Audit and Assurance Practice Exam

To make an existence/occurrence assertion about inventory, what may auditors do?

1. Only examine financial records

2. Observe personnel taking physical inventory

3. Rely solely on previous year’s results

4. None of the above

The correct answer is: Observe personnel taking physical inventory

The correct answer focuses on a key auditing procedure that directly addresses the existence and occurrence assertion related to inventory. When auditors are concerned with whether the inventory reported in the financial statements physically exists and is properly accounted for, they must verify this assertion through direct observation. By observing personnel taking a physical inventory, auditors can gather evidence that the inventory items listed on the financial records actually exist and are appropriately counted at the time of the inventory observation. This approach allows auditors to confirm that the quantity of inventory recorded aligns with physical counts, thereby establishing the validity of the existence aspect of the assertion. It also serves to mitigate the risk of misstatement due to inventory being overrepresented or fabricated on the financial records. In contrast, solely examining financial records does not provide sufficient evidence for existence, as documents can be manipulated. Relying solely on previous year's results also fails to address current periods' validity and may not accurately reflect the current inventory situation due to potential fluctuations. Therefore, observing the physical inventory is a practical and reliable method for auditors to ensure the existence and occurrence of inventory items.