What should auditors do to avoid overstating inventory on a balance sheet?

Auditors should conduct physical counts and ensure that obsolete inventory is written off to avoid overstating inventory on a balance sheet. This practice is crucial because physical counts provide a real-time, accurate assessment of the actual inventory on hand, allowing auditors to verify that the reported amounts match what exists physically. Moreover, identifying and writing off obsolete inventory prevents the financial statements from reflecting outdated or non-sellable products, thereby giving a more accurate portrayal of the company's financial health.

By taking this proactive step, auditors can address potential discrepancies between recorded and actual inventories, which could lead to an inflated value on the balance sheet if such items are not properly accounted for. Regularly updating inventory records in conjunction with these physical counts can lead to more reliable financial reporting, ensuring that the inventory presented to stakeholders reflects true value and risk.