What are the management assertions for sales that the auditor should be most concerned about?

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ourteen standard audit procedures used in an audit 'FIVE CARROT CARS:- Footing; crossfooting; recalculation- Inquiry- Vouching- Examination/Inspection- Confirmation- Analytical Procedures- Reperformance- Reconciliation- Observation- Tracing- Cut Off Review- Analyse related accounts simultaneously- Client Rep Letter- Subsequent Reviews----------------------------------------------------------------------------------------------------------------------------------------Most relevant Assertions for accounts (B/S Accounts)1) Completeness (most relevant to liabilities)2) Valuation ,Allocation, Accuracy3) Existence and Occurrence (most relevant to assets)4) Right and Obligations----------------------------------------------------------------------------------------------------------------------------------------Most Relevant Assertion for Revenue Accounts (Transactions)1) Completeness(expense)2) Valuation, Allocation and Accuracy3) Existence and Occurrence (Revenue)4) Understandability and Classification5) CutOff----------------------------------------------------------------------------------------------------------------------------------------Assertions for Presentation1) Completeness2) Valuation Accuracy and Allocation3) Understandability and Classification (Most relevant)4) Rights and Occurrence----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the completeness assertion?- Tracing- Analytical review- Observation----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the valuation, allocation, and accuracy assertion?- Inspection- Footing- Independent recalculation- Reconciliation----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the existence and occurrence assertion?- Confirmation- Observation, inspection, and examination- Vouching----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the understandability and classification assertion?- Inspection- Review- Inquiry of management----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the rights and obligations assertion?-Inspection
Valuation and AllocationThis is a Management Assertion.The Valuation and Allocation assertion addresses whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
CompletenessThis is a Management Assertion.Relating to TransactionsCompleteness relates to whether all transactions that occurred during the period have been recorded. For example, if a client fails to record a valid revenue transaction, the revenue account will be understated. The completeness assertion is more focused on expense and liability accounts.Relating to Account BalancesCompleteness addresses whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included. For example, management implicitly asserts that the ending balances shown for accounts payable on the balance sheet includes all such liabilities as of the balance sheet date.Relating to Presentation and DisclosureThis assertion relates to whether all disclosures that should have been included in the financial statements have been included.
ExistenceThis is a Management Assertion.Existence addresses the assertion of whether ending balances of assets, liabilities, and equity interests included in the financial statements actually exist at the date of the financial statements. Auditors will often "vouch for existence" by starting from an ending balance of an account and finding the supporting transactions making up that balance.
Events and circumstances that would create contingent liabilities, such as lawsuits, are the types of matters that are addressed at director meetings. Reading minutes of board meetings may provide evidence of contingent liabilities.
An entity may expense a disbursement that should have been capitalized and will often do so by recognizing the cost as repairs and maintenance. Reviewing the repairs and maintenance account may alert the auditor to disbursements that were inappropriately expensed. Since many capital assets are financed, a review of cash may not reveal large disbursements that should be capitalized. A review of depreciation expense will only provide information about fixed assets that have been properly capitalized. Not all capital assets are subject to property taxes and reviewing property tax expense would not provide reliable information.
An auditor analyzes repairs and maintenance expense to determine if it includes items that were reported as expense but should have been capitalized. The auditor can determine that obsolete equipment is written off and that recorded assets actually exist by comparing the reported amounts to actual assets, not by reviewing repairs and maintenance expense. The auditor can identify equipment that should be written off by an observation of the equipment, but not with a review of repairs and maintenance expense.
This will increase AR responses=Including a list of items or invoices making up an account balance reduces the amount of effort a customer will have to apply to respond to the confirmation, increasing the likelihood that it will be responded to.
Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? When confirmation recipients are likely to sign other types of positive confirmations without careful investigation, there is also a likelihood that a similar lack of investigation will be applied when responding to accounts receivable confirmations. Use of a blank form would require a recipient to research the information being requested rather than simply approve it without investigation.
Which of the following fraud schemes might be detected through the use of a bank cutoff statement?If checks written near year-end are held before being mailed, they will take longer than a normal amount of time to clear the entity’s bank account, which may be detected by examining a bank cutoff statement.
A standard bank confirmation will provide information about balances in deposit accounts and balances of outstanding loans as of the balance sheet date. It also provides information about arrangements related to compensating balances and collateral for loans. It does not ordinarily provide information about the dates on which inactive accounts were closed.
When testing investments in equity securities of publicly held entities, the auditor prepares a schedule of dividends received and compares it to dividend information available to the public. Which assertion is the auditor testing?By comparing dividends received to publicly available information, the auditor can determine if the dividends recognized by the entity reconciles to the dividends that had been declared and paid to investors during the period. A discrepancy may indicate that dividends were received for securities that were not included in the accounting records, indicating the records may be incomplete.
When securities are held by an independent custodian on behalf of an entity, the custodian can confirm the existence of the investment securities and their ownership. Custody of securities provides evidence of ownership, which the auditor will obtain by observation of securities on hand.
Since derivatives are required to be reported at fair value, using the Black-Scholes-Merton model to measure the fair value of stock options, which are derivatives, and comparing them to their carrying values would provide evidence about management’s assertion related to valuation and allocation. Confirming terms of an interest rate swap, a form of derivative, would provide evidence of existence and rights and obligations, but not about valuation and allocation. Marketable securities are not necessarily derivatives and observing a physical count provides evidence about existence, not about valuation and allocation. Evaluating management’s documentation measuring the effectiveness of cash flow hedges will support whether changes in value are properly classified as a component of income or other comprehensive income, related to management’s classification assertion.
Since replacement cost is considered the market value of inventories, subject to floor and ceiling limitations, determining replacement cost will enable the auditor to evaluate the client’s valuation of inventory at the lower of cost or market. Tracing inventories to purchase documents provides evidence of rights and obligations. Tracing inventory counts to accounting records tests the assertion of completeness. Tracing items reported to inventory counts tests the assertion of existence.
Reviewing shipping terms for inventory in transit will provide evidence about whether goods in transit should or should not be included in the amount reported for inventory, but will not provide information about the accuracy of the physical count. Evaluating internal controls related to the maintenance of perpetual inventory records provides the auditor with evidence as to the reliability of those records and, as a result, the amounts reported as inventory.
The auditor will analyze inventory turnover rates and make inquiries of production supervisors and inventory control personnel to determine if inventory contains slow-moving or obsolete items. If that is the case, the items should be written down, reducing the carrying value of inventory and related to the valuation and allocation assertion.
