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could use cycle counting because: (1) Wal-Mart had accurate
retail accounting records, (2) Wal-Mart had retained independent
counting services to work with Wal-Mart's internal audit
department, and (3) Wal-Mart's previous physical inventories had
not required significant changes to the retail records. E&Y
certified that petitioners' financial statements for the subject
years (which included the shrinkage estimates) conformed with
Generally Accepted Accounting Principles (GAAP), issuing
unqualified opinions to that effect for each of the years. E&Y
had been periodically reviewing petitioners' methodology for
accounting for shrinkage, including the accrual of the shrinkage
estimate during the stub period, and E&Y had never recommended
that petitioners change their method of accounting for shrinkage.
D. Physical Counts
The amount of shrinkage or overage was verified by
petitioners when the inventory on hand was counted. In general,
Wal-Mart counted each store's inventory approximately every 11 to
13 months. In the case of new stores, petitioners did not count
the inventory until the store had been open for at least
6 months. Petitioners also did not count inventory in the months
of November, December, and the first week in January. During
November and December, Wal-Mart was focusing on the Christmas
season, which is one of the busiest times of the year, and its
inventory was at a maximum. During the first week of January,
Wal-Mart's employees were recuperating from the Christmas season,
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