[hermesconradcpa]

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

a. Tracing inventory items from the tag listing back to the physical inventory quantities.

b. Examining paid vendor invoices.

c. Scanning perpetual inventory, production, and purchasing records.

d. Performing cutoff procedures for shipping and receiving.

As far as my understanding goes, the physical inventory list is one document “above” the tag listings and the CPA test counts. In the Becker lecture there is a diagram that states that going from the inventory tags to the physical inventory list is considered a test of the completeness assertion, where as going from the physical inventory list to the inventory tags is considered a test of the existence assertion.

However, the answer states that, “Choice “a” is incorrect. Tracing items from the tag listing back to the physical inventory quantities is a test for the existence of the inventory on the tag listing. For the completeness assertion, the auditor should trace from the physical inventory quantities to the tag listing.”

Can somebody help clarify this diagram/answer? I don’t have any trouble understanding tracing/vouching for any other section other than this diagram Gearty drew.

[Anonymous]

I think it is D. By testing cutoff you are making sure all inventory is included in the correct period which has to do with completeness.

[SammyJ]

Hi hermesconradcpa,

I think the key to your problem is confusing the terms “physical inventory list” with “physical inventory quantities”. The list is an actual record detailing all the physical inventory on paper. The quantities are the actual goods on hand. For example, for Walmart, the list would be an actual 1000 page document showing us exactly the number of canned goods there are on the shelves and etc. The quantities are the actual canned goods which you can touch and feel.

And as a hint, a lot of times you can treat inventory tags as the same as inventory quantities. These tags are usually attached to the actual physical items.

So going from inventory tag to inventory listing– actual v. record –>Completeness (want to make sure everything we can touch and feel is recorded on paper)

And inventory listing to inventory tag– record v. actual –> Existence(want to make sure everything on paper is something we can go to the shelves and find physically.

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[SeattleAccountant]

@ SammyJ,

Great explanation, completely agree.

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[Anonymous]

The question is a good example of directional testing. Completeness refers to items being on record and in the correct period. I like the ‘recorded on paper' explanation. If the count is ‘recorded on paper' and in the correct period, then the Completeness assertion is supported.

[SeattleAccountant]

Yeap, the correct answer is “d” – just verified this by coming across the very same question as I've been going over final review of A-4.

Reason of why “a” is incorrect is that the direction of a test is incorrect in order to satisfy completeness assertion.

” For the completeness assertion, the auditor should trace FROM the physical inventory quantities TO the tag listing”, not the other way around.

Source: Becker + 2010 AICPA released questions.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[Author]

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