You are conducting an audit of the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and in two public warehouses. A perpetual inventory computer database is maintained on a computer disk. The database is updated at the end of each business day. Each individual record of the perpetual inventory database contains the following data: Item number.

Location of item.

Description of item.

Quantity on hand.

Cost per item.

Date of last purchase.

Date of last sale.

Quantity sold during year.

You are planning to observe the distributor’s physical count of inventories as of a given date. The client will provide a computer file of the preceding items taken from its database as of the date of the physical inventory count. Your firm has a computer audit plan that will be ideal for analyzing the inventory records. Required: List the basic inventory auditing procedures and, for each, describe how the use of CAATs and the computerized perpetual inventory database might be helpful to the auditor in per-forming such auditing procedures. (See Appendix 9B for substantive procedures for inventory.) Organize your answer as follows:

Basic Inventory Auditing Procedures

Conduct an observation of the company’s physical inventory count.

How CAATs and Copy of the Inventory Data File

Might Be Helpful

Determine which items are to be test counted by selecting a random sample of a representative number of items from the inventory file as of the date of the physical inventory count.