Audit and Assurance Practice Exam

True or False: The auditor's review of the physical inventory count is not necessary if the internal controls are strong.

1. True

2. False

3. Only partially true

4. Depends on the audit scope

The correct answer is: False

The statement claiming that the auditor's review of the physical inventory count is not necessary if the internal controls are strong is false. Regardless of the strength of internal controls, auditors must still perform procedures to assess the accuracy and existence of inventory. The physical inventory count helps to verify that the inventory recorded in the financial statements corresponds with what actually exists. Strong internal controls may reduce the risk of material misstatement in inventory; however, they do not eliminate it completely. Factors such as human error, fraud, or unforeseen events can still affect inventory accuracy. Therefore, an auditor's independent examination of the physical inventory is crucial to providing reasonable assurance that the financial statements are free from material misstatement related to inventory values. While effective internal controls can provide some level of assurance, they cannot substitute for substantive testing, particularly in critical areas such as inventory. The auditor's review not only serves as a check on internal controls but also captures potential issues that may not be detected through internal processes alone. Thus, regardless of internal controls, the physical inventory review remains a necessary part of the audit.