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During observation of a client’s year end physical inventory, the auditor notes that shipping document 8702...

During observation of a client’s year end physical inventory, the auditor notes that shipping document 8702 was the last shipment for the year and that receiving report 10163 was the last receiving report for the year. Explain how the information gathered would be used in performing an inventory cutoff test.
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Inventory cut-off testing involves ensuring that the inventory transactions are reported in the proper accounting period. The receiving report is used to ensure the last receipt of inventory purchases are recorded while the shipping document is used to ensure the last dispatches of inventory are excluded from inventory and no further movements in and out of inventory take place which could result in error in the physical count of inventory and that the inventory is accurately and completely reported in the proper reporting period.

The auditor will ensure that shipping documents after document 8702 are not recorded as dispatches from inventory and receiving report after 10163 is not included in inventory in the period under audit.

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