CPA · Question 20 · Area III: Performing Procedures
Scenario: An auditor is testing the existence of inventory for a retail client with multiple locations. The auditor observes the physical count at the main warehouse but not at the smaller retail stores. The retail stores hold 30% of the total inventory value. The auditor performs analytical procedures on the retail store inventory and finds the gross margins to be consistent with prior years. <br/><br/>Is this evidence sufficient and appropriate to support the existence assertion for the retail store inventory?
Answer options:
Yes, because the retail stores individually are not material.
Yes, because analytical procedures provide sufficient assurance for existence when combined with observation of the primary location.
No, because observation of physical inventory is a required procedure for material inventory balances unless impracticable.
No, unless the auditor obtains a management representation letter specifically covering the retail stores.
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