Question

You are an auditor assigned to observe and test your client’s physical count of inventory at year-end. For one of your procedures, you have made your own test counts of randomly selected items of the client’s inventory. Clearly answer each of the following with respect to the year-end inventory account balance on the general ledger: A.) How could the evidence you selected be used to test the management assertion of completeness? B.) How could you test the management assertion of valuation and what additional evidence would you need to do this? Explain and be specific.

Answer 1

A)

The assertion of completeness requires that all transactions and events, assets and liabilities and disclosures that should have been recorded have been recorded.

In the immediate case the result of test count can be verified by performing test of details i.e vouching the transactions and ensuring that they are properly recorded and verifying the account balances so as to ensure that the books of accounts reflect the actual inventory position existing for those particular items of inventory for which test count was performed.

B)

We can test management's assertion of valuation by ensuring that financial and other information are disclosed fairly and at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

To test the abovementioned assertion we can:

i. Obtain written represtation from management regarding the same assertion.

ii. Engage auditor's expert for valuation of inventory, and use his report as sufficient and appropriate audit evidence.

iii Use the report of managements expert, if any, for the valuation of inventory as sufficient and appropriate audit evidence after verifying the relevancy, reasonableness and consistancy of the findings of those reports.