You are the audit manager assigned to the audit of MNO Corporation. MNO imports goods from around the world and sells the goods to small and midsize retailers. This is the first year of the audit. Andy has recently graduated and has joined your firm as a junior accountant. He has been assigned to the inventory section for the interim audit and is eager to do a good job. Andy uses the model documentation used by your firm. His notes show that MNO has thirty personnel at the warehouse in Brampton and four at the head office in midtown Toronto who work on inventory. Downtown there is a purchasing agent who works closely with the sales team to buy what retailers want to sell. The purchasing agent authorizes the orders that he enters into the computer system. A logistics specialist arranges for shipping and customs clearance, including any shipments to customers. The inventory analyst monitors sales and stock levels. She makes journal entries to write off any obsolete or slow moving inventory, oversees the annual inventory count, and reconciles the perpetual records with sales records. She has an assistant reporting to her. The assistant gets a copy of all receiving reports for incoming goods and a copy of all shipping documents for sales. He enters these into the computer system to match to purchase orders and customer sales orders, making notes of any backorders and short shipments to bring to the inventory analysts attention. At the warehouse, the warehouse manager supervises two receiving clerks and four shipping clerks as well as the twenty-three warehousemen. He also authorizes any write-offs for damaged goods. The warehousemen put received goods on the shelf as well as pick goods off the shelf to prepare for shipment to customers. They also look for any damaged goods that need to be written off. The clerical staff double check all counts for received or shipped and prepare the relevant reports. A copy of each report is kept for the warehouse records, a copy is sent to the assistant inventory analyst, and a third copy is sent to either accounts payable or to the invoicing clerks depending on whether the goods were received or shipped out.

Required

a) Evaluate the general and environmental controls over inventory.

b) How would you explain to Andy the difference between validity and completeness as they apply to testing inventory controls in a perpetual inventory system?