Certified Internal Auditor (CIA) Practice Test

Which documentation is critical when assessing asset impairment during an audit?

1. Appraisal reports of assets.

2. Sales reports from the last quarter.

3. Budget forecasts for the next year.

4. Inventory turnover ratio.

The correct answer is: Appraisal reports of assets.

When assessing asset impairment during an audit, appraisal reports of assets are critical because they provide a professional valuation of the assets in question. These reports present detailed analyses of the assets' current worth, comparing it with their carrying amounts on the financial statements. If the appraisal indicates that the recoverable amount of an asset is less than its carrying value, this suggests that an impairment loss may have occurred. The appraisal reports often consider various factors, including market conditions, the condition of the asset, and projected future cash flows, which are all essential for accurately determining whether an asset has been impaired. This information allows auditors to make informed decisions regarding the necessary adjustments to the financial statements and to ensure that the reported values reflect the true economic reality of the entity's assets. Other types of documentation, such as sales reports or budget forecasts, while useful for understanding operational performance or future planning, do not directly address the valuation of individual assets for impairment assessment. Similarly, inventory turnover ratios provide insight into inventory management efficiency but are not sufficient on their own to evaluate the carrying value against the recoverable amount of specific assets. Thus, appraisal reports are indispensable in the context of assessing asset impairment.