Inventory Auditing & Data Accuracy Flashcards

Which type of inventory variance is most likely to trigger a formal investigation rather than an automatic adjustment?

Answer: A variance that exceeds the dollar or percentage tolerance defined in audit policy

Audit policies define tolerance thresholds; variances exceeding those thresholds require investigation to identify root cause before an adjustment is approved.

A perpetual inventory system maintains accuracy by:

Answer: Recording every inventory transaction in real time as items are received, moved, or shipped

A perpetual system updates records with each transaction, providing a continuously current on-hand quantity rather than a periodic snapshot.

Which statistical technique is used in cycle counting to determine the sample size needed to achieve a desired confidence level in inventory accuracy?

Answer: Stratified random sampling

Stratified random sampling divides inventory into strata (e.g., ABC classes) and selects random samples from each to produce statistically valid accuracy estimates.

When an inventory audit reveals consistent negative variances (system shows more than physical) in a specific product category, the investigation should first examine:

Answer: Outbound transaction processes — picking, shipping, and returns — for that category

Consistent negative variances suggest unrecorded outbound movements — unscanned picks, shipping without system updates, or improperly processed customer returns.

An inventory audit that is conducted by an independent external party provides which primary benefit over an internal audit?

Answer: It provides an unbiased assessment free from internal conflicts of interest

External auditors are independent of management pressures and internal biases, giving their findings greater credibility for financial reporting and governance purposes.

The 'two-bin' visual replenishment system supports inventory accuracy primarily by:

Answer: Making stock levels physically visible so shortfalls are detected before they affect operations

The two-bin system uses physical container depletion as a visual signal, reducing reliance on potentially inaccurate system records for replenishment triggers.

Which of the following best describes 'shrinkage' in the context of inventory auditing?

Answer: The unexplained loss of inventory due to theft, damage, administrative errors, or vendor fraud

Shrinkage encompasses all unexplained inventory losses and is quantified as the gap between book inventory and physical count after accounting for known transactions.