Audit and Assurance Practice Exam

Which assertion is often evaluated during an audit of inventory?

1. Completeness assertion.

2. Rights and obligations assertion.

3. Existence assertion.

4. Valuation assertion.

The correct answer is: Existence assertion.

The existence assertion is crucial in an audit of inventory because it ensures that the inventory recorded in the financial statements actually exists at the reporting date. Auditors perform various procedures to confirm the physical presence of inventory items, which might include conducting a physical inventory count, observing inventory counting processes, or using analytical procedures to validate inventory balances against sales and production data. Validating existence helps to address issues related to overstatement; if the inventory is not present, it should not be reported as an asset on the balance sheet. This assertion is foundational in ensuring that the financial statements are free from material misstatement, thereby providing users with confidence in the reported figures. While completeness, rights and obligations, and valuation assertions are also important in the overall evaluation of inventory, the existence assertion specifically addresses whether the items recorded are actually present, making it a primary focus during an inventory audit.