Audit and Assurance Practice Exam

What type of assertions are usually most relevant for inventory?

1. Existence and presentation/disclosure assertions.

2. Completeness and rights and obligations assertions.

3. Valuation and allocation assertions.

4. Classification and accuracy assertions.

The correct answer is: Existence and presentation/disclosure assertions.

When considering which type of assertions are most relevant for inventory, existence and presentation/disclosure assertions are particularly important. Existence asserts that the inventory recorded in the financial statements actually exists, which is crucial given the potential for inventory to be overstated. For instance, if a company reports that it has a significant amount of inventory but the physical count reveals otherwise, it misleads stakeholders regarding the company's asset base. Presentation and disclosure assertions come into play as well, ensuring that the inventory is classified correctly within the financial statements and that relevant information about inventory policies, valuations, and methods is disclosed appropriately. This is vital for providing a transparent view of the company's financial health and for aiding in the decision-making process of users of the financial statements. In contrast, while other types of assertions like completeness, rights and obligations, and valuation may have relevance, they are not as critical in the context of inventory as the existence and presentation/disclosure assertions. Completeness, for example, would pertain to whether all inventory that should be recorded is indeed recorded, but it does not address the need to confirm that recorded items are valid. By focusing on the existence of inventory and its correct presentation and disclosure, auditors can more effectively assess potential risks and ensure accurate financial reporting