Choice "B" is correct. Interim testing is permitted when the risk of material misstatement is low. An entity has strong internal control over inventory and therefore low risk of material misstatement if the entity has well kept perpetual inventory records that are checked periodically by comparisons with physical counts. In this situation, the auditor could elect to perform the inventory observation at an interim date during the period under audit, or after year-end. If the inventory observation is performed at an interim date, the perpetual inventory records would allow the auditor to gather evidence regarding changes to inventory between the interim date and year-end.
Choice "c" is incorrect. Interim testing is generally not appropriate when an entity maintains periodic inventory records because periodic inventory records are only updated on the date when a physical inventory is taken and the books are adjusted to actual. Subsequent transactions to inventory (purchases and sales) are not recorded in the inventory account. If the inventory observation was performed at an interim date, periodic inventory records would not allow the auditor to gather evidence regarding changes to inventory between the interim date and year-end.
Choice "d" is incorrect. The auditor cannot rely upon the results of substantive procedures performed in prior years when conducting an audit in the current year.
Choice "a" is incorrect. Whether or not total inventory has not varied more than 5% in the last five years is irrelevant to whether the auditor's observation procedure for inventory be performed during or after the end of the period under audit.