The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the Existence - assets, liabilities, and equity interests exist.
period under audit: (COCAC)

Completeness - all assets, liabilities and equity interests that

Completeness - all transactions and events that should have
should have been recorded have been recorded.
been recorded have been recorded.

Valuation and allocation - assets, liabilities, and equity

Occurrence - transactions and events that have been
interests are included in the financial statements at
recorded have occurred and pertain to the entity.
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.

Classification - transactions and events have been recorded

in the proper accounts.

Assertions about presentation and disclosure: (COCA)

Accuracy - amounts and other data relating to recorded
transactions and events have been recorded appropriately.
Completeness - all disclosures that should have been
included in the financial statements have been included.

Cutoff - transactions and events have been recorded in the

correct accounting period.
Occurrence and rights and obligations - disclosed events,
transactions, and other matters have occurred and pertain
to the entity.

Assertions about account balances at the period end:

(RECV)
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity.
Classification and understandability - financial information is
appropriately presented and described, and disclosures are
clearly expressed.
Accuracy and valuation - financial and other information are
disclosed fairly and at appropriate amounts.

INTERNAL CONTROL MEASURES

1. Authority and responsibility for controlling the

inventories should be centralized management and in
one person.
2. There should be careful selection of inventory personnel
and intensive training of such personnel in policies,
objectives and system of inventory control.
5. Quantitative controls through perpetual inventory
records; book quantities verified with physical counts at
least once a year and differences being investigated,
promptly adjusted and reported to higher authority
should be implemented.

3. Adequate physical facilities for handling and storage of

inventory should be provided.

4. Adequate system of procedures, forms and reports

related to the management of inventories should be
developed and implemented.

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6. Deliveries of materials, finished stock and merchandise Valuation on the basis of approved cost-mark-down
should be made only upon specific authorizations methods should be reviewed.
emanating at authorized levels.

8. Safeguards against that action of the element and

7. Slow-moving, obsolete and damaged stock should be inaccuracies in recording receipts and issues should be
identified and reported following periodic reviews of adopted. Example – Maintaining adequate insurance
physical and book records by qualified employees. coverage.

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SUBSTANTIVE AUDIT OF INVENTORIES

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Inventory Balances

Existence: Recorded inventory exist

1. Before the client takes the physical inventory, review and approve the client’s written
plan for taking it.

2. Observe the client personnel physically counting inventory.

3. Confirm inventories on consignment and held in public warehouses.

Completeness: All inventory of the entity recorded

4. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and
reconcile the tags to the listing.

5. For selected items, trace from tags to listing.

6. Perform cutoff procedures. Obtain the receiving report number for the last shipment
received prior to year-end and determine that the item is included in inventory. Also,
identify the last shipping document and determine, based on shipping terms, whether the
item was properly recorded in sales or inventory.

7. Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity

8. Determine that consigned inventory has been excluded from inventory and that
inventory pledged has been properly disclosed. Examine confirmations from financial
institutions and read minutes of the board of directors’ meetings.

Valuation and allocation: Recorded inventory is valued in accordance with GAAP

9. Considering the method the client uses for inventory valuation, examine invoices for
inventory on hand or trace prior year’s inventory listing to verify cost.

10. For selected items, determine net realizable value (NRV) of the inventory and apply the
lower of cost or NRV.

11. Verify computations in the inventory listing.

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12. Review the obsolescence of the inventory by:

a. being alert while observing inventory being taken for damaged, slow-moving, or
scrap inventory.

b. Scanning perpetual records for slow-moving items and discussing their valuation
with client.

Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP

13. Determine whether accounts are classified and disclosed in the financial statements in
accordance with GAAP.

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Purchases

Completeness: Purchases that occurred are recorded

Trace a sequence of receiving reports to entries in the voucher register. Test cutoff.
Account for a sequence of entries in the voucher register.

Occurrence: Recorded purchases are for items that were acquired

Examine underlying documents for authenticity and reasonableness. Scan voucher register
for large or unusual items. Trace inventory purchased to perpetual records. Scan voucher
register for duplicate payments.

Classification: Purchase transactions have been recorded in the proper accounts

For a sample of entries in the purchases journal, verify the accuracy of account coding.

Accuracy (Valuation): Purchases are recorded at proper amounts

Recompute invoices and compare invoice price to purchase order.

Production

Completeness: All production transactions that occurred are recorded

Account for a sequence for production reports.

Occurrence: Recorded production transactions occurred

For selected transactions, examine signed materials requisitions, approved labor tickets, and
allocation of overhead.

Classification: Production transactions have been recorded in the proper accounts

For a sample of entries, verify the accuracy of account coding.

Accuracy (Valuation): Production transactions are recorded at proper amounts

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Test cost records by tracing to underlying documents, such as bill of materials, labor tickets,
authorized labor rates, and standard overhead rates. Review variances.

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