Question

I have listed two audit procedures. For each procedure, say:

1. Which of the various management assertions the test most directly addresses. (If you believe the test equally addresses more than one assertion, say why. Don’t list four or five assertions – I’ll assume you can’t tell which is which…..)
2. How does this test address that assertion?

(You need to address BOTH procedures for a full answer)

Inventory

Procedure #1 – The auditor obtains a copy of the year-end inventory listing. For a sample of the items on the list, the auditor checks to see that the client has computed the FIFO cost correctly.

Procedure #2 – The auditor asks the client if there were any inventory items in transit to the client’s location on the last day of the year under terms FOB shipping point. (the client would own these goods while they were in transit.)

Answer 1

Audit Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures.

After you test inventory and verify that your audit client is following its standards, you’re ready to start testing management assertions.

Occurrence: Occurrence tests if the inventory transactions actually took place. To test occurrence, you should take a sample of additions to inventory (purchases) and vouch them to purchase requisitions and receiving reports.

Completeness: Completeness evaluates the management assertion opposite of occurrence. In the inventory management process, understatement (lack of completeness) is your highest risk. In other words, the company buys inventory but the purchase isn’t recorded in the inventory account

Authorization: This step addresses whether your client’s management and staff follow proper internal control or other company authorization procedures when handling inventory transactions

Accuracy: Testing accuracy addresses whether transactions are free from error. Your two big issues with accuracy are making sure that your client’s mathematical physical inventory figures are correct and that the correct amount of inventory flows from the balance sheet to the income statement as cost of goods sold.

Cutoff: This step involves making sure all transactions have been reported in the proper financial period. You do so by testing receiving and shipping documents to prove that the client has correctly recorded movement into inventory (receiving) and out of inventory (shipping).

yes i do believe that this test equally addresses more than one assertion in common beacause ;

Transactions include sales, purchases, and wages paid during the accounting period. Account balances include all the asset, liabilities and equity interests included in the statement of financial position at the period end.

Obviously there is a link between the two because if the auditor performs tests to confirm the occurrence of sales this will also provide some assurance about the existence of receivables. Although the auditor may perform other tests specifically focussed on existence

Assertions about account balances and related disclosures at the period end
(i) Existence – assets, liabilities and equity interests exist.
(ii) Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
(iii) Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included.
(iv) Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded and related disclosures have been appropriately measured and described.
(v) Classification – assets, liabilities and equity interests have been recorded in the proper accounts.
(vi) Presentation – assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.