Audit and Assurance Practice Exam

Which procedure would be used to test the valuation or allocation assertion for inventory?

1. Inquire about sales adjustments related to markdowns

2. Perform random checks on employee hours

3. Review all shipping documents

4. Trace inventory adjustments from reports

The correct answer is: Inquire about sales adjustments related to markdowns

The procedure that accurately tests the valuation or allocation assertion for inventory involves examining sales adjustments related to markdowns. This assertion is crucial because it ensures that inventory is recorded at the appropriate value, reflecting its lower market value when necessary. By inquiring about sales adjustments, especially markdowns, auditors can assess whether the inventory has been adjusted appropriately in the financial statements to align with its realizable value. Discounts or markdowns can significantly impact the valuation of inventory; if these adjustments are not properly made, it could lead to overstatement of inventory values. The other procedures don’t directly address the valuation or allocation of inventory. Performing checks on employee hours relates to payroll and labor costs rather than inventory valuation. Reviewing shipping documents focuses more on the completeness and existence of inventory rather than its valuation. Tracing inventory adjustments could provide insights into accuracy and completeness but does not directly validate whether the recorded value is appropriate considering factors like market conditions. Thus, inquiring about sales adjustments is the most relevant and effective approach to testing the valuation assertion for inventory.