Below are four independent client scenarios:
1. Food Giant is a regional grocery store chain located in the Pacific Northwest. Rather
than operate a company-owned distribution center, Food Giant uses five different in-
dependent storage warehouse companies across the region to store most of its gro-
cery inventory before shipping to the individual stores. Typically, about 75 percent
of the inventory is located at the storage warehouses, with the remaining inventory
located at Food Giant’s 42 stores.
2. Colburn Pharmacy, Inc., has 77 stores located in the New England area.
Approximately 60 percent of the inventory recorded on the balance sheet for the
consolidated company is located at two distribution warehouses, which are in
Boston, Massachusetts, and Hartford, Connecticut. The remainder of inventory is
spread across the 77 stores. The high-dollar-value items in the inventory consist of
prescription drugs that are stored in secure areas both in the distribution centers
and at the individual stores.
3. Zenith, Inc., manufactures high-end motorcycles in production facilities located in
Pennsylvania and Wisconsin. During 2017, the company also opened major produc-
tion facilities in India and Brazil. Each production facility receives raw materials that
are then assembled into motorcycles. Manufactured motorcycles are stored at the
production facilities until orders are received from dealers.
4. Texide Electronics manufactures component parts that are used in their custom-
ers’ computer and other electronic products. Given that customer products differ,
each of Texide’s products is designed uniquely for each customer’s production
process. Individual parts are quite small, and the interior components are not vis-
ible to the human eye. All inventory items are stored in Texide’s only manufactur-
ing plant.
address the following for each independent client scenario.
a. Describe issues the auditor should consider when determining which locations to
visit to physically observe the client’s inventory count.
b. How would you determine which locations to visit?
c. How does the type of inventory create potential risks of material misstatements in the inventory balances?
d. How might the auditor address the risks noted in part c.?
