1) Jake Jones is auditing anending inventory balance. He obtained acomplete listing of every item that made up the ending inventory balance fromthe auditee's subsidiary inventory ledger.
The listing included the number of items is inventory, the cost per unitassigned to each item, and the extended cost (cost times quantity). At the same time that the auditee took itsphysical count of the items in ending inventory, he selected a sample of itemsfrom the listing and performed his own count of the number of that item inending inventory. He then compared hiscount to the auditee's count and noted any differences in his working papers.
Then he obtained he used the costs in the listing andverified those cost to purchase invoices from the vendors. Finally, he multiplied the number in hiscount by the invoice costs and compared the resulting amount to a listing thatthe client had provided that included their totals for each item. He traced the total of their listing to theirgeneral ledger account.
a) For each of the following tests he performed, describe the purpose of the test to include all the auditobjective(s) involved. Be sure toexplain how the test supports each objective.
i) Counting the items ininventory
ii) Verifying the costs per item
iii) Tracing the total to the general ledger
b) When Jake ran his inventory tests as described above using a statistical sampling technique, he found differences in the inventory recorded cost that totaled to more than yourtolerable misstatement. Discuss what alternatives he has to address this difference and how each alternative mightcompensate for or correct the sample results he found.
i) Alternative 1
ii) Alternative 2
iii) Alternative 3
iv) Alternative 4
c) Discuss which how Jake should order these alternativesand why. That is, which alternativeshould he try first, second, third, and fourth and why?