An auditor is assessing the risk of material misstatement for a nonissuer's inventory. The company manufactures high-tech components that are subject to rapid obsolescence. Which assertion is MOST at risk?

Answer options:

Existence.

Rights and Obligations.

Valuation and Allocation.

Completeness.

How to approach this question

Link the business risk (obsolescence) to the financial statement assertion (Value).

Full Answer

C.Valuation and Allocation.✓ Correct

Valuation and Allocation.

Rapid obsolescence means the inventory may not be salable at its recorded cost. This directly impacts the 'Valuation and Allocation' assertion, specifically the requirement to report inventory at the lower of cost or net realizable value.

Common mistakes

Selecting Existence because the inventory is 'high risk', but the physical items are likely there.

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