Tracing inventory to purchase documents provides evidence that the entity actually purchased goods included in inventory, supporting the rights and obligations assertion. It also provides the auditor evidence of the cost of the inventory, which can be used in cost or market evaluations, supporting the valuation and allocation assertion.
By selecting items from the accounting records and observing them in the entity’s factory, the auditor can determine that items that are included in the accounting records actually do exist. Tracing items seen on the factory floor to the accounting records provides evidence that the accounting records are complete. Tracing items from the accounting records to purchase documents provides evidences of rights and obligations. Evaluating the entity’s policies for capitalizing and expensing costs related to equipment acquisitions provides evidence about valuation and allocation.
An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity’s manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion?By comparing an entity’s volume to the capacity of its factory, the auditor can determine if the amount of equipment the entity asserts that it has is reasonable based on how much the entity is producing.
By examining the repairs and maintenance account, the auditor can determine if items that should have been capitalized as property, plant, and equipment were inappropriately recognized as expense and excluded from recorded amounts. Completeness.
When equipment is sold at a significant gain, it raises question as to the useful life, salvage value, and method of depreciation that was being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.
Tracing equipment that has been observed by the auditor to its inclusion in the accounting records provides the auditor with evidence that the accounting records are complete and include all equipment that the entity has.
Tracing payable to the original transaction documentation will provide evidence that the entity actually entered into the transaction and received the goods or services ordered, supporting existence and rights & obligations. The documentation will show amounts which supports the valuation and allocation assertion. To obtain evidence about completeness, the auditor would trace items from the original documentation to the accounting records.
Tracing subsequent payments to amounts included on the accounts payable listing will provide evidence that all amounts that the entity was liable for and ultimately paid had been recorded, supporting completeness. Tracing items on the accounts payable listing to subsequent payments, tracing amounts recorded to original transaction documentation, and sending confirmations to vendors included on the accounts payable listing will provide evidence that the items on the list are legitimate, supporting existence, rights & obligations, and valuation & allocation, but not completeness.
Reviewing minutes of board of director meetings will provide evidence as to when the board has approved financing transactions, which can then be traced to recorded liabilities to make certain that amounts recorded are complete and include all loans. Tracing loans to original documentation or to subsequent payments and confirming loans with creditors will provide evidence about the existence of the loans, the entity’s rights and obligations in relation to the loans, and the correctness of the amount, supporting valuation and allocation.
PRESENTATION/DISCLOSURE = Inquire, InspectEXIST = Vouch, Observe, ConfirmRIGHTS/OBLIGATION = Inspect, Inquire, ConfirmCOMPLETENESS = Cutoff, Analytical, TraceVALUE = Reconcile, Recalculate, AnalyticalOCCURANCE = Confirm, VouchCLASSIFICATION = Inspect
An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value will result in a misstatement of the income recognized under the equity method and would misstate the return on investment.
An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by?By comparing dividends received to publicly available information, the auditor can determine if the dividends recognized by the entity reconciles to the dividends that had been declared and paid to investors during the period. A discrepancy may indicate that dividends were received for securities that were not included in the accounting records, indicating the records may be incomplete.
Assertions are claims in the financial statements made by management. The existence assertion for an asset such as property, plant, and equipment involves determining whether the asset actually exists on a given date. By personally inspecting additions to property, plant, and equipment, the auditor satisfies the existence assertion. The “presentation and disclosure” assertion involves judging whether an asset is properly classified in the financial statements. Visually inspecting an asset does not sufficiently determine whether the financial statements are properly prepared.
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:?The key to this type of question is to ask, “What does the evidence obtained by this procedure prove?” and “What question does this procedure help answer?”When the auditor reviews the credit ratings of customers with delinquent accounts receivable, the question being asked is, “Will we really collect this much for this receivable?” or “Is this receivable really worth this much?” Thus, the procedure is providing evidence about the valuation and allocation assertion. The delinquency of receivables indicates that the accounts may not be paid. Thus, the ability of the customers to pay, as reflected in their credit ratings, may corroborate or contradict the carrying amount of accounts receivable; that is, evidence may indicate the need either to allow for the possible uncollectibility of the accounts or to write off the receivable directly, thereby reducing the carrying value of receivables.
The auditor must identify the relevant assertions by determining the source of likely potential misstatements for each significant?The auditor must identify the relevant assertions by determining the source of likely potential misstatements in each significant class of transactions, account balance, and presentation and disclosure. For example, the inventory asset account balance may have a likely potential misstatement due to shipped items that have not been removed from inventory. This potential misstatement would relate to the cutoff assertion.
Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:?CutoffAssertions about cutoff deal with recording items in the proper period. Completeness deals with whether all transactions and accounts that should be presented in the financial statements are included.In this case, the sales have been recorded, so the records are complete, but they have been recorded in the incorrect period, which is a cutoff issue.
Assertions are declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08). Assertions are representations by management that are embodied in the account balance, transaction class, and disclosure components of the financial statements (AU-C 315.A114).Assertions about classes of transactions include the following:OccurrenceCompletenessAccuracyCutoffClassificationAssertions about account balances at the period end include the following:ExistenceRights and obligationsCompletenessValuation and allocationAssertions about presentation and disclosure include the following:Occurrence and rights and obligationsCompletenessClassification and understandabilityAccuracy and valuationThe independent auditor's work in forming an opinion on the financial statements consists primarily of obtaining and evaluating audit evidence concerning these assertions.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be?The key to this type of question is to ask: Which set of items will indicate whether every amount that should be recorded has been? Is the selected item, which should be recorded, actually recorded? Should this selected item, which is not recorded, actually be recorded?In this case, the questions concern the completeness assertion, which states that all amounts are included and none is omitted. With respect to the completeness of accounts payable, you should ask: Which population will indicate where all accounts payable are recorded? Does the auditee owe some amount to anyone else?Thus, the auditor must select from a population containing items that are not included but which possibly should be. For accounts payable, confirmation with vendors with whom the entity has previously done business, but to whom no recorded payable balance is due, is the appropriate population (“If the auditee asks this vendor if any amount is owed, will the answer be zero?”) Responses from a vendor to whom the client does owe a payable would reveal an unrecorded (i.e., incomplete) liability.Keep in mind that the question asks about populations appropriate for confirmation for completeness. The other three populations listed are appropriate for other procedures; mere comparison of amounts recorded in the accounts payable subsidiary ledger to payees of checks drawn in the month after the year-end or to invoices filed in the entity's open invoice file may reveal an unrecorded liability. However, confirmation of a recorded amount is unlikely to provide any additional evidence about completeness.
