1. Auditor's Objectives: According to an essay published online by the United States General Accounting Office, managers and other decision-makers need to know how much inventory there is and where it is located in order to make effective budgeting, operating, and financial decisions and to create accurate financial reports. Physical inventory involves counting the individual items in stock at a particular date and time to ensure accuracy of inventory quantities and values as reported on the organization's Balance Sheet.
             Proper inventory accountability requires that detailed records of produced or acquired inventory be maintained, and that this inventory be properly reported in the organization's financial reports. Physical controls and accountability reduce the risk of (1) undetected theft and loss, (2) unexpected shortages, and (3) unnecessary purchases of items already on hand.
             There are many factors that can cause the record of on-hand inventory to differ from the physical quantity counted including omission of items from the count, incorrect counts, and improper recording or reconciliation of count results. These problems must be addressed by the auditor. Accurate inventory records are key to management 's confidence in financial data.
             According to the GAO essay, adequate supervision by the auditor is a key factor in the accuracy of the audit. This includes planning, conducting the inventory count, as well as reconciling variances. The auditor should provide instructions to employees, and perform certain counts or re-counts independently. Careful records of discrepancies should be made, and if a pattern occurs further testing would be required. Adequate supervision by the auditor increases the likelihood of accurate and consistent counts and reduces the overall risk of incorrect or unreliable physical inventory counts resulting in inaccurate financial reports being created (2002).
             2. The Genera...