Question

. What is meant by a “bill and hold” scheme?

. The observation of a client’s physical inventory is a mandatory auditing procedure when possible for the auditors to carry out and when inventories are material. Required: Why is the observation of physical inventory a mandatory auditing procedure? Explain.

Under what circumstances is observation of physical inventory impossible? Why is the auditors’ review of the client’s control of inventory tags important during the observation of physical inventory? Explain.

Answer 1

(1) DEFINITION of 'Bill And Hold'

A bill and hold is a form of sales arrangement in which a seller of a good bills a customer for products but does not ship the product until a later date. For a transfer of ownership to occur, certain conditions must be met. These conditions include payment for the goods, that the goods be segregated from all other similar goods by the seller, and that the goods be finished and ready for use.

This is also referred to as "bill in place."

(2) a. Observation of physical inventory is generally mandatory because it provides strong evidence as to existence and quality of the client's inventories. b. Observation of physical inventory generally is impossible when the independent auditors were not appointed by the client until after the physical inventory had been taken. There may also be conditions where weather conditions, terrains, or some other circumstances make it impossible for the independent auditors to be present at the site of the client's inventory-taking; but such circumstances should be rare. c. The auditors' review of the client's control for inventory tags is important because of the danger that fictitious inventory tags might be created by dishonest client personnel after the auditors have completed their observation of the physical inventory