An auditor is most likely to inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of

An auditor is most likely to inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of

• A. Existence or occurrence
• B. Presentation and disclosure
• C. Completeness
• D. Valuation or allocation

Answer: (B)

The key idea here is how information about encumbered assets is shown to users. When inventories are pledged as collateral, the important risk is that the notes and overall presentation might not clearly reflect that those inventories are restricted, and what liabilities are secured by them. By inspecting loan agreements, the auditor verifies that the financial statements properly present and disclose the secured liabilities, the nature and extent of the lien, and any restrictions on the inventories. This ensures readers understand the true asset base and the associated obligations, which is a presentation and disclosure issue. It’s not mainly about whether the inventories exist, how much they’re worth, or whether every item is recorded; those aspects relate to existence, valuation, or completeness, whereas the disclosure of liens and collateral speaks to how the information is presented to users.

The key idea here is how information about encumbered assets is shown to users. When inventories are pledged as collateral, the important risk is that the notes and overall presentation might not clearly reflect that those inventories are restricted, and what liabilities are secured by them. By inspecting loan agreements, the auditor verifies that the financial statements properly present and disclose the secured liabilities, the nature and extent of the lien, and any restrictions on the inventories. This ensures readers understand the true asset base and the associated obligations, which is a presentation and disclosure issue. It’s not mainly about whether the inventories exist, how much they’re worth, or whether every item is recorded; those aspects relate to existence, valuation, or completeness, whereas the disclosure of liens and collateral speaks to how the information is presented to users.