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what are assertions?
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what is existence or occurrence
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Audit Quiz 3
| Question | Answer |
|---|---|
| what are assertions? | expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information on the financial statements |
| what is existence or occurrence | assets or liabilities of the company exist at a given date and recorded transactions have occurred during a given period |
| what assertion relates to an account being potentially overstated? | existence or occurrence |
| what assertion relates to an account being potentially understated? | completeness |
| what is completeness | all transactions and accounts that should be presented in the financial statements are included |
| what is valuation or allocation | asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts |
| what is rights and obligations | the company holds or controls rights to the assets and liabilities are obligations of the company at a given date |
| what is presentation and disclosure | the components of the financial statements are properly classified, described, and disclosed |
| how would you confirm a company's disclosures for a machine are correct? (presentation and disclosure) | - is it recorded? - is the depreciation schedule disclosed? - is the asset properly classified as long-term? |
| how would you confirm a company has valued its machine correctly? (valuation) | - inspect purchase invoices - recalculate depreciation expense |
| how would you confirm existence for a company's accounts receivable? | - confirm in writing |
| how would you confirm rights and obligations for a company's accounts receivable? | - read contracts - look for payments - ask management |
| how would you confirm accuracy, valuation, and allocation for a company's accounts receivable? | test the allowance for doubtful accounts |
| why is completeness not a big risk for accounts receivable? | companies are not motivated to understate their assets |
| what is audit evidence? | all the information from whatever source used by the auditor in arriving at the conclusions on which the audit opinion is based |
| what are the 3 concepts of audit evidence? | 1. nature of audit evidence 2. sufficiency and appropriateness of audit evidence 3. evaluation of audit evidence |
| what are the different natures of audit evidence you can use? | accounting records, checks, invoices, contracts, journal entries, spreadsheets, meeting minutes, third party reports, industry analyst reports, competitor data |
| what is sufficiency | measure of the quantity of audit evidence |
| what is the relationship between the risk of misstatement and the quantity of audit evidence | greater risk of misstatement requires a higher quantity of audit evidence |
| what is the relationship between the quality of audit evidence and the quantity of audit evidence | higher quality audit evidence results in a lower quantity of audit evidence |
| what is appropriateness | measure of the quality of audit evidence |
| what is relevance | relationship to the assertion or objection of the control being tested |
| what is reliability | refers to whether a particular type of evidence can be relied upon to signal the true state of an assertion |
| how does the source of the evidence relate to reliability? | external experts are more reliable than internal experts |
| how do the effectiveness of internal controls relate to reliability? | effective controls yield more reliable audit evidence |
| how does the auditor's direct personal knowledge relate to reliability? | direct observation of evidence is better than evidence obtained indirectly |
| how does documentary evidence relate to reliability? | evidence that is tangible in document form is better than oral representation |
| how do original documents relate to reliability? | original signed copies of agreements are better than photocopies or PDFs |
| what does it mean for evidence to be persuasive? | auditor should rely on evidence that is persuasive rather than convincing/conclusive -- auditors can't 100% guarantee their opinion so evidence should point/persuade them in a particular direction |
| what are audit procedures? | specific acts performed by the auditor to gather evidence about whether specific assertions are being met |
| what is an audit program? | a set of audit procedures prepared to test assertions for a component of the financial statements |
| what are the 3 categories of audit procedures? | 1. risk assessment procedures 2. tests of controls 3. substantive procedures |
| what are the 2 parts of substantive procedures? | tests of details and analytical procedures |
| why is inspection of records and documents important? | evidence obtained from external documents is more reliable than evidence obtained from internal documents |
| what direction does vouching/occurrence/existence go | comparing journal/ledger to source documents |
| what direction does tracing/completeness go | comparing source documents to journal/ledger |
| what does inspection of tangible assets involve and what assertions does it test | physical examination of a tangible asset; tests existence but not rights and obligations |
| what does observation involve? | watching a process or procedure being performed by others |
| what does inquiry involve? | asking clear, concise, and relevant questions |
| what does confirmation involve? | obtaining a representation of information or of an existing condition directly from a third party |
| what does recalculation involve? | determining the mathematical accuracy of documents or records |
| what does reperformance involve? | auditor's independent execution of procedures or controls that were originally performed by company personnel |
| what are examples of accounts that auditors would test with recalculation | depreciation expense, accrued interest, sales invoices |
| what are examples of things auditors would test with reperformance | aging of accounts receivable, agreeing total of subsidiary and general ledgers, test counting raw material, tracing billing program price use |
| what do analytical procedures involve? | evaluations of financial information made by a study of plausible relationships among financial and non financial data |
| what does scanning involve? | reviewing accounting data to identify significant or unusual items |
| which 3 evidence types have the highest reliability? | inspection of tangible assets, reperformanc,e recalculation |
| which 2 evidence types have lower reliability? | observation, inquiry |
| type of audit evidence and assertion: trace from receiving reports to vendors' invoices and entry in the acquisitions journal | inspection of documents; completeness |
| type of audit evidence and assertion: add the sales journal for the month of July and trace amounts to the general ledger | recalculation; valuation |
| type of audit evidence and assertion: examine expense voucher packages and related vendors' invoices for approval of expense account classification | inspection; presentation/disclosure |
| type of audit evidence and assertion: observe opening of cash receipts to determine that cash receipts are promptly deposited and recorded | observation; completeness |
| type of audit evidence and assertion: ask the accounts payable clerk about procedures for verifying prices, quantities, and extensions on vendors' invoices | inquiry; valuation |
| type of audit evidence and assertion: vouch entries in sales journal to sales invoices and related shipping documents | inspection; occurrence/existence |
| why is completeness a greater risk for a liability account? | companies are motivated to understate liabilities |
| why is existence/occurrence a greater risk for an asset account? | companies are motivated to overstate assets |
| what are the 3 functions of audit documentation? | 1. provide support for the audit report 2. aid in planning, performance, and supervision of the audit 3. provide basis for quality reviews and evidence supporting auditors' significant conclusions |
| what is the purpose of risk assessment procedures? | used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures |
| what is the purpose of substantive analytical procedures? | used to obtain evidential matter about particular assertions related to account balances or classes of transactions |
| what is the purpose of final analytical procedures? | used as an overall review of the financial information in the final review stages of the audit |
| how do auditors develop an expectation when using analytical procedures? | look at sources like financial and operating data, budgets and forecasts, industry publications, competitor information, managements' analyses, analysts' reports |
| how do auditors define tolerable difference | size should depend on the significance of the account, desired degree of reliance on the substantive analytical procedures, level of disaggregation in the amount being tested, precision of the expectation |
| what is vouching? | selecting an item for testing from the accounting records and examining the source documents |
| what is tracing? | selecting a source document and following it into the journal/ledger |
Created by:
graceatnyu