Hovington, CPA, knows that while audit objectives relating to inventories may be stated in terms of...
Hovington, CPA, knows that while audit objectives relating to inventories may be stated in terms of the assertions as presented in this chapter, they also may be subdivided and stated more specifically. He has chosen to do so and has prepared the second column of the following table. LO 12-3, 5, 6 Required: LO 12-3, 5, 6 LO 12-3, 5, 6 Required: LO 12-2, 6 Required: In-Class Team Case LO 12-1, 2, 6 Financial Statement Assertion Specific Audit Objective Audit Procedure
1. The entity has legal title to inventories.
2. Recorded inventory quantities include all products on hand.
3. Inventories are reduced, when appropriate, to replacement cost or net realizable value.
4. Cost of inventories is properly calculated.
5. The major categories of inventories and their basis of valuation are adequately reported in the financial statements.
Assume that Hovington’s client, a retail department store, does no production. For each specific inventory audit objective listed above, select the most closely related financial statement assertion and the most appropriate audit procedure from the following:
Homework Answers
| Financial Statement Assertion | Specific Audit Objective | Audit Procedure |
| Rights and obligations | 1. The entity has legal title to inventories. | Select a sample of recorded items and examine supporting vendor invoices and contracts. |
| Completeness and cutoff | 2. Recorded inventory quantities include all products on hand. | Select a sample of items during the physical inventory count and determine that they have been included on count sheets. |
| Valuation and accuracy | 3. Inventories are reduced, when appropriate, to replacement cost or net realizable value. | Examine current vendor price lists. |
| Valuation and accuracy | 4. Cost of inventories is properly calculated. | Select a sample of recorded items and examine supporting vendor invoices and contracts. |
| Presentation and disclosure | 5. The major categories of inventories and their basis of valuation are adequately reported in the financial statements. | Review drafts of the financial statements. |
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