(a) Use computerised sequence checks on inventory record numbers and inventory sheets. An exception report can highlight missing items in the sequence.

Select items from inventory records to be physically vouched. This could be done statistically within defined strata.

Select inventory balances held at third parties for external confirmation and print standard confirmation letters.

Reperform casts and extensions of inventory sheets.

Interrogate cost or purchase records to check that costs on valued inventory sheets are correct.

Compare reports between cost and net realisable value with report produced to show adjustments required by inventory type and in total.

Reorganise client’s inventory records by inventory volume, turnover and age to facilitate additional testing of material or potentially obsolete inventory.

(b) If continuous counting proves unsuccessful/unreliable, a full year-end count may still be necessary.

The size and nature of current discrepancies found under the quarterly system need to be investigated as similar problems may arise with continuous counting.

The discrepancies could indicate inadequate recording of returns, theft, or timing differences. Until these problems are resolved, a full year-end count will probably still be necessary.

Since computerised records are already maintained, book quantities are already available for checking against when continuous counts are made. However, it may be that, because employees know these records will be corrected at the end of every quarter, the records are not kept as accurately as they should be. Additional resources may be required to keep them up-to-date for continuous counting purposes. (However, the increased control over inventory exercised by continuous counting may prevent/detect theft.)

If the auditor relies on the current system (i.e., performs tests of control on it), he is more likely to rely on (and therefore recommend) the proposed system.

The full year-end count currently provides an opportunity to assess the condition of inventories. The computerised system may need to be amended to provide additional information which may help in identifying potentially obsolete inventory (e.g., no sales in the last X months).