reduction

B) Increased inventory levels

C) Increased inventory turnover ratio

D) Inclusion of the third party inventory within Abby Cos inventory balance