Audit and Assurance Practice Exam

During an inventory audit, which factor would most likely require further investigation?

1. Inventory records align with sales data

2. High levels of unsold inventory

3. Consistent supplier relationships

4. Regular inventory evaluations

The correct answer is: High levels of unsold inventory

High levels of unsold inventory during an audit can signal potential issues that need further investigation. This situation may indicate obsolete stock, ineffective sales strategies, or even inaccuracies in inventory valuation. Unsold inventory may lead to financial implications, such as increased holding costs or the need for markdowns, which could negatively affect the company's profitability. Investigating high levels of unsold inventory allows auditors to assess whether the company is effectively managing its stock and aligning its purchasing decisions with actual sales demand. Additionally, it raises concerns about valuation methods applied to the inventory and might suggest a need for adjustments to the financial statements if the inventory is not likely to be sold at its recorded value. In contrast, when inventory records align with sales data, it suggests a normal operating practice that typically does not warrant additional scrutiny. Likewise, consistent supplier relationships and regular inventory evaluations indicate stability and proactive management, and thus, are less likely to raise red flags during an audit.