You are responsible for the audit of inventory for Honey
Best Grocery Wholesale, 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 10 southeastern states with a central distribution center in Atlanta and local distribution centers in each of the 10 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 that originate from the Atlanta office,
Required
Required
Research
Required
In-class
Discussion
724Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES
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 an electronic 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 is limited to online sales transaction
entry. Internal auditors test the perpetual records continuously, sample physical inven-
tory counts, and test inventory adjustments. Their tests and results are filed in Atlanta.
a. Identify six or more internal controls in Honey Best’s inventory and warehousing
cycle. For each control identified, list a corresponding test 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 re-
duce or change physical observation tests of inventory. Be specific.