Obtaining and understanding internal controls involves which of the following?Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented.Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements. The auditor should consider the design of a control in determining whether to consider its implementation. An improperly designed control may represent a material weakness in the entity's internal control and the auditor should consider whether to communicate this to those charged with governance and management.Implementation of a control means that the control exists and that the entity is using it.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that?Accounts receivable turnover is affected by the balance in accounts receivable, so fictitious credit sales could be the cause. The other answer choices would not cause the turnover ratio to decrease.If fictitious sales were recorded, the net credit sales (numerator) would increase. Since the sales are not real, the ending accounts receivable balance would also be higher than normal. These “fake” receivables are also not being repaid. This in turn, means that the average receivables (denominator) would get larger. This would in all likelihood result in a lower receivable turnover ratio.
Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA?CPAs are independent contractors, not employees; as a result, they have legal title to their workpapers. The CPA's ownership of the workpapers is custodial and cannot be transferred without the client's permission. Exceptions include subpoena by a federal court or agency, or inspection by an AICPA or state society quality review team. A seller of an accounting practice must obtain permission of the client before transfer to a buyer of the practice.
A primary advantage of using data extraction software packages to audit the financial statements of a client that uses an EDP system is that the auditor may?Data extraction programs have the following advantages:They allow the CPA a high degree of independence.They reduce the CPA's required level of EDP expertise and training.They access a wide variety of client records interchangeably without special programming and only a limited knowledge of the client's hardware and software features.They allow the CPA to totally control program execution.They use the speed and accuracy of the computer.
Regardless of the assessed risk of material misstatement, an auditor would perform?AU-C 330.18 explains that irrespective of the assessed risk of material misstatement, the auditor should design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure. AU-C 330.A9 states that effective controls reduce, but do not eliminate, the risk of material misstatement.
When a disbursement is reported on January of 1 period and the receipt in December of the preceding period, it indicates that either the disbursement was recorded too late or the receipt too early. In either case, cash would be overstated as a result of showing money in without showing money out. When transfers are recorded in the same period by the receiver as by the disbursing entity, cash will not be misstated. When the bank records the amounts is not relevant.
The statement of cash flows converts the income statement and changes in balance sheet items into cash receipts and disbursements. The auditor should be able to reconcile amounts on the statement of cash flows to the other financial statements. The auditor may vouch a sample of cash receipts and disbursements to obtain evidence about revenues, expenses, or internal controls, but not to evaluate the statement of cash flows. A reconciliation of the bank cutoff statement will provide information about the bank balance but not cash flows. The auditor may confirm the ending balance with the entity’s financial institution, but not the individual
Information about dividends paid by publicly-held entities is a matter of public record. The most reliable and efficient way to obtain evidence about dividend income received from public entities would be to access the information on the Internet. Decisions to purchase or sell securities might be discussed at a board meeting but dividends are not likely to be a topic of discussion.
Depending on the fluctuating value of an underlying, a derivative can represent an asset or an obligation. An auditor would examine derivative documentation to determine if there are obligations that require disclosure or accrual.
When securities are held by an independent custodian on behalf of an entity, the custodian can confirm the existence of the investment securities and their ownership. Custody of securities provides evidence of ownership, which the auditor will obtain by observation of securities on hand.?An auditor is establishing procedures for testing management’s assertion regarding rights and obligations in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about rights and obligations?
When equipment is sold at a significant gain, it raises question as to the useful life, salvage value, and method of depreciation that was being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.
Principal limitations concerning analytical procedures include (1) The guidelines for evaluation may be inadequate (e.g., Why is an industry average good? Why should the ratio be the same as last year?)(2) It is difficult to determine whether a change is due to a misstatement or is the result of random change in the account.(3) Cost-based accounting records hinder comparisons between firms of different ages and/or asset compositions.(4) Accounting differences hinder comparisons between firms (e.g., if one firm uses LIFO and another uses FIFO the information is not comparable).(5) Analytical procedures present only "circumstantial" evidence in that a "significant" difference will lead to additional audit procedures as opposed to direct detection of a misstatement.
Timing (1) The higher the risk of material misstatement, the more likely it is that the auditor may decide it is more effective to (a) Perform substantive procedures nearer to, or at, the period end rather than at an earlier date, or(b) Perform audit procedures unannounced or at unpredictable times (2) If the auditor performs tests of operating effectiveness of controls or substantive procedures before period end, the auditor should consider the additional evidence that is needed for the remaining period (3) Other timing considerations (a) Control environment strength(b) When relevant information is available (e.g., electronic files may subsequently be overwritten)(c) Nature of risk (e.g., risk of inflated revenues to meet earnings expectations)(d) Period or date to which audit evidence relates
An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice? Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
Long-Term Debt a. Special audit considerations for long-term debt (1) Overall approach. Despite the fact that this account’s turnover rate is low, considerable analysis is performed on its ending balance. Confirmations are frequently used; recall that when the debt is owed to banks, confirmation is obtained with the standard bank confirmation. In addition, minutes of director and/or stockholder meetings will be reviewed to determine whether new borrowings have been properly authorized.The proceeds of any new borrowings are traced to the cash receipts journal, deposit slips, and bank statements. Repayments are traced to the cash disbursements journal, canceled checks, and canceled notes. If a debt trustee is used, it will be possible to obtain information through use of a confirmation whether the repayments have been made.
Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide?Corroborative audit evidence.
1.Type 1—make an adjusting entry to adjust the financial statements a. Examples (adsbygoogle = window.adsbygoogle || []).push({}); (1) Settlement of litigation for an amount different from the liability recorded in the accounts, assuming the event causing the litigation occurred before year-end (2) Loss on an uncollectible account receivable as a result of a customer’s deteriorating financial condition that led to bankruptcy subsequent to the balance sheet date NOTE: Think about the above example. Although the customer filed for bankruptcy after year-end, an adjustment is appropriate because filing for bankruptcy was simply the conclusion of the condition—deteriorating financial position—which began prior to year-end. 2.Type 2—disclose in notes to the financial statementsa.Examples(1)Sale of bond or stock issue(2)Purchase of a business(3)Litigation settlement, but only when the litigation is based on a post-balance-sheet event (a) Because of the time involved with litigation, this would presumably be rare (4)Fire or flood loss(5)Receivable loss, but only when the loss occurred due to a post-balance-sheet event such as a customer’s major casualty arising after the balance sheet date
