12-8 Test counts of amounts of inventory are made by auditors while they are observing employees do the physical inventory counts because auditors are responsible for determining the existence of inventory. Doing test counts allows the auditor to get a better idea of the condition of the inventory, whether employees are following the instructions of management when performing the counts, and gain evidence regarding the trustworthiness of the counts and the procedures used for the counts. The amount of the test counts needed fluctuates based on the degree of risk that the inventory counts are incorrect and the importance of inventory amounts to the audit. The auditor compares the test count to the client's inventory count. If there are disagreements …show more content…
In a perpetual inventory system, a company track inventory instantaneously by using an electronic system that records the inventory amount as they are being bought and sold. Although perpetual inventory systems provide for solid internal controls, it is still important to do test counts of inventory to confirm the accuracy of the electronic system. These test counts do not have to be performed at the end of each year or accounting period; rather they can be performed whenever it is considered a fitting time. (An attempt to put p. 509 into my own words) 12-11 A "bill and hold" scheme is when the company bills the purchaser of the inventory while holding the inventory in their possession and including the sold inventory in the inventory counts. By doing this, the company is either overstating inventory, and in so doing understating cost of goods sold, or overstating revenues, either of which is overstating net income. (An attempt to put p. 526 into my own words) 12-35 Misstatement Error or Fraud Control Substantive Procedure a. Error Create effective controls for counting inventory and supervise the counting of