Question

The following issues were discovered by the audit team while performing the audit of Matador Corporation. Consider each issue independently.

1. Management depreciated equipment over 10 years when the true useful life of the equipment was only 5 years.

2. Revenue was not recorded for three valid sales transactions.

3. In a multi-step income statement, cost of goods sold was erroneously included in the selling and administrative expenses line item.

4. After counting inventory in the warehouse, the audit team believes some inventory is obsolete. However, Matador does not believe its inventory is obsolete.

For each of the four audit issues above, identify the assertion that best pertains to that issue.

Answer 1

Question 1. Management depreciated equipment over 10 years when the true useful life of the equipment was only 5 years.

As per the standards when the useful life of the asset is only 5 years the depreciation calculated must also be done for 5 years instead of it, it is calculated for 10 years. It means there is an assertion of Accuracy and valuation.

Question 2. Revenue was not recorded for three valid sales transactions

Cutoffs assertion: The accounting and reporting of transactions should in the proper financial period, in this case, it is not recorded in the proper period.

Question 3. In a multi-step income statement, cost of goods sold was erroneously included in the selling and administrative expenses line item

Classification: The wrong classification of expenses to another account or another head makes a wrong classification assertion.

Question 4. Inventory valuation

Valuation: The inventory should be valued at lower of the cost or net realizable value, here in this case even when the inventory is obsolete the management decided to value it, Its a clear valuation assertion.