May 2018 Q4 b.
i) Identify and explain two financial statement assertions relevant to account balances at the year-end; and (2 marks)
ii) For each identified assertion, describe a substantive procedure relevant to the audit of year-end inventory. (4 marks)
View Solution
- Existence
Assets, liabilities and equity interests exist.
Substantive procedures
During the inventory count select a sample of assets recorded in the inventory records and agree to the warehouse to confirm the assets exist.
Obtain a sample of pre year-end goods dispatch notes and agree that these finished goods are excluded from the inventory records. - Rights and obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Substantive procedures
Confirm during the inventory count that any goods belonging to third parties are excluded from the inventory records and count.
For year-end raw materials and finished goods confirm title belongs to the company by agreeing goods to a recent purchase invoice in the company name. - Completeness
All assets, liabilities and equity interests that should have been recorded have been recorded.
Substantive procedures
Obtain a copy of the inventory listing and agree the total to the general ledger and the financial statements.
During the inventory count select a sample of goods physically present in the warehouse and confirm recorded in the inventory records. - Valuation and allocation
Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Substantive procedures
Select a sample of goods in inventory at the year end, agree the cost per the records to a recent purchase invoice and ensure that the cost is correctly stated.
Select a sample of year-end goods and review post year-end sales invoices to ascertain if net realisable value is above cost or if an adjustment is required.