Which of the following is true about the auditors' observation of the client's physical inventory?

• A. Auditors do not need to observe inventory if perpetual records are maintained.
• B. Auditors observe the physical inventory count to provide evidence about the existence and condition of inventory.
• C. Auditors' observation guarantees the accuracy of the inventory valuation.
• D. Auditors are responsible for counting the inventory themselves.

Answer: (B)

Verified step by step guidance

1. Understand the role of auditors in the context of physical inventory observation. Auditors are tasked with verifying the existence and condition of inventory, not necessarily its valuation or performing the count themselves.
2. Clarify the misconception that auditors do not need to observe inventory if perpetual records are maintained. Perpetual records are helpful but do not replace the need for physical observation to ensure accuracy and reliability.
3. Explain that auditors observe the physical inventory count to provide evidence about the existence and condition of inventory. This observation helps confirm that the inventory reported in the financial statements is accurate and exists in the stated condition.
4. Highlight that auditors' observation does not guarantee the accuracy of inventory valuation. Valuation involves additional procedures, such as assessing cost flow assumptions (e.g., FIFO, LIFO) and market value considerations.
5. Emphasize that auditors are not responsible for counting the inventory themselves. Their role is to observe and evaluate the client's counting process to ensure it is conducted properly and aligns with accounting standards.