Audit and Assurance Practice Exam

Which of the following is generally a red flag for inventory valuation issues?

1. Consistent inventory turnover

2. Unusual spikes in inventory purchase volumes

3. Stable customer demand patterns

4. Regular supplier evaluations

The correct answer is: Unusual spikes in inventory purchase volumes

Unusual spikes in inventory purchase volumes can be a significant red flag for inventory valuation issues because they may indicate atypical behavior in inventory management practices. When a company experiences sudden increases in procurement, it could suggest a number of underlying problems, such as overestimating future demand, stockpiling products in anticipation of price increases, or mismanagement in existing inventory levels. These erratic purchasing patterns may lead to discrepancies in inventory records and financial statements. For instance, a sudden surge in purchases without corresponding sales can suggest potential overvaluation of inventory, which could mislead stakeholders about the company's financial health. This situation may also increase the risk of obsolescence or spoilage, especially for commodities with limited shelf life. In contrast, consistent inventory turnover typically indicates effective inventory management and a balanced approach to purchasing, while stable customer demand patterns suggest predictability in sales which is generally positive. Regular supplier evaluations are a best practice to maintain quality and manage relationships efficiently, rather than a signal of valuation issues. Thus, unusual spikes in inventory purchase volumes stand out as a clear indicator warranting further scrutiny.