While observing a client rsquo s annual physical inventory an auditor conducted tescounts for certai...........

Auditing Vouching and verification

While observing a client’s annual physical inventory, an auditor conducted tescounts for certain test counts were higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to record –

Purchase returns

Sales returns

Goods with consignor

Purchase discounts

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Explanation:

- When the auditor’s test counts are higher than what is in the client’s perpetual inventory records, it usually means inventory was not completely reduced from the records.

- Let’s review each option:

- Option 1: Purchase returns

- If returns to suppliers were not recorded, perpetual records would be overstated (not understated).

- Option 2: Sales returns

- If sales returns were not recorded, items returned by customers physically exist but are not yet added back into perpetual records. This leads to physical counts being higher than perpetual records.

- Correct Answer

- Option 3: Goods with consignor

- This is about goods owned by another company, not related to recording errors in the client’s books.

- Option 4: Purchase discounts

- This impacts cost, not quantities, so won’t affect count differences.

- Summary: The mismatch is most likely due to failing to record sales returns, so inventory on hand is more than what records show.