Balance Assertions: Production Cycle

Question 1

Name the Balance Assertions for the Production Cycle.

Answer 1

Existence
Rights and obligations
Completeness
Valuation and allocation

Question 2

Define Existence

Answer 2

Inventory exists.

Question 3

Define Rights and Obligations

Answer 3

The entity holds or controls the rights to inventory.

Question 4

Define Completeness

Answer 4

All inventory that should have been recorded has been recorded.

Question 5

Define Valuation and Allocation

Answer 5

Inventory is included in the financial statements at appropriate amounts and any resulting valuation adjustments are properly recorded.

Question 6

Which substantive procedures are relevant to Existence?

Answer 6

Observe client’s physical inventory count.

Confirm inventory held by others on consignment.

Vouch items on inventory listing to inventory count tags.

Analytical procedures. Compare inventory turnover and gross margin to budget and previous periods an discuss differences with client personnel.

Question 7

Which substantive procedures are relevant to Rights and Obligations?

Answer 7

Inquire whether any inventory is on consignment.

Inquire whether any inventory has been pledged as collateral or security. Inspect loans and other agreements for the use of inventory as collateral.

Question 8

Which substantive procedures are relevant to Completeness?

Answer 8

Trace inventory subsidiary accounts to inventory control account.

Observe physical inventory count to ensure all items were counted.

Trace test inventory counts to inventory subsidiary accounts and control account.

Question 9

Which substantive procedures are relevant to Valuation and Allocation?

Answer 9

Perform lower of cost or market tests.

Review cost of goods sold calculations.

Trace inventory cost to standard costs or purchase invoices.

Inquire whether any inventory is obsolete or unsalable.