Question - In the audit of Dodgy Co. Manufacturing Pty, the auditor concluded that internal controls were inadequate because of the lack of segregation of duties. As a result, the decision was made to carry out a surprise inventory audit one month before the client's balance date, because of a fear over possible theft or fraud. Because the auditor had never been involved in an inventory audit, she did not know how to proceed with fraud detection procedures.

Required -

1) What's the purpose of surprise inventory audit?

2) List three major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit. For each characteristic, state at least two things an auditor can do evaluate its significance in the engagement.