A manufacturer uses a materials requirements planning (MRP) system to track inventory, orders, and raw materials requirements. What condition should an auditor search for in the MRP database if a preliminary assessment indicated that inventory is understated?
I. Item cost set at zero.
II. Negative quantities on hand.
III. Order quantity exceeding requirements.
IV. Inventory lead times exceeding delivery schedule.
If inventory is understated in the MRP database, it would be logical to search for conditions that directly contribute to this undervaluation. Setting item costs at zero would result in the total inventory value recorded being less than the actual value because the system would not account for the cost of those items. Similarly, negative quantities on hand would indicate that the inventory records are showing fewer items than actually available. Both conditions directly lead to understated inventory values, and therefore, the correct answer is options I and II.
I don't understand this. Can please someone explain it?
I. Item cost set at zero. = Total inventory value would be less than actual on the record if the item cost is set at zero instead of its actual price. II. Negative quantities on hand. = The inventory quantity is literally <0, so would be understated.