Certified Internal Auditor (CIA) Practice Test

During an operational audit, why did the auditor compare inventory turnover rates?

1. Evaluate the accuracy of internal financial reports

2. Test controls designed to safeguard assets

3. Determine compliance with corporate procedures regarding inventory levels

4. Assess performance and indicate additional audit needs

The correct answer is: Assess performance and indicate additional audit needs

Comparing inventory turnover rates during an operational audit serves as a critical tool for assessing performance. This metric reveals how efficiently a company manages its inventory, indicating how well it is converting goods into sales over a specified period. A high inventory turnover rate suggests effective inventory management and sales performance, while a low rate may indicate overstocking, obsolescence, or poor sales. The analysis of inventory turnover can also highlight areas that may require further investigation or auditing. For example, if the turnover rate is significantly below industry benchmarks, it may suggest operational inefficiencies, prompting the auditor to delve deeper into inventory management practices, procurement processes, or sales strategies. Consequently, this data-driven assessment assists in directing future audit efforts to ensure the organization is operating optimally and adhering to best practices in inventory management.