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4. Mr. B, an Articled Clerk responsible for the audit procedures concerning inventory, found that the inventory amounting to ` 38 lakhs, after excluding ` 2 lakhs of inventory that was held by PQ Ltd. as a consignee, has been recognized in the Balance Sheet. Which of the following assertions related to inventory are applicable in this situation? (I) Occurrence (II) Completeness (III) Rights & Obligations (IV) Measurement

Options

AI & II above
BII & III above
CIII & IV above
DI & IV above (2 Marks)
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Correct Answer

Option BII & 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.

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