Audit Assertion Testing Case Study of Inventory & Assets

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Missing inventory, obsolete assets, or sales entered in the wrong period can affect the fairness of financial statements.

This article provides an overview of how auditors test assertions on inventory and fixed assets through several scenarios that are close to the company's activities.

The Urgency of Audit Assertion Testing on High-Risk Accounts

Assertions are management's statements about the information presented in the financial statements. Auditors test these statements through procedures appropriate to the risks of each account.

Inventory, fixed assets, and revenue have different characteristics. Therefore, their testing procedures cannot be equated.

Inventory, for example, requires attention to physical condition, quantity, ownership, and carrying value. Fixed assets require an examination of the company's existence and rights to those assets.

Revenue also carries its own risks, particularly related to the timing of transaction recording. Errors cut-off can cause income to be included in the wrong period.

Assertion testing helps the auditor determine whether the information has a sufficient basis before concluding the audit results.

Case Study 1: Testing Inventory Management Assertions in the Manufacturing Industry

Imagine a manufacturing company has large inventories of raw materials, work in progress, and finished goods.

Auditors need to ensure that the balance accurately reflects the inventory condition at the reporting date. Testing is not simply matching the figures on the report with warehouse records.

Procedures also need to consider the risks of loss, double recording, damaged goods, and misvaluation.

Testing the Existence and Completeness Assertions in Stocktaking Procedures

The existence assertion deals with whether the recorded inventory actually exists.

Auditors can make observations stocktaking and select a number of items to match physical condition with inventory records.

For example, the system records 500 units of a particular raw material. The auditor then checks the physical count and traces the count to supporting documentation.

In contrast, the completeness assertion focuses on whether all inventory that should be recorded is included in the company's records.

Testing can be conducted by tracing physical documents back to accounting records. Auditors can also examine items in receiving areas, production areas, or other storage locations.

Differences in calculation results need to be investigated before the auditor determines whether there is a misstatement.

Analysis of Valuation and Allocation Assertions in Inventory Valuation

The quantity of goods isn't the only thing to examine when testing inventory audit assertions. Auditors also need to determine whether inventory has been recorded at the appropriate value, consistent with the company's accounting policies.

Damaged, obsolete, or difficult-to-sell inventory may require value adjustments based on applicable conditions and accounting policies.

For example, a company still records old products at a certain value, even though some of the goods were damaged during storage.

Auditors can examine purchasing documents, acquisition prices, condition of goods, and value adjustment calculations.

These tests relate to valuation and allocation assertions. The focus is on ensuring that inventory balances are not misstated.

Example of Manufacturing Audit Assertions on Cost of Goods Sold and Raw Materials Flow

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Inventory is also closely related to Cost of Sales or HPP.

Mistakes in recording raw materials can impact inventory and the cost of goods sold (COGS). The impact can then be seen in a company's reported profit.

Auditors can trace the use of raw materials from warehouse records to the production process and cost recording.

For example, raw materials leaving the warehouse must have supporting documents and be reflected in production records.

Auditors can also compare production data with raw material usage to find discrepancies that need to be investigated.

This test helps to correlate physical records, operational documents, and figures on financial statements.

Case Study 2: Application of Fixed Asset Assertions and Revenue Recognition

Fixed assets and revenue have different characteristics, but both can lead to misstatements if their recording is not supported by adequate evidence. Testing audit assertions for these two areas requires approaches and procedures tailored to the respective risks.

In fixed assets, the auditor's attention may include the existence of assets, company rights, and depreciation calculations.

Meanwhile, revenue testing has a lot to do with the validity of transactions and the period of their recognition.

Manufacturing Fixed Asset Assertion Analysis (Existence, Rights/Obligations, and Depreciation)

A manufacturing company may have production machines, operational vehicles, buildings, and various supporting equipment.

In testing audit assertions for fixed assets, auditors can verify the existence of assets through physical inspection. The asset number, location, condition, and information on the asset register can be compared with actual conditions on the ground.

Rights and obligations assertions relate to whether the company actually has rights to the recorded assets.

Purchase documents, invoices, contracts, certificates, or ownership documents can be supporting evidence according to the type of asset.

Depreciation also needs to be reviewed. Auditors can assess whether the methods, useful lives, residual values, and depreciation calculations have been applied consistently in accordance with applicable accounting policies.

If assets are found that are no longer used but are still recorded, the auditor needs to assess their impact on the financial statements.

Verification of Revenue Recognition Assertions and Sales Transaction Cut-off

Revenue can be at risk when transactions are recorded too early or too late.

For example, a company might record sales at the end of December, but new goods are shipped in January. This situation needs to be examined based on applicable revenue recognition provisions.

Auditors can take transactions around the closing date and match them with supporting documents.

These documents can be customer orders, delivery notes, invoices, and proof of delivery or receipt of goods.

The procedure helps to test cut-off, namely whether the transactions have been recorded in the correct period.

Auditors also need to consider relevant revenue recognition provisions. Not all transactions can be assessed solely on the basis of the invoice date.

Digitizing Assertion Testing Documentation Using Audithink

Assertion testing produces many documents, ranging from audit programs, audit evidence, audit results. stocktaking, to the findings notes.

If everything is managed separately, auditors can spend a lot of time just looking for supporting documents.

Digital platforms can help connect audit assertion testing procedures, evidence, findings, and follow-up actions into one integrated working environment that is easily accessible to the entire audit team.

Audithink can be used as a solution to help audit teams manage documentation and audit processes in a more structured manner.

Recording Stock Opname Results and Issue Tracking on Digital Worksheets

Results stocktaking can be part of the audit evidence that needs to be neatly documented.

Auditors can record procedures, audit results, differences found, and supporting evidence. working paper digital.

If there is a difference between the physical quantity and the system records, this information can be recorded as issue to be followed up.

Centralized logging helps teams know the status of each finding without having to manually check multiple files.

Documentation also becomes easier to trace when auditors or reviewer require evidence of the procedures that have been carried out.

Standardization of Audit Programs and Risk Mapping of Risky Accounts

Each account has different risks. Audit program should be structured based on the risks and testing objectives to be achieved.

Inventory accounts can have risks related to existence, completeness, and valuation. Fixed assets have a different focus, as does revenue.

The mapping helps the auditor determine the relevant procedures for each audit area.

With a digital platform, audit programs, risks, procedures, evidence, and test results can be managed in a more connected manner.

Audithink helps audit teams manage the process in one platform so that documentation is not scattered across multiple locations.

Conclusion

Testing audit assertions helps auditors assess whether information on inventory, fixed assets, and revenue is supported by adequate conditions and evidence.

Audithink helps audit teams manage programs, working paper, evidence, findings, and follow-up in a more structured manner. Learn the solution through Audithink or schedule a demo.

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