CPA Exam — AUDAssessing Risk and Developing a Planned ResponseEasy
During the planning phase, an auditor learns that a client's inventory is highly susceptible to obsolescence due to rapid technological changes in its industry. This situation primarily affects which financial statement assertion for inventory?
- AValuation and allocation
- BCompleteness
- CExistence
- DRights and obligations
Show answer & explanationAnswer & explanation
Correct answer: A. Valuation and allocation
Obsolescence directly impacts the net realizable value of inventory. If inventory becomes obsolete, its value decreases, affecting the valuation and allocation assertion, which states that assets, liabilities, and equity components are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Why the other options are wrong
- B. Completeness addresses whether all inventory that should be recorded is recorded, not its value.
- C. Existence deals with whether inventory physically exists, not its value.
- D. Rights and obligations concern whether the entity holds or controls the rights to assets, not their value.
Valuation and Allocation Assertion
This assertion states that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
- Addresses accuracy of recorded amounts.
- Includes proper application of accounting principles.
- Affected by estimates, impairments, and obsolescence.
Memory trick: COVER U: Completeness, Cutoff, Valuation, Existence, Rights, Understandability.