In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions.

Required:
Hillmart is a retail department store that purchases all goods directly from wholesalers or manufacturers. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.)

Audit Procedure:
1. Examine current vendor price lists.
2. Review drafts of the financial statements.
3. Select a sample of items during the physical inventory count and deter-mine that they have been included on count sheets.
4. Select a sample of recorded items and examine supporting vendor invoices and contracts.
5. Select a sample of recorded items on count sheets during the physical inventory count and determine that items are on hand.
6. Review loan agreements and minutes of board of directors’ meetings.

Specific Assertion
a. Ensure that the entity has legal title to inventory (rights and obligations).
b. Ensure that recorded inventory quantities include all products on hand (completeness).
c. Verify that inventory has been reduced, when appropriate, to replacement cost or net realizable value (valuation).
d. Verify that the cost of inventory has been properly determined (accuracy).
e. Verify that the major categories of inventory and their bases of valuation are adequately reported in the financial statements (completeness and accuracy and valuation for presentation and disclosure).

Audit Procedure