Because there are a number of ways that a company could manipulate inventory numbers to misstate the final account balance, auditors must be diligent to prevent fraud or human error. A misstatement in inventory can have two effects: increase the value of the account and thus the company; and, increase cost of goods sold and thus increase revenue. One of the most important jobs for an auditor is to inspect the physical inventory itself. This tests two key assertions: existence and accuracy. The auditor must confirm that the inventory in the final account balance actually exists and that is accurately recorded. The main goal for an auditor during the inspection of physical inventory is too ensure that all inventory that is material is counted.
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Goodwin & Company, the auditor, took a lax approach even when faced with evidence that the final numbers were suspect. If they had known that William Nashwinter, the general manager responsible for the inventory account balance, was under pressure to improve performance, perhaps they would have taken more care during the audit. Instead of simply accepting Nashwinter’s excuses without following up on them, the auditor should have challenged Nashwinter to explain the discrepancies. Second, Analytical procedures would have shown the rapid growth in the inventory account over the three-year period. This should have instructed them to seek an explanation from the company that showed why Nashwinter’s division alone was growing inventory at that rate. Finally, Thomas Wilson and Frank Pollard, the lead auditors, didn’t fully count the inventory because they felt that the freezer was too cold. Because of this, they were not able to fully verify the accuracy of the inventory account balance. There is no excuse for the pitiful job that Goodwin & Company did on this audit. However, if the auditor had known the full extent of the situation that William Nashwinter was in, they could have realized that he fit the three categories of the fraud triangle. This would have hopefully led to a more thorough
Goodwin & Company, the auditor, took a lax approach even when faced with evidence that the final numbers were suspect. If they had known that William Nashwinter, the general manager responsible for the inventory account balance, was under pressure to improve performance, perhaps they would have taken more care during the audit. Instead of simply accepting Nashwinter’s excuses without following up on them, the auditor should have challenged Nashwinter to explain the discrepancies. Second, Analytical procedures would have shown the rapid growth in the inventory account over the three-year period. This should have instructed them to seek an explanation from the company that showed why Nashwinter’s division alone was growing inventory at that rate. Finally, Thomas Wilson and Frank Pollard, the lead auditors, didn’t fully count the inventory because they felt that the freezer was too cold. Because of this, they were not able to fully verify the accuracy of the inventory account balance. There is no excuse for the pitiful job that Goodwin & Company did on this audit. However, if the auditor had known the full extent of the situation that William Nashwinter was in, they could have realized that he fit the three categories of the fraud triangle. This would have hopefully led to a more thorough