Audit and Assurance Practice Exam

What should an auditor conclude if inventory turnover is expected to increase as a result of strong demand for a new product?

1. Overall inventory is becoming more expensive

2. Sales are expected to improve

3. Days' sales in inventory is likely to decrease

4. Gross margin is expected to decrease

The correct answer is: Days' sales in inventory is likely to decrease

When an auditor observes that inventory turnover is expected to increase due to strong demand for a new product, this suggests that the company is selling its inventory more quickly. Increased inventory turnover typically indicates that products are moving off the shelves at a faster rate, which is often a sign of healthy sales performance. The specific conclusion that days' sales in inventory is likely to decrease aligns with this scenario because days' sales in inventory is a metric that measures the average number of days it takes for a company to sell its entire inventory. If inventory turnover is high, it means that the company is converting inventory into sales rapidly, thus reducing the number of days inventory sits before being sold. This metric is directly related to inventory efficiency and reflects the company's ability to manage its inventory effectively in response to market demand. This reasoning underscores why the conclusion regarding days' sales in inventory is the most fitting in the context of increasing inventory turnover spurred by strong demand for a new product.