CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceEasy
An auditor is performing an audit of a manufacturing company. During the inventory observation, the auditor identifies several large, slow-moving items in the finished goods warehouse that appear to be obsolete. Which financial statement assertion is most directly affected by this observation?
- AExistence.
- BCompleteness.
- CValuation and Allocation.
- DRights and Obligations.
Show answer & explanationAnswer & explanation
Correct answer: C. Valuation and Allocation.
Obsolete inventory would need to be written down to its net realizable value, directly impacting the valuation and allocation assertion. The items exist, but their recorded value might be too high.
Why the other options are wrong
- A. Existence means the inventory is physically present, which it is.
- B. Completeness means all inventory is recorded, which is not the issue here.
- D. Rights and obligations mean the client owns the inventory, which is not questioned by obsolescence.
Valuation and Allocation Assertion (Inventory)
The assertion that inventory and related accounts are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
- Focuses on whether inventory is recorded at net realizable value (lower of cost or market/NRV).
- Addresses issues like obsolescence, damage, and pricing accuracy.
- Audit procedures include reviewing inventory aging, comparing costs to selling prices, and testing calculations.
Memory trick: CEAV: Completeness, Existence, Accuracy, Valuation.