Auditors typically confirm consigned inventory and inventory in warehouses. Some companies store inventory items in public warehouses. In such a situation, the auditor should confirm in writing with the custodian that the goods are being held. Additionally, if such holdings are significant, the auditor should apply one or more of the following procedures: (a) Review the client's control procedures relating to the warehouseman.(b) Obtain a CPA's report on the warehouseman's internal control.(c) Observe physical counts of the goods.(d) If warehouse receipts have been pledged as collateral, confirm with lenders details of the pledged receipts.
An examination of the balance in the accounts payable account as a part of a financial statement audit is ordinarily not designed to?Verify that accounts payable were properly authorized. This answer is correct because proper authorization is an internal control principle that an auditor examines by testing controls. Proper authorization only suggests that related account balances are more likely to be correct. Based on this reliance the auditor adjusts his/her substantive tests of account balances accordingly. Additionally, account balances may be correct whether they are properly authorized or not.
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?Auditor judgment.This answer is correct because the measure of the validity of evidence for audit purposes is based upon the judgment of the auditor. This audit judgment is used to estimate levels of materiality, and relative risk.
To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?This answer is correct because a debit to sales returns with a credit to accounts receivable is a normal entry for returns and is one which would not appear questionable. Therefore, the auditor would expect an experienced bookkeeper to charge sales returns in a defalcation involving accounts receivable.
Subsequent period auditing procedures 1. Certain procedures are applied to transactions after year-end a. To assure proper year-end cutoffb. To help evaluate asset and liability valuation 2. In addition, the CPA should perform other procedures near completion of fieldwork to identify subsequent events a. Read latest interim statements (1) Make comparison with other data b. Discuss with management (1) Existence of contingent liabilities(2) Significant changes in shareholders’ equity items(3) Statement items accounted for on tentative data(4) Unusual adjustments in the subsequent period c. Read minutes of Board of Directors and other committees (1) Make inquiries when minutes are not available d. Obtain lawyer’s letter on (1) Litigation(2) Impending litigation, claims(3) Contingent liabilities
Close333 Management Representations Overall Objectives and Approach —This section establishes a requirement that auditors obtain written representations from management (representation letters) as part of any audit and provides related guidance. A. Reliance upon management’s representations 1. Written representations by management to an auditor (in a representation letter) a. Confirm representations explicitly or implicitly provided throughout the auditb. Indicate and document the continuing appropriateness of such representations, andc. Reduce the possibility of misunderstanding 2. Although written representations are not a substitute for other necessary audit procedures, in some cases they provide additional audit evidence a. For example, as to management’s intent to discontinue a line of business 3. If a representation is contradicted by other audit evidence, the auditor should investigate the circumstances and consider whether reliance upon other representations during the audit is appropriate and justified B. Written representation obtained 1. Representations should be obtained for all financial statements and periods covered by the auditor’s report2. Representations should be tailored by engagement, but should include the following matters:a. Financial statements (1) Management acknowledges its responsibility for the financial statements being prepared in conformity with GAAP(2) Management believes financial statements presented in conformity with GAAP(3) Management believes effects of uncorrected financial statement misstatements are immaterial, both individually and in the aggregate b. Completeness of information (1) Availability of all financial records and related data(2) Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors(3) Communications from regulatory agencies(4) Absence of unrecorded transactions c. Recognition, measurement, and disclosure (1) Management’s acknowledgement of its responsibility to design and implement programs and controls to prevent or detect fraud(2) Information concerning fraud or suspected fraud affecting the company(3) Information concerning any allegations of fraud or suspected fraud affecting the company, for example, because of communications from employees, former employees, analysts, regulators, short sellers, or other investors
CloseUsing analytical procedures at various stages of the audit Risk assessment (also referred to as analytical procedures used to plan the audit) —Identify aspects of the entity of which the auditor was unaware and assist in assessing the risks of material misstatement. As such these tests help the auditor to determine the nature, timing, and extent of tests. Substantive procedures —Obtain relevant and reliable audit evidence to substantiate accounts for which overall comparisons are helpful. Near the end of the audit —Assist the auditor when forming an overall conclusions about whether the financial statements are consistent with the auditor's understanding of the entity. NOTE: GAAS requires the use of analytical procedures during the risk assessment and near the end of the audit. Analytical procedures are not a required substantive test.
Before applying procedures at an interim date, an auditor should consider the incremental audit risk involved as well as whether performance of such interim procedures is likely to be cost-effective. As an illustration of a substantive test applied at an interim date, consider the confirmation of receivables as of November 30, one month prior to the client’s year-end.
An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertion of:?Assertions tested by the auditor for account balances at period end:Existence—Assets, liabilities, and equity interests exist.Rights and obligations—The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.Completeness—All assets, liabilities, and equity interests that should have been recorded have been recorded.Valuation and allocation—Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.The auditor would be testing for valuation and allocation by scanning the investment records just before and just after the year-end to determine that transfers have been recorded correctly. The question that this procedure helps answer is, “Are the investments recorded at the correct amount at year-end?”To obtain evidence regarding management's assertion of rights and obligations, the auditor would perform a procedure such as viewing stock certificates or other original evidence of purchases or sales. To obtain evidence regarding management's assertion of existence, the auditor would perform a procedure such as a confirmation with the investment company. The assertion of classification and understandability refers to financial statement disclosures. The auditor would be performing procedures that would determine if the investments were properly classified as long term and if the notes to the financial statements were clear and understandable.
In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of:?Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed (AU-C 315.A114). The auditor should determine that the retained earnings have been properly appropriated in accordance with the restrictions and that such restrictions have been disclosed.
Management's letter of representation would ordinarily include references to the following:Management's responsibilities, as set out in the terms of the audit engagement for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting frameworkManagement's acknowledgment of their responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or errorAcknowledgment of their responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraudSignificant assumptions used in making accounting estimates, including those measured at fair value, are reasonable.Related party relationships and transactions have been appropriately accounted for and disclosed.All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with the applicable financial reporting framework.Management provided the auditor with:access to all information, of which they are aware, that is relevant to the preparation and fair presentation of the financial statements such as records, documentation and other matters;additional information requested for the purpose of the audit; andunrestricted access to persons within the entity the auditor determined it necessary to obtain audit evidence.All transactions have been recorded in the accounting records and are reflected in the financial statements.Disclosure of the results of management's assessment of the risk that the financial statements may be materially misstated as a result of fraudManagement has no knowledge of any (or disclosed to the auditor all information that they are aware of regarding) fraud or suspected fraud that affects the entity and involves:management,employees who have significant roles in internal control, orothers when the fraud could have a material effect on the financial statements.Management's acknowledgement of (or no knowledge of any; or disclosure to the auditor of all information that they are aware of regarding) allegations of fraud, or suspected fraud, affecting the entity's financial statements communicated by employees, former employees, analysts, regulators or othersManagement's disclosure of all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statementsDisclosure of (have disclosed to the auditor all known actual or possible; or are not aware of any pending or threatened) litigation, claims, and assessments whose effects should be considered when preparing the financial statements (and management has not consulted legal counsel concerning litigation, claims, or assessments)Management's acknowledgment of disclosing the identity of the entity's related parties and all the related party relationships and transactions of which they are aware
