Short Case
Virtual Lab 2
You are responsible for the audit of inventory for MSS Grocery Wholesales, Inc., a closely
held grocery wholesaler that sells to independent grocery stores. Inventory is by far the largest
account on their balance sheet. MSS operates in ten southeastern states with a central
distribution center in Atlanta and local distribution centers in each of the ten states in which it
operates. Management has implemented a sophisticated perpetual inventory system that
includes only quantities to assist in managing quantity levels in Atlanta and the local
distribution centers. All accounting is maintained in Atlanta, including purchases which
originate from the Atlanta office using online inventory information available for all centers.
All inventory deliveries are made to the Atlanta center and then sent to local centers, again
using the online information. Product and quantity information for sales are prepared online by
each distribution center for updating the perpetual records, with a hard copy sent to Atlanta.
Each center takes a quarterly physical inventory for comparison to and adjustment of the
perpetual records. The counts are sent to Atlanta where all adjustments are made. Regional
centers’ access to the perpetual records are limited to online sales transaction entry. Internal
auditors test the perpetual records continuously, sample physical inventory counts and test
inventory adjustments. Their tests and results are filed in Atlanta
Required:
1.List six or more internal controls and tests of controls that can be used to test the effectiveness
of internal controls over inventory.
[7.5 Marks]
2. Assuming you determine that internal controls are effective, state how you can reduce or
change physical observation tests of inventory. Be specific
[7.5 Marks]