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Hi,
I have seen several times in the question bank, for example, Kaplan Exam Kit Q113, and I am getting it hard to get it into my head – especially the logic.So the issue is that whenever there is a chance that inventory quantity might be misstated, the book always says this does not affect valuation. As in, if inventory is overstated – it affects quantity but will not represent an overvaluation.
I have seen several variants of this type of response ( quantity does not affect valuation assertion, only existence).
If you have overcounted 3rd party inventory in a stock count, surely then this would mean your value of inventory is overstated and overvalued? If you have made a mistake and counted an extra 10 laptops, your inventory will be overvalued by 10 x £1000 surely? Why does the book keep saying incorrect quantity of stock does not impact the valuation assertion,
Thanks in Advance,Henry
I don’t have a current edition kit to know what it is that you are reading to put what you say it is saying in context.
The existence assertion concerns quantities – were there 10 items, 100 items or 1,000 items?
The valuation assertion concerns measurement of inventory at the lower of cost and net realisable.
Yes it is true that if inventory quantities are wrong, the amount in the financial statements will be wrong, but that would be because the assertions of completeness and existence have not been met … it does not mean that inventory has not been correctly stated at the lower of cost and NRV (e.g. production overheads have been included in cost and/or sufficient allowance has been made for damaged items).
Thanks so much for the reply. Sorry it was the 2022 edition.
I understand, just need to get that logic in my head that valuation concerns more the method used and how it’s valued, not as much the final value figure? Valuation does not really encapsulate the overall final figure? I think I have understood you correctly there, so thanks if so 🙂
Can’t seem to get the Assertions clarified in my head!
Learn the assertions note on page 86 of our notes:
Learn the assertions:
? Note that completeness, accuracy, classification and presentation are relevant to both
‘transactions and events’ and ‘account balances’ and their related disclosures.
? Understand that occurrence and cut-off relate only to transactions and events.
? Understand that existence, rights and obligations and valuation and allocation relate only to
account balances.You may find this post helpful https://opentuition.com/topic/audit-procedures-assertions-2
Thanks. I have learned the list of them, and split between both types TE – COPACC and AB – COPERC for my memory. My struggle is really with knowing which one does what and mixing them up ( like above lol), although it is probably due to lack of practice. I will get working on that now though, thanks so much for link.
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