You are the auditor of Elsams Co which operates a chain of retail shops throughout the country selling a wide range of electrical goods. Each branch has computerised cash registers linked into the central computerised sales, receivables and inventory records. At the point of sale, the information keyed in includes the following: branch reference, product number, inventory location, unit selling price and date of sale. The file of inventory records is updated daily for sales and receipts. It contains both cost (on a FIFO basis) and selling price information. The only regular printed output is sales summaries analysed by value, product and branch.

a.) Explain the ways in which you, as the auditor of Elsams Co, could use computer programs to assist in the verification of inventory at the year end, and explain their limitations.

b.) Without particular reference to Elsams Co, describe the objectives and principles of using test data and comment on the areas where it can be of most use in an audit, and on the difficulties of this technique.