Question

Existence is one of the general assertions regarding a client's inventory balance. Which of the following is not a substantive auditing procedure related to this assertion?

A)Physical inventory count
B)Confirmation of inventory held by third parties
C)Inspection of purchase invoices and receiving reports
D)Observation of the client's procedures for recording inventory transactions

Answer 1

Observation of the client's procedures for recording inventory transactions is not a substantive auditing procedure related to the assertion of existence, as it does not verify the physical presence of inventory.

Step-by-step explanation:

The question relates to the audit procedures and assertions tied to a client's inventory balance. When auditors assess the assertion of existence in relation to inventory, they employ various substantive auditing procedures to verify that inventory items are actually present at a given date. Here are examples of typical auditing procedures:

• Physical inventory count: Directly involves counting the actual inventory items.
• Confirmation of inventory held by third parties: Obtaining confirmation from outside parties that inventory items are held on behalf of the client.
• Inspection of purchase invoices and receiving reports: Verifying documents that support the procurement and receipt of inventory items.
• Observation of the client's procedures for recording inventory transactions: While this is an important procedure, it is not directly tied to verifying the existence of inventory, but rather the appropriateness of the recording process.

Therefore, observation of the client's procedures for recording inventory transactions (option D) is not a substantive auditing procedure related to the assertion of existence, as it does not provide evidence that the inventory items are actually present.