The auditor is required by existing auditing standards to observe the client’s physical inventory. That requirement could be met by observing the client’s annual physical count of inventory, and, in some circumstances, by observing inventory in connection with tests of the accuracy of the client’s perpetual inventory.

Required

a. What major purpose is served by requiring the auditor to observe the client’s physical inventory count? What is the rationale behind the profession’s decision to require the inventory observation?

b. Identify at least five items related to inventory items that the auditor should be looking for and should document during observation of the client’s inventory.

c. How does the observation process differ when the client takes a complete physical count at or near year end vs. when physical counts are taken throughout the year to test the accuracy of the perpetual records?