Audit and Assurance Practice Exam

When there is a heightened risk of fraud, what is the auditors' likely course of action regarding inventory observation?

1. Observe inventory at some locations

2. Observe inventory only at year-end

3. Observe inventory at all locations simultaneously

4. Rely on other audit procedures

The correct answer is: Observe inventory at all locations simultaneously

When there is a heightened risk of fraud, the auditors are inclined to increase the extent of their procedures to gain assurance over the integrity and existence of the inventory. Observing inventory at all locations simultaneously allows auditors to have a comprehensive view of the inventory held by the entity. This approach helps to mitigate the risk of fraud because it reduces the chance of manipulation or misstatement occurring at different locations without the auditor's knowledge. Conducting simultaneous observations can also enhance the auditor's ability to detect discrepancies or irregularities in the inventory records, reinforcing the reliability of the inventory valuation. In contrast, observing inventory at some locations, only at year-end, or relying on other audit procedures may not provide sufficient evidence in an environment where fraud risk is heightened. These alternatives could leave gaps in the understanding of the overall inventory processes, potentially allowing fraudulent activities to go undetected.