Question

Confirmations are a highly regarded form of information. Confirmation is most effective in addressing the existence assertion for the?

1) addition of a milling machine to a machine shop
2) sale of merchandise during regular course of business
3) inventory held on consignment
4) granting of a patent for a special process developed by the organization

Answer 1

Confirmations are most effective for the existence assertion of inventory held on consignment, as they directly verify the presence and condition of the inventory from a third party, reducing the risk of imperfect information.

Step-by-step explanation:

Confirmations are a respected form of evidence in the auditing process, particularly effective in providing assurance about the existence assertion of assets or transactions. When considering the scenarios provided, confirmations would most effectively address the existence assertion for inventory held on consignment.

In such situations, a third party holding the inventory can provide direct confirmation to the auditor that the inventory does indeed exist and is under their control. This reduces the risk of imperfect information and provides a higher degree of accuracy regarding the existence of the inventory compared to other assertions where confirmations may be less effective or applicable.