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 refer to the representations of management responsible for preparing, presenting and recognising Financial Statements on its appropriateness. The Auditor gathers audit evidence to ensure the Audit Assertions does not contain any material mistatement.

Procedure I :

Management Assertion addressed : Valuation, allocation and accuracy

Explanation : The Auditor obtains the copy of year end inventory to check that the cost is computed correctly using the correct method adopted i.e FIFO. This implies that the auditor gathers evidences in order to obtain assurance on correctness of valuation, accuracy of computation of costs and allocation of appropriate inventory valuation method.

Procedure II :

Management Assertion addressed : Rights and obligations

Explanation : The Auditor seeks confirmation of inventory in transit under the FOB shipment terms, it means that the company has a legal title or controls the rights on the goods in transit or has an obligation to pay a creditors for such goods. This provides the assurance of ownership of goods in transit.