Why is the observation of physical inventory a mandatory auditing procedure? Explain.

Assignment Questions

Observation of physical inventory is generally mandatory because it provides strong evidence as to the existence and quality of the client’s inventories.1Under what circumstances are the observation of physical inventory impossible?Observation of physical inventory generally is impossible when the independent auditors were not appointed by the client until after the physical inventory had been taken. There may also be conditions where weather conditions, terrains, or some other circumstances make it impossible for the independent auditors to be present at the site of the client’s inventory-taking; but such circumstances should be rare.1Why is the auditors’ review of the client’s control of inventory tags important during the observation of physical inventory? Explain.The auditors’ review of the client’s control for inventory tags is important because of the danger that fictitious inventory tags might be created by dishonest client personnel after the auditors have completed their observation of the physical inventory.12–24. During your observation of the November 30, 20X0, physical inventory of Jay Company, you note the following unusual items:1Electric motors in the finished goods storeroom not tagged. Upon inquiry, you are informed that the motors are on consignment to Jay Company.1A cutting machine (one of Jay’s principal products) in the receiving department, with a large “REWORK” tag attached.1A crated cutting machine in the shipping department, addressed to a nearby U.S. naval base, with a Department of Defense “Material Inspection and Receiving Report” attached, dated November 30, 20X0, and signed by the Navy Source Inspector.1A small, isolated storeroom with five types of dusty raw materials stored therein. Inventory tags are attached to all of the materials, and your test counts agree with the tags.Required:2

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