Professor Adams' Lecture Materials

Learning Objective 9-07: Apply your knowledge to perform rndit procedures in the audit of inventory and evaluate the findings of your tests.

Audit Risk Model Applied

Detection risk drives substantive testing extent, with low risk requiring extensive year-end counts and high risk relying on analytics and cycle counts.

World Electronics LLC

Low inherent and control risks (strong IT controls, industry growth) allow high detection risk, limiting testing to cycle counts and analytics, achieving low audit risk.

Fraud Case: Extended Audit Procedures (Phar-Mor)

Problem: Phar-Mor hid losses in inventory, manipulating counts and margins over 10 years ($1 billion fraud).
Audit Approach: Weak controls (overridden by management) and lax skepticism failed to detect fraud; randomized counts and margin tests were needed.
Discovery Summary: External tip uncovered fraud, not audit procedures.

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