Question

All inventory items are not counted or tagged.

Extension errors are made on the client's inventory summaries.

Purchase received near the balance sheet date may be included in the physical count but may not be booked.

Obsolete and damaged goods are not noticed in the warehouse.

Inventory stored in a public warehouse may not exist.

Client personnel may incorrectly count the inventory.

The lower of cost or market method may be incorrectly applied.

Empty containers or hollow squares may be included in the inventory.

Goods held on consignment may be included as inventory.

Losses on purchase commitments may not be recognized.

a) Identify the substantive test that should detect each error.

b) For each test, indicate the financial statement assertion(s) to which it pertains.

c) Indicate the type of audit procedures used for each substantive test.

Answer 1

Answer:

The substantive procedure is those procedures that create conclusive evidence related to assertions level i.e. completeness, accuracy, existence, valuation & disclosure requirement on the financial statement.

a) All inventory items are not counted or tagged properly, Obsolete and damaged goods are not noticed in the warehouse, Inventory stored in a public warehouse may not exist, Client personnel may incorrectly count the inventory & Empty containers or hollow squares may be included in the inventory may be detected using the substantive procedure like existence & Completeness related to inventory.

While checking the existence of inventory & completeness related to inventory all these errors can be easily detected & corrected on a timely basis.

b) Existence & Completeness of Inventory: this assertion pertains to the balance sheet of the entity as it will affect the existence of inventory which is the part of current assets.

Valuation: At these level of assertion value of inventory will be verified & also these assertion helps to determine whether inventory is valued properly or not & hence it can be tested whether the lower of cost or market method may be incorrectly applied as it is the part of profit & loss, as well as the value of inventory, might be wrongly reported in the financial statement.

Goods held on consignment may be included as inventory. is needs to be excluded from the inventory.

Disclosure: Losses on purchase commitments need to be recognized in the statement of profit & loss hence using these assertions it can be verified easily & all other facts need to be disclosed in the financial statement & notes to account wherever applicable as per the applicable framework

c) The auditor can use the following substantive test for each type of audit procedure:

• Apply Cutt off procedure to verify the purchase are made or inventory is sold near balance sheet date
• An auditor may apply count test for the existence & completeness of the inventory
• An auditor can check the accuracy by applying recomputation etc test procedure