B is corrent because inventory turnover analysis may be useful to the auditor in detecting the existence of obsolete merchandise. As the proportion of obsolete merchandise to total inventory grows, the inventory turnover would decrease.
A is incorrect because the external auditor’s primary concern is fair presentation of the financial statements rather than control over inventory holding costs.
C is incorrect because the auditor’s primary concern is fair presentation of the financial statements rather than control over inventory reorder points.
D is incorrect because the mispricing of inventory would need to be significantly material to affect the inventory turnover ratio. Recall that the inventory turnover ratio is cost of goods sold divided by the average inventory. Thus, the inventory would have to be substantially incorrect to affect the turnover ratio to a noticeable degree.
|