In order to obtain evidence about subsequent events, the auditor would be interested in events occurring after year-end but before the date of the auditor's report that would have a material effect on the financial statements. Only one of these choices represents a procedure that would uncover an event after the balance sheet date that could potentially have a material effect. Generally accepted auditing standards (GAAS) suggest that, as part of the subsequent-period auditing procedures, the auditor should read the latest available interim financial statements, compare them with the financial statements being reported upon, and make any comparisons considered appropriate in the circumstances.
Substantive tests of payroll should be extended when overpayments are discovered in performing tests of details. Since the auditor has substantial doubts concerning the validity of payroll transactions, he should obtain additional audit evidence to remove this doubt. When payroll is extensively audited by the state government, the auditor may consider a higher acceptable level of detection risk (i.e., fewer substantive tests). The fact that payroll expense is substantially higher than in the prior year and that employees complain about too much overtime does not necessarily result in material misstatements of payroll expense.
If the auditor determines that the audit team does not have the necessary skills and knowledge to plan and perform audit procedures related to fair values, the auditor may decide to?The auditor should consider whether to engage a specialist and use the work of that specialist as audit evidence in performing substantive tests to evaluate material financials statement assertions. The auditor may have the necessary skill and knowledge to plan and perform audit procedures related to fair values or may decide to use the work of a specialist. Obtaining management representations as to fair value would not provide sufficient appropriate audit evidence as to the fair value measurements. While the auditor could withdraw from the engagement, it would not be advisable, especially when a specialist could be engaged to perform the substantive procedures.
An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of:?An organization follows up on errors to the monthly statements to determine the accounts receivable dollar amount that the organization has the right to receive. The presentation assertion deals with whether components of the financial statements are properly listed and disclosed. The presentation would not be affected by management's following-up on errors reported by customers.
To support financial statement assertions, an auditor develops specific audit objectives. The auditor then designs substantive tests to satisfy or accomplish each objective. Which of the following audit procedures would primarily respond to the audit objective for accounts receivable that accounts receivable are properly described and presented in the financial statements?The audit procedure, “Review the accounts receivable trial balance for amounts due from officers and employees,” is used to satisfy the audit objective that accounts receivable are properly described and presented in the financial statements (which supports the assertion about presentation) because it provides evidence about transactions with related parties, which must be separately disclosed.
A weakness in internal control over recording retirements of equipment may cause an auditor to:?Since the primary concern is whether equipment remaining on the records as assets has been retired (resulting in an overstatement of equipment), the auditor would select items of equipment from the accounting records for testing. These equipment items would then be located in the plant to determine whether they are still in use.
An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:?The completeness assertion deals with whether or not all of the transactions and events that should have been recorded have been recorded. If an order was shipped, were the corresponding revenue and receivable recorded? In order to determine that the control is in place, the auditor would make sure that an invoice has been prepared for each shipping document.Determining whether each receivable is collected subsequent to the year-end would provide evidence about the valuation of the accounts receivable balance. This procedure would be a substantive test, not a test of controls. (adsbygoogle = window.adsbygoogle || []).push({}); Ensuring that each invoice is supported by a purchase order may help the auditor determine if the sale is from a valid customer, but the revenue still would not be recorded until the order has been shipped.Examining the approval of credit memos would assist the auditor with testing the controls over the existence of sales returns.
An auditor may achieve audit objectives related to particular assertions by:?Specific audit objectives are developed regarding assertions. Assertions are management representations that are embodied in the account balance, transaction class, and disclosure component of financial statements. Substantive tests (tests of detail and analytical procedures) are performed to detect material misstatements in the account balance, transaction class, and disclosure components of financial statements. Substantive tests help to achieve audit objectives by verifying no material misstatements exist. Of the responses provided, only analytical procedures are substantive tests and, consequently, may aid an auditor to achieve audit objectives related to particular assertions.
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?Testing the operating effectiveness of the relevant controls is usually the most efficient methodology for the auditor to evaluate specific relevant assertions and risks. When circumstances exist that indicate testing the operating effectiveness of the relevant controls is not possible or would not be efficient, the auditor would use only substantive procedures to evaluate specific relevant assertions and risks.If the relevant internal control components are not well documented, the internal auditor already has tested the relevant controls and found them effective, or the cost of substantive procedures will exceed the cost of testing the relevant controls, testing the operating effectiveness of the relevant controls would be more efficient than using only substantive procedures.
Confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor would most likely gather evidence in support of management's financial statement assertions of existence and:?The assertion of rights and obligations concerns itself with whether assets are rights of the entity and liabilities are obligations of the entity at balance sheet date. An auditor confirms with an outside agent that the agent is holding investment securities in the client's name to verify whether an asset claimed by the client is in fact the client's as of a certain date. This assures that the security is a right of the entity, and, thus would be an evaluation of management's assertion regarding rights and obligations.
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?Testing the entity's computation of standard overhead ratesThe key to this type of question is to match the correct procedure to the assertion specified in the question (since all answer choices could be appropriate procedures). Assurance about the valuation (i.e., the dollar value assigned to each unit) of a manufacturing entity's inventory is provided by testing the entity's computation of standard overhead rates. Valuation is concerned with inventory (an asset) being stated at the proper amount. Acquisition (materials) costs are relatively easy to verify. However, labor and overhead can also be considered inventoried cost, which are added to the materials costs of work-in-progress and finished goods. Thus, application of the correct amount of overhead is crucial to the valuation of manufactured inventory.Confirmation of inventories pledged under loan agreements provides assurance about presentation and disclosure. (Note that this is a very specific type of confirmation. Confirmation of inventories at locations outside the entity provides assurance concerning existence, completeness, and rights or ownership.)Review of shipping and receiving cutoff procedures for inventories pertains to the completeness and rights/obligations assertions. Tracing test counts to the entity's inventory listing is directed to the existence assertion.
Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero's balance sheet date, but one month before the issuance of the financial statements and the auditor's report. Under these circumstances:the financial statements should be adjusted.the event requires financial statement disclosure, but no adjustment.the auditor's report should be modified for a lack of consistency.Only financial statement disclosure is required when a material loss occurs after the balance sheet date but before the issuance of the auditor's report. No adjustment is required since the condition (the customer's bankruptcy due to a natural disaster) did not exist at the balance sheet date. Disclosure is required to keep the financial statements from being misleading. Consistency in the application of generally accepted accounting principles is not affected.
The procedure, “The accountant should make inquiries about events subsequent to the date of the financial statements that would have a material effect on the financial statements,” is:?The accountant is required to make inquiries about events subsequent to the date of the financial statements that would have a material effect on the financial statements when performing a review of the financial statements of a nonissuer, but not when performing a compilation.
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:?Reviewing the numerical sequence of shipping documents and invoices would determine whether the documents represented transactions incurred and that none of the documents were missing. This procedure would ensure the transactions are complete and, thus, relate to the assertion of completeness (AU-C 315.A114).
The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor's report.
Rule 3522 of the Public Company Accounting Oversight Board prevents registered public accounting firms from marketing, planning, or opining in favor of tax treatment of a transaction. Should public accounting firms violate this rule, they will no longer be considered independent.
The Fair Labor Standards Act law requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of 1.5 times the regular rate of pay. This act also restricts the hours that children under the age of 16 may work and forbids the employment of children in jobs deemed to be dangerous.
Tests of details of transactions can be performed as tests of controls or as substantive tests. The objective of tests of details of transactions performed as tests of controls is the same as that of any test of controls: to evaluate whether controls operated effectively.The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the account balances of the financial statements.Monitoring the design and use of entity documents such as prenumbered shipping forms is a type of control procedure. In planning the audit, the auditor's understanding of the entity's internal control includes its design and determining whether controls have been placed in operation.
Tolerable error or the tolerable misstatement is the maximum monetary error in the related account balance or class of transactions that may exist without causing the financial statements to be materially misstated. The tolerable error is a planning concept and is related to the auditor's preliminary estimates of materiality. The higher the auditor sets the tolerable error, the smaller the sample size the auditor will require.Assessing control risk is the process of evaluating the effectiveness of an entity's internal controls in preventing or detecting material misstatements in the financial statements. The less an auditor can depend on internal control in preventing or detecting material misstatements in the financial statements (increasing the assessed level of control risk), the larger the sample size the auditor will require.AICPA Audit Guide: Audit Sampling (2012), Table 4.4
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:A. valuation and allocation.B. presentation and disclosure.C. existence.D. rights and obligations.
The key to this type of question is to ask, “What does the evidence obtained by this procedure prove?” and “What question does this procedure help answer?”When the auditor reviews the credit ratings of customers with delinquent accounts receivable, the question being asked is, “Will we really collect this much for this receivable?” or “Is this receivable really worth this much?” Thus, the procedure is providing evidence about the valuation and allocation assertion. The delinquency of receivables indicates that the accounts may not be paid. Thus, the ability of the customers to pay, as reflected in their credit ratings, may corroborate or contradict the carrying amount of accounts receivable; that is, evidence may indicate the need either to allow for the possible uncollectibility of the accounts or to write off the receivable directly, thereby reducing the carrying value of receivables.
Which of the following elements should the auditor not consider in evaluating the entity's control environment?A. Communication and enforcement of integrity and ethical valuesB. Participation of those charged with governanceCorrect C. Measurements and review of the entity's financial performanceD. Assignment of authority and responsibility
The control environment involves those factors that set the tone for the entire entity. In evaluating the entity's control environment, the auditor should consider the following elements and how they have been incorporated into the entity's processes:Communication and enforcement of integrity and ethical valuesCommitment to competenceParticipation of those charged with governanceManagement's philosophy and operating styleOrganizational structureAssignment of authority and responsibilityHuman resource policies and practicesMeasurements and review of the entity's financial performance would be classified as control activities.
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for:A. segregation of duties of employees in the accounts payable department.B. authorization by the board of directors of significant equipment acquisitions.Correct C. investigation of variances within a formal budgeting system.D. independent verification of invoices for disbursements recorded as equipment acquisitions.
The auditor’s emphasis is on identifying and obtaining an understanding of control activities that address the areas where the auditor considers that material misstatements are more likely to occur. The auditor’s primary consideration is whether, and how, a specific control activity prevents, or detects and corrects, material misstatements in classes of transactions, account balances, or disclosuresOf the answer choices given, the investigation of variances within a formal budgeting system is the only procedure that would help detect the misclassification. The other answer choices may help prevent the misclassification, but are not really designed to detect the misclassification once it has occurred.
An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:A. each receivable is collected subsequent to the year-end.Correct B. an invoice is prepared for each shipping document.C. each invoice is supported by a customer purchase order.D. each credit memo is properly approved.
The completeness assertion deals with whether or not all of the transactions and events that should have been recorded have been recorded. If an order was shipped, were the corresponding revenue and receivable recorded? In order to determine that the control is in place, the auditor would make sure that an invoice has been prepared for each shipping document.Determining whether each receivable is collected subsequent to the year-end would provide evidence about the valuation of the accounts receivable balance. This procedure would be a substantive test, not a test of controls.Ensuring that each invoice is supported by a purchase order may help the auditor determine if the sale is from a valid customer, but the revenue still would not be recorded until the order has been shipped.Examining the approval of credit memos would assist the auditor with testing the controls over the existence of sales returns.
In determining whether transactions have been recorded, the direction of the audit testing should be from the:A. general ledger balances.B. adjusted trial balance.Correct C. original source documents.D. general journal entries.
To verify that transactions have been recorded, the direction of the audit testing should be from a point as close to the transaction as possible. In the form of documentation, this is represented best by the original source documents.
What are the 5 management assertions?
Which audit assertion relates to sales?
What are the 7 assertions of audit?
What are the most important assertions for revenue?

