While observing an entity's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record:
A)purchase discounts.
B)purchase returns.
C)sales.
D)sales returns.

Question

Quizplus · Accepted Answer

When a customer returns goods, the perpetual inventory tracking system reduces the inventory quantity by the returned amount. If these returns were not properly recorded in the system, the physical inventory count could be higher than what is reflected in the perpetual records. This is the most likely reason for the observed discrepancy.

While Observing an Entity's Annual Physical Inventory, an Auditor Recorded