CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is performing an audit of a manufacturing company. During the inventory observation, the auditor notes several bins of raw materials that appear dusty and disorganized. The client uses a standard cost system. Which of the following assertions for inventory is most likely to be at risk due to this observation?
- AValuation and Allocation
- BCompleteness
- CRights and Obligations
- DExistence
Show answer & explanationAnswer & explanation
Correct answer: A. Valuation and Allocation
Dusty and disorganized raw materials suggest potential obsolescence or damage, which would impair their net realizable value. If the inventory is obsolete or damaged, its recorded value (standard cost) might be higher than its market value, leading to a misstatement under the lower of cost or market rule. This directly impacts the valuation and allocation assertion.
Why the other options are wrong
- B. Disorganization doesn't inherently mean inventory is missing; completeness is about all inventory being recorded.
- C. This observation does not provide direct evidence about whether the client legally owns the inventory.
- D. Dusty bins don't directly challenge whether the inventory exists; they suggest issues with its condition or salability.
Valuation and Allocation Assertion (Inventory)
The valuation and allocation assertion for inventory states that inventory is recorded at appropriate amounts, including proper application of costing methods, write-downs for obsolescence, and allocation of costs.
- Ensures inventory is stated at lower of cost or market/NRV.
- Considers obsolescence, damage, and decline in utility.
- Impacted by physical condition of inventory.
Memory trick: Dusty bins mean money sins.