There are two
1). Create a scenario
that demonstrates specific ways in which management could manipulate
transactions impacting inventory values that the auditing team might not

Recommend key
strategies that the auditor could implement in anticipation of such manipulation.

Justify your response.

Please respond with 5 to 7 sentences to the rebuttal
Management can overstate
inventory and cost of goods sold by inflating inventory or overhead expenses.
The key strategy to uncover this kind of fraud is to perform substantive
analytical procedures of inventory balances, including:
1. Compare gross margin percentage
with that of previous years.
2. Compare inventory turnover
(cost of goods sold divided by average inventory) with that of previous
3. Compare unit costs of
inventory with those of previous years.
4. Compare extended inventory
value with that of previous years.
5. Compare current-year
manufacturing costs with those of previous years (variable costs should be
adjusted for changes in volume).
Substantive analytical
procedures may include the assessment of reasonability of inventory count with
available storage facilities. Auditor needs to obtain a knowledge about
inventory (size, weight, method of storage) and the knowledge about the
available storage footage.
After performing the
appropriate tests of the cost accounting records and substantive analytical
procedures, auditors have a basis for designing and performing tests of details
of the ending inventory balance, including a physical observation of the

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