CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is testing the valuation assertion for inventory. The client uses the FIFO method and has a perpetual inventory system. Which of the following procedures would provide the most relevant evidence regarding the valuation of inventory?
- AConfirming inventory held at third-party warehouses directly with the custodians.
- BTracing recorded inventory purchases to vendor invoices and receiving reports.
- CObserving the physical inventory count and performing test counts.
- DComparing recorded inventory costs to recent sales prices and evaluating for obsolescence.
Show answer & explanationAnswer & explanation
Correct answer: D. Comparing recorded inventory costs to recent sales prices and evaluating for obsolescence.
The valuation assertion for inventory includes ensuring that inventory is recorded at the lower of cost or net realizable value (LCNRV). Comparing recorded costs to recent sales prices helps assess net realizable value and identify potential obsolescence, thus directly addressing valuation.
Why the other options are wrong
- A. Confirming inventory at third-party locations tests existence, not valuation.
- B. Tracing purchases to invoices tests accuracy and existence of purchases, which contributes to cost, but doesn't directly address LCNRV or obsolescence.
- C. Observing the physical count primarily tests existence and completeness, not valuation.
Inventory Valuation (FIFO)
Inventory valuation under FIFO requires ensuring that inventory is recorded at the lower of its cost or net realizable value, considering factors like obsolescence.
- Valuation assertion includes LCNRV.
- FIFO cost flow assumption affects cost determination.
- Obsolescence assessment is crucial for net realizable value.
Memory trick: Cost vs. Sale Price: Is the inventory still Worth it?