Certified Government Auditing Professional (CGAP) Practice Exam

Which assertion is most relevant for assessing whether the balance sheet reflects obsolete inventory?

1. Rights and obligations

2. Valuation

3. Presentation and disclosure

4. Completeness

The correct answer is: Valuation

The valuation assertion is particularly relevant when assessing whether the balance sheet accurately reflects obsolete inventory because it focuses on ensuring that assets are recorded at their appropriate value. In the context of inventory, this means determining that the carrying amount of the inventory does not exceed its net realizable value. When inventory becomes obsolete, its value diminishes, and it is crucial for auditors to verify that such inventory is either written down or disclosed properly in the financial statements. When evaluating inventory, if the obsolete inventory is not valued correctly, it can lead to a misstatement of the total inventory on the balance sheet and, consequently, the overall financial health of the entity. Thus, understanding how to properly assess and report the valuation of obsolete inventory is critical in ensuring that the balance sheet presents a true and fair view of the organization’s financial position. The other assertions relate to different aspects of financial reporting: rights and obligations pertain to ownership and legal claims on assets; presentation and disclosure ensure that information is shown clearly and comprehensively; completeness refers to whether all necessary items have been included in the financial statements. While these assertions are important in their own contexts, the direct impact of obsolete inventory is most closely tied to the valuation assertion.