Auditing and EthicsQuestion 5676 of 212
All Questions AI & II above
BII & III above
CIII & IV above
DI & IV above
(2 Marks)
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Correct Answer
✅ Option B — II & III above
All Options:
- AI & II above
- BII & III above ✓
- CIII & IV above
- DI & IV above (2 Marks)
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Detailed Solution & Explanation
Correct Answer: Option **B**
Explanation:
For period-end asset balances like inventory, the auditor tests specific financial statement assertions:
1. **Rights and Obligations (III)**: This assertion states that the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Since inventory held by PQ Ltd. as a "consignee" belongs to the consignor, PQ Ltd. does not own this inventory. Excluding the ₹ 2 lakhs of consignee inventory from the Balance Sheet ensures that only inventory to which the company has ownership rights is recognized. This represents the **Rights and Obligations** assertion.
2. **Completeness (II)**: This assertion states that all assets, liabilities, and equity interests that should have been recorded have been recorded. Verifying that the entire ₹ 38 lakhs of owned inventory has been recognized in the Balance Sheet ensures that no owned inventory is omitted, which directly tests the **Completeness** assertion.
Let's look at the other assertions:
- **Occurrence (I)** is an assertion related to classes of transactions and events (e.g., whether sales occurred during the period), not period-end balances.
- **Measurement (IV)** is also typically a transaction-level assertion. For balance sheet accounts, "Valuation and Allocation" is the standard assertion used.
Therefore, the applicable assertions in this scenario are **Completeness** (II) and **Rights & Obligations** (III). This corresponds to Option B.
Hence, **Option B** is the correct answer.
Explanation:
For period-end asset balances like inventory, the auditor tests specific financial statement assertions:
1. **Rights and Obligations (III)**: This assertion states that the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Since inventory held by PQ Ltd. as a "consignee" belongs to the consignor, PQ Ltd. does not own this inventory. Excluding the ₹ 2 lakhs of consignee inventory from the Balance Sheet ensures that only inventory to which the company has ownership rights is recognized. This represents the **Rights and Obligations** assertion.
2. **Completeness (II)**: This assertion states that all assets, liabilities, and equity interests that should have been recorded have been recorded. Verifying that the entire ₹ 38 lakhs of owned inventory has been recognized in the Balance Sheet ensures that no owned inventory is omitted, which directly tests the **Completeness** assertion.
Let's look at the other assertions:
- **Occurrence (I)** is an assertion related to classes of transactions and events (e.g., whether sales occurred during the period), not period-end balances.
- **Measurement (IV)** is also typically a transaction-level assertion. For balance sheet accounts, "Valuation and Allocation" is the standard assertion used.
Therefore, the applicable assertions in this scenario are **Completeness** (II) and **Rights & Obligations** (III). This corresponds to Option B.
Hence, **Option B** is the correct answer.
Key Concepts to Understand
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