ourteen standard audit procedures used in an audit 'FIVE CARROT CARS:- Footing; crossfooting; recalculation- Inquiry- Vouching- Examination/Inspection- Confirmation- Analytical Procedures- Reperformance- Reconciliation- Observation- Tracing- Cut Off Review- Analyse related accounts simultaneously- Client Rep Letter- Subsequent Reviews----------------------------------------------------------------------------------------------------------------------------------------Most relevant Assertions for accounts (B/S Accounts)1) Completeness (most relevant to liabilities)2) Valuation ,Allocation, Accuracy3) Existence and Occurrence (most relevant to assets)4) Right and Obligations----------------------------------------------------------------------------------------------------------------------------------------Most Relevant Assertion for Revenue Accounts (Transactions)1) Completeness(expense)2) Valuation, Allocation and Accuracy3) Existence and Occurrence (Revenue)4) Understandability and Classification5) CutOff----------------------------------------------------------------------------------------------------------------------------------------Assertions for Presentation1) Completeness2) Valuation Accuracy and Allocation3) Understandability and Classification (Most relevant)4) Rights and Occurrence----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the completeness assertion?- Tracing- Analytical review- Observation----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the valuation, allocation, and accuracy assertion?- Inspection- Footing- Independent recalculation- Reconciliation----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the existence and occurrence assertion?- Confirmation- Observation, inspection, and examination- Vouching----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the understandability and classification assertion?- Inspection- Review- Inquiry of management----------------------------------------------------------------------------------------------------------------------------------------What audit procedures are relevant to the rights and obligations assertion?-Inspection

Valuation and AllocationThis is a Management Assertion.The Valuation and Allocation assertion addresses whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

CompletenessThis is a Management Assertion.Relating to TransactionsCompleteness relates to whether all transactions that occurred during the period have been recorded. For example, if a client fails to record a valid revenue transaction, the revenue account will be understated. The completeness assertion is more focused on expense and liability accounts.Relating to Account BalancesCompleteness addresses whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included. For example, management implicitly asserts that the ending balances shown for accounts payable on the balance sheet includes all such liabilities as of the balance sheet date.Relating to Presentation and DisclosureThis assertion relates to whether all disclosures that should have been included in the financial statements have been included.

ExistenceThis is a Management Assertion.Existence addresses the assertion of whether ending balances of assets, liabilities, and equity interests included in the financial statements actually exist at the date of the financial statements. Auditors will often "vouch for existence" by starting from an ending balance of an account and finding the supporting transactions making up that balance.

Events and circumstances that would create contingent liabilities, such as lawsuits, are the types of matters that are addressed at director meetings. Reading minutes of board meetings may provide evidence of contingent liabilities.

An entity may expense a disbursement that should have been capitalized and will often do so by recognizing the cost as repairs and maintenance. Reviewing the repairs and maintenance account may alert the auditor to disbursements that were inappropriately expensed. Since many capital assets are financed, a review of cash may not reveal large disbursements that should be capitalized. A review of depreciation expense will only provide information about fixed assets that have been properly capitalized. Not all capital assets are subject to property taxes and reviewing property tax expense would not provide reliable information.

An auditor analyzes repairs and maintenance expense to determine if it includes items that were reported as expense but should have been capitalized. The auditor can determine that obsolete equipment is written off and that recorded assets actually exist by comparing the reported amounts to actual assets, not by reviewing repairs and maintenance expense. The auditor can identify equipment that should be written off by an observation of the equipment, but not with a review of repairs and maintenance expense.

This will increase AR responses=Including a list of items or invoices making up an account balance reduces the amount of effort a customer will have to apply to respond to the confirmation, increasing the likelihood that it will be responded to.

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? When confirmation recipients are likely to sign other types of positive confirmations without careful investigation, there is also a likelihood that a similar lack of investigation will be applied when responding to accounts receivable confirmations. Use of a blank form would require a recipient to research the information being requested rather than simply approve it without investigation.

Which of the following fraud schemes might be detected through the use of a bank cutoff statement?If checks written near year-end are held before being mailed, they will take longer than a normal amount of time to clear the entity’s bank account, which may be detected by examining a bank cutoff statement.

When testing investments in equity securities of publicly held entities, the auditor prepares a schedule of dividends received and compares it to dividend information available to the public. Which assertion is the auditor testing?By comparing dividends received to publicly available information, the auditor can determine if the dividends recognized by the entity reconciles to the dividends that had been declared and paid to investors during the period. A discrepancy may indicate that dividends were received for securities that were not included in the accounting records, indicating the records may be incomplete.

When securities are held by an independent custodian on behalf of an entity, the custodian can confirm the existence of the investment securities and their ownership. Custody of securities provides evidence of ownership, which the auditor will obtain by observation of securities on hand.

Since replacement cost is considered the market value of inventories, subject to floor and ceiling limitations, determining replacement cost will enable the auditor to evaluate the client’s valuation of inventory at the lower of cost or market. Tracing inventories to purchase documents provides evidence of rights and obligations. Tracing inventory counts to accounting records tests the assertion of completeness. Tracing items reported to inventory counts tests the assertion of existence.

Tracing inventory to purchase documents provides evidence that the entity actually purchased goods included in inventory, supporting the rights and obligations assertion. It also provides the auditor evidence of the cost of the inventory, which can be used in cost or market evaluations, supporting the valuation and allocation assertion.

An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity’s manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion?By comparing an entity’s volume to the capacity of its factory, the auditor can determine if the amount of equipment the entity asserts that it has is reasonable based on how much the entity is producing.

By examining the repairs and maintenance account, the auditor can determine if items that should have been capitalized as property, plant, and equipment were inappropriately recognized as expense and excluded from recorded amounts. Completeness.

When equipment is sold at a significant gain, it raises question as to the useful life, salvage value, and method of depreciation that was being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.

Tracing equipment that has been observed by the auditor to its inclusion in the accounting records provides the auditor with evidence that the accounting records are complete and include all equipment that the entity has.

Tracing payable to the original transaction documentation will provide evidence that the entity actually entered into the transaction and received the goods or services ordered, supporting existence and rights & obligations. The documentation will show amounts which supports the valuation and allocation assertion. To obtain evidence about completeness, the auditor would trace items from the original documentation to the accounting records.

Tracing subsequent payments to amounts included on the accounts payable listing will provide evidence that all amounts that the entity was liable for and ultimately paid had been recorded, supporting completeness. Tracing items on the accounts payable listing to subsequent payments, tracing amounts recorded to original transaction documentation, and sending confirmations to vendors included on the accounts payable listing will provide evidence that the items on the list are legitimate, supporting existence, rights & obligations, and valuation & allocation, but not completeness.

Reviewing minutes of board of director meetings will provide evidence as to when the board has approved financing transactions, which can then be traced to recorded liabilities to make certain that amounts recorded are complete and include all loans. Tracing loans to original documentation or to subsequent payments and confirming loans with creditors will provide evidence about the existence of the loans, the entity’s rights and obligations in relation to the loans, and the correctness of the amount, supporting valuation and allocation.

PRESENTATION/DISCLOSURE = Inquire, InspectEXIST = Vouch, Observe, ConfirmRIGHTS/OