Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Physical Inventory Count, Ownership of Goods, and Consigned Goods

Financial Accounting

5. Inventory

Physical Inventory Count, Ownership of Goods, and Consigned Goods

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Multiple Choice

Which of the following is true about the auditors' observation of the client's physical inventory?

Auditors do not need to observe inventory if perpetual records are maintained.

Auditors observe the physical inventory count to provide evidence about the existence and condition of inventory.

Auditors' observation guarantees the accuracy of the inventory valuation.

Auditors are responsible for counting the inventory themselves.

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Verified step by step guidance

Understand the role of auditors in the context of physical inventory observation. Auditors are tasked with verifying the existence and condition of inventory, not necessarily its valuation or performing the count themselves.

Clarify the misconception that auditors do not need to observe inventory if perpetual records are maintained. Perpetual records are helpful but do not replace the need for physical observation to ensure accuracy and reliability.

Explain that auditors observe the physical inventory count to provide evidence about the existence and condition of inventory. This observation helps confirm that the inventory reported in the financial statements is accurate and exists in the stated condition.

Highlight that auditors' observation does not guarantee the accuracy of inventory valuation. Valuation involves additional procedures, such as assessing cost flow assumptions (e.g., FIFO, LIFO) and market value considerations.

Emphasize that auditors are not responsible for counting the inventory themselves. Their role is to observe and evaluate the client's counting process to ensure it is conducted properly and aligns with accounting standards.