| Course | ACC 492 Contemporary Auditing II (ACC/492) |
|---|---|
| Week | 2 |
| Paper type | Inventory audit paper |
| Length | about 1,015 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 492 Week 2
Counting 41,000 Part Numbers in Three Warehouses: Observing the Count, Testing Cutoff and Pricing and Judging Obsolescence at a Composite Auto Parts Distributor
[Student Name]
University of Phoenix
ACC/492: Contemporary Auditing II
Week 2 Assignment
[Instructor Name]
[Date]
The distributor, its warehouses and all figures are composites written for a model paper; standards and research findings come from the sources listed.
A composite distributor supplies brake parts, filters, belts, batteries and electrical components to independent repair shops and dealerships from a main warehouse and two smaller ones. It also places consigned stock of fast-moving parts at 30 large repair shops, which pay only when they use a part. At its December 31 year end, inventory of about 41,000 part numbers is recorded at $22 million, 38% of total assets. Inventory is where an auditor must look at the physical goods, the paperwork and the market at once, because each can make the recorded amount wrong. This paper describes the audit.
Risks and Assertions
The main risks are that inventory does not exist or has been double-counted, that items belonging to others are included or items the company owns are excluded, that shipments and receipts are recorded in the wrong period and that cost exceeds what slow-moving parts can be sold for. The relevant assertions are existence, completeness, rights and obligations, cutoff and valuation. Because the count is the basis for the year-end balance, auditing standards require the auditor to attend the physical count when inventory is material (American Institute of Certified Public Accountants, 2011).
Evaluating the Count Instructions
Before the count, the team reviewed management's written instructions. They assigned two-person count teams by aisle, used prenumbered count tags, froze receiving and shipping during the count, segregated damaged and consigned-in goods and required a supervisor to recount a sample of tags. The team recommended one change: the instructions did not say how to count parts in sealed master cartons, and the team asked that a sample of cartons be opened to confirm contents.
Observing the Count
At the main warehouse, two team members observed count teams, confirmed that tags were used in sequence and that goods were not moved during the count and made test counts. They selected 40 items from the floor and traced them to count tags and later to the final listing, testing completeness. They selected 40 items from the preliminary listing and found them on the shelves, testing existence. Two differences were found, both small and corrected by the count supervisor. The team recorded the last receiving and shipping document numbers used before the count for later cutoff testing.
A Warehouse the Team Could Not Attend
A storm closed roads to the smallest warehouse on the count date, and its count was delayed by five days. The team attended the later count, performed test counts and then tested the transactions between December 31 and the count date, rolling the count back to year end by subtracting receipts and adding shipments recorded in those days. Because the roll-back period was short and the controls over receiving and shipping were effective, the team concluded the evidence was sufficient.
Consigned Goods
The consigned stock at repair shops belongs to the distributor until used, so it must be included. The team sent confirmations to all 30 shops asking them to confirm quantities by part number and visited three shops to count the stock. The distributor also held about $300,000 of batteries on consignment from a manufacturer, which were excluded from its inventory; the team confirmed they had been tagged separately and left out of the listing.
Cutoff
Using the last document numbers recorded at the count, the team examined shipping documents and sales invoices for five days before and after year end. One shipment of $86,000, made on December 31, was recorded as a January sale; its cost of $61,000 was still in inventory. The team proposed an adjustment. Receiving tests found no errors: goods received on December 30 were included in inventory and recorded as payables.
Tracing and Compilation
The team traced its test counts and a sample of count tags to the final inventory listing to confirm that quantities were carried forward correctly, checked that the tag sequence was complete, with no missing or duplicate tags, and footed the listing and agreed its total to the general ledger.
Price Tests
The company uses FIFO. The team selected 60 items weighted toward high-value parts and compared the recorded unit cost with the most recent vendor invoices for the quantities on hand. Fifty-eight agreed. Two used an older, higher cost because a vendor price reduction had not been entered, overstating inventory by $18,000.
Obsolescence and Net Realizable Value
Auto parts become slow-moving as the vehicles they fit age out of service. The team obtained an aging report showing $2.4 million of parts with no sales in the past 18 months, compared that list with the distributor's catalog of discontinued parts and discussed a sample with the purchasing manager. Management had reserved $900,000. Using sales history and quotes from a liquidator who buys surplus parts at about 20% of cost, the team estimated the required write-down at $1.25 million, a difference of $350,000. After discussion, management increased the reserve to $1.2 million, and the remaining $50,000 difference was recorded as an uncorrected misstatement below the trivial threshold.
Why Inventory Deserves This Attention
Beasley et al. (2010) found that overstated assets, including inventory, were among the most common techniques in fraudulent financial reporting cases brought by the SEC over a decade. Inventory is attractive to manipulate because it is complex, estimated in part and often held in several places. Thomas and Zhang (2002) showed that firms whose inventories swelled faster than expected tended to earn weaker stock returns afterward, a sign that markets and auditors alike should treat inventory growth as information. The procedures above are designed so that no single weakness, such as an unobserved location or an unreviewed reserve, can hide a material error.
Conclusion
The team observed the count, tested counts in both directions, rolled back a delayed count, confirmed consigned stock, tested cutoff and pricing and challenged the obsolescence reserve. It proposed adjustments for a cutoff error, a pricing error and the reserve. With those corrections, the evidence supports the existence, completeness, rights, cutoff and valuation of the distributor's $22 million inventory.
References
American Institute of Certified Public Accountants. (2011). Statements on auditing standards: Clarification and recodification (Statement on Auditing Standards No. 122).
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2010). Fraudulent financial reporting 1998-2007: An analysis of U.S. public companies. Committee of Sponsoring Organizations of the Treadway Commission.
Thomas, J. K., & Zhang, H. (2002). Inventory changes and future returns. Review of Accounting Studies, 7(2-3), 163-187. https://doi.org/10.1023/A:1020221918065
What the ACC 492 Week 2 instructions ask
The ACC 492 Week 2 task usually asks students to plan and describe the audit of inventory. Typical requirements include the risks and assertions for inventory, the auditor's evaluation of management's count procedures, observation of the physical count and test counts, cutoff tests for shipments and receipts, tests of the final inventory compilation, price tests, procedures for obsolete or slow-moving items and lower of cost and net realizable value, and special situations such as inventory at multiple locations, goods held by others or counts at an interim date with a roll-forward. Each procedure should be tied to the assertion it serves, with the governing standard and supporting research referenced in APA form.
How this ACC 492 Week 2 example is built
An auto parts distributor has tens of thousands of small items, fast-moving and slow-moving parts side by side and parts placed on consignment with repair shops, so every inventory risk appears in one engagement. The paper follows the audit in the order it happens: planning around management's count instructions, observing the count at the main warehouse, handling a smaller warehouse with a different approach, testing cutoff, then the office work of tracing, pricing and valuation. Obsolescence receives particular attention because vehicle models change and some parts stop selling. The paper ends with the team's conclusion on each assertion and a note on why inventory has featured in many financial reporting frauds.
ACC 492 Week 2 grading rubric: where the points go
The grading for the inventory audit tends to reward procedures matched to assertions, a correct explanation of observation and test counts, correct cutoff and pricing tests and a reasoned approach to valuation. Faculty check that test counts run from the floor to the listing for completeness and from the listing to the floor for existence, that cutoff testing covers the days just before and just after the balance sheet date, that price tests compare recorded costs with vendor invoices under the company's cost method and that slow-moving items are evaluated against net realizable value. Special situations should be handled with appropriate alternative procedures. Clear reasoning, sensible sample choices and cited standards complete the rubric.
ACC 492 Week 2 help: mistakes to avoid
The most frequent ACC 492 Week 2 mistake is describing observation as the auditor counting the inventory. Management counts; the auditor observes, evaluates the procedures and makes test counts. Another is testing counts in only one direction. Students also forget cutoff, where many misstatements arise, or test only shipments and not receipts. Price tests must compare cost with actual vendor invoices, not with selling prices. For obsolescence, use the company's sales history and industry information, not a general percentage. Address consigned goods, which belong to the consignor, not the holder. Finally, explain what the auditor does when a location cannot be observed on the count date, and why the substitute works.
Related ACC 492 sample papers
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- ACC 492 Week 3: Capital Assets and Selected Accounts
- ACC 492 Week 4: Completing the Audit and Reporting
- ACC 492 Week 5: Assurance, Ethics and Liability
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ACC 492 Week 2 questions, answered
What does ACC/492 Week 2 usually cover?
It usually covers the audit of inventory: risks and assertions, observation of the physical count and test counts, cutoff, tests of the inventory listing, pricing and valuation, including obsolescence.
Where can I find a free ACC 492 Week 2 sample paper?
This page presents an auto parts distributor inventory audit, from count observation to obsolescence, with margin notes, free for anyone to read. An inventory case of your own can be turned into an opening draft free of charge.
Why do auditors observe the inventory count?
Observation provides direct evidence that inventory exists and helps the auditor judge whether management's count procedures are reliable, which is why auditing standards require attendance when inventory is material.
What is an inventory cutoff test?
The auditor examines shipping and receiving documents for the last days before and first days after year end to confirm that each shipment and receipt is recorded in the correct period.
How do auditors evaluate obsolete inventory?
By reviewing sales history, inventory aging, discontinued items and industry information, and comparing cost with estimated net realizable value for slow-moving items.
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