Question

An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of:

a. completeness.
b. existence.
c. presentation and disclosure.
d. rights and obligations.
e. valuation

Answer 1

The auditor's procedure of observing inventory and tracing these counts to the inventory listing provides evidence for the existence assertion. This verifies the actual presence of inventory items reported on the financial statements and ensures they are not overstated.

Step-by-step explanation:

The procedure conducted by the auditor primarily provided evidence concerning the existence assertion of the client's inventory. Since the auditor actually observed the inventory items during the physical count and then traced those counts to the inventory listing that agrees with the financial statements, the auditor is verifying that the items that are claimed to be present (existence) are indeed there. This is a crucial aspect of an audit because investors and creditors rely on the financial statements to represent the true financial state of a company, including its assets. Such verification addresses the risk that the inventory might be overstated on the balance sheet, ensuring that the company is not presenting a more favorable financial position than is actually the case.

By doing this, the auditor is not primarily assessing completeness (whether all items that should have been recorded have been recorded), presentation and disclosure (proper classification and description of inventory), rights and obligations (ownership of the inventory), or valuation (the appropriate cost or market value attributed to the inventory), although secondary evidence might incidentally be collected about such assertions during the process.