- 6 Marks
Question
b)
i) Identify and explain two financial statement assertions relevant to account balances at the year-end. (2 marks)
ii) For each identified assertion, describe a substantive procedure relevant to the audit of year-end inventory.
(4 marks)
Answer
(i) Financial Statement Assertions for Year-End Account Balances:
- Existence:
This assertion confirms that assets, liabilities, and equity balances actually exist as of the year-end date. - Valuation and Allocation:
This assertion ensures that assets, liabilities, and equity interests are recorded at appropriate amounts, and any necessary adjustments have been made.
(Total: 2 marks)
(ii) Substantive Procedures for Inventory Audit Based on the Identified Assertions:
- Existence (Substantive Procedure):
- Physical Count Attendance: Attend the year-end inventory count and select a sample of items from the inventory records, tracing them to their physical existence in the warehouse to ensure that the recorded inventory actually exists.
- Valuation and Allocation (Substantive Procedure):
- Cost Valuation: Select a sample of inventory items and compare the recorded cost in the inventory records to the relevant purchase invoices to ensure that inventory is valued correctly at cost.
- Net Realisable Value Test: For the same sample, review post-year-end sales to ensure that the net realisable value (selling price less costs to complete and sell) is higher than the recorded cost, to ensure inventory is not overstated.
(Total: 4 marks)
- Topic: Audit and Assurance Evidence
- Series: MAY 2018
- Uploader: Dotse