An internal auditor is tasked with evaluating the adequacy of the organization ' s inventory fraud controls. What is the most relevant information that the auditor can obtain from the documentation of cyclic counting for this purpose?
A.
Accounting adjustments of inventories are approved by the management in accordance with a signature policy
B.
Root causes of inventory differences are analyzed and corrective measures are followed
C.
High value items are inventoried more frequently throughout the year
D.
Value of accounting adjustments matches with the value of inventory differences and are made in a timely manner
Cyclic counting is a control technique used to verify inventory accuracy and prevent fraud or misstatement. While documentation of approvals (A), valuation reconciliations (D), and frequency of counts (C) all contribute to control effectiveness, the most relevant evidence for evaluating fraud control adequacy is whether the organization analyzes root causes of differences and implements corrective actions (B). Simply reconciling and adjusting balances does not address why discrepancies occur, and fraud risks remain if underlying causes go unexamined. For example, if theft or unauthorized removals are occurring, approving adjustments without corrective measures merely hides the issue. By identifying and addressing root causes, management ensures sustainable fraud prevention and strengthens internal controls. Thus, the focus must be on corrective actions tied to root cause analysis, aligning with IIA guidance on ensuring controls address risks rather than only reporting deviations.
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