Audit and Assurance Practice Exam

What would be a substantive procedure for testing the existence of inventory?

1. Perform year-end cutoff tests

2. Analyze sales trends

3. Conduct employee interviews

4. Review supplier contracts

The correct answer is: Perform year-end cutoff tests

Performing year-end cutoff tests is a substantive procedure designed to ensure that transactions are recorded in the appropriate accounting period and that inventory is accurately reflected in the financial statements. This procedure helps verify the existence of inventory by confirming that all goods produced, received, or sold around the year-end have been properly accounted for in the correct periods. By examining transactions occurring just before and after the year-end, the auditor can establish a clear picture of what inventory is on hand at the reporting date, thus supporting the assertion of existence. In achieving the objective of testing inventory existence, focusing on cutoff tests is critical because it addresses issues of timing and recognition, which could otherwise conceal inaccuracies about inventory levels. While the other choices may provide context or information around inventory, they do not directly substantiate the physical presence of the inventory itself, making them less effective for this specific purpose. Conducting employee interviews might give insight into inventory practices, but it doesn’t provide direct evidence of inventory existence. Analyzing sales trends might indicate inventory turnover rates but does not confirm what inventory exists at year-end. Reviewing supplier contracts can strengthen understanding of procurement commitments but does not directly verify the actual inventory on hand.