Response to the following problem:
You are responsible for the audit of inventory for Honey Best Grocery Wholesales, Inc., a closely held grocery wholesaler that sells to independent grocery stores. Inventory is by far the largest account on their balance sheet. Honey Best operates in ten southeastern states with a central distribution center in Atlanta and local distribution centers in each of the ten states in which it operates. Management has implemented a sophisticated perpetual inventory system that includes only quantities to assist in managing quantity levels in Atlanta and the local distribution centers. All accounting is maintained in Atlanta, including purchases which originate from the Atlanta office using online inventory information available for all centers. All inventory deliveries are made to the Atlanta center and then sent to local centers, again using the online information. Product and quantity information for sales are prepared online by each distribution center for updating the perpetual records, with a hard copy sent to Atlanta. Each center takes a quarterly physical inventory for comparison to and adjustment of the perpetual records. The counts are sent to Atlanta where all adjustments are made. Regional centers' access to the perpetual records are limited to online sales transaction entry. Internal auditors test the perpetual records continuously, sample physical inventory counts, and test inventory adjustments. Their tests and results are filed in Atlanta.
Required:
a. List six or more internal controls and tests of controls that can be used to test the effectiveness of internal controls over inventory.
b. Assuming you determine that internal controls are effective, state how you can reduce or change physical observation tests of inventory. Be specific.