RSM323 Assignment
Discussion Questions
(1) There could be various reasons to why the physical count of Lakeside’s inventory produces a balance that is almost $14000 below the figure indicated by the company’s own perpetual records:
Inventory may have been counted incorrectly
Company’s inventory may be out on consignment
It may be an indication of theft
Perpetual records may be in error
i. Human error ii. FIFO not properly applied
Inventory that are damaged or obsolete may be disposed without recording a reduction in the ledgers
The cost assigned to each inventory item may have been incorrect
Goods in transit may have been recorded incorrectly
Auditor’s judgment is required to determine whether the $14000 difference is a material amount. The auditor would need to determine whether $14000 is a reasonable discrepancy for a company that has $1434101.69 worth of inventory. The difference is worth 10% of the total cost of inventory.
The auditor should be mainly interested in the errors found in the counted figure since the perpetual records are adjusted to match with the physical inventory. If Mitchell observed the physical count properly, the chance of error in the quantity of inventory should be very low. To further reduce the risk of errors, more tests may be performed (verify the costing, extensions, footings). If it is found that the discrepancy is due to errors in quantity of inventory, auditors may have to recount certain accounts. Auditors may discover that costing variances caused the discrepancy, thus, auditors will have to perform validations for those particular figures instead.
(2) Members of a company’s management may attempt to over-count inventory because it can lead to a decrease in cost of goods sold. This will, therefore, increase the net income reported. Companies may have the incentive to overstate net income to get a loan or a high stock price. Since Lakeside has a profit-sharing plan, management personnel may have the incentive to increase the net
(1) There could be various reasons to why the physical count of Lakeside’s inventory produces a balance that is almost $14000 below the figure indicated by the company’s own perpetual records:
Inventory may have been counted incorrectly
Company’s inventory may be out on consignment
It may be an indication of theft
Perpetual records may be in error
i. Human error ii. FIFO not properly applied
Inventory that are damaged or obsolete may be disposed without recording a reduction in the ledgers
The cost assigned to each inventory item may have been incorrect
Goods in transit may have been recorded incorrectly
Auditor’s judgment is required to determine whether the $14000 difference is a material amount. The auditor would need to determine whether $14000 is a reasonable discrepancy for a company that has $1434101.69 worth of inventory. The difference is worth 10% of the total cost of inventory.
The auditor should be mainly interested in the errors found in the counted figure since the perpetual records are adjusted to match with the physical inventory. If Mitchell observed the physical count properly, the chance of error in the quantity of inventory should be very low. To further reduce the risk of errors, more tests may be performed (verify the costing, extensions, footings). If it is found that the discrepancy is due to errors in quantity of inventory, auditors may have to recount certain accounts. Auditors may discover that costing variances caused the discrepancy, thus, auditors will have to perform validations for those particular figures instead.
(2) Members of a company’s management may attempt to over-count inventory because it can lead to a decrease in cost of goods sold. This will, therefore, increase the net income reported. Companies may have the incentive to overstate net income to get a loan or a high stock price. Since Lakeside has a profit-sharing plan, management personnel may have the incentive to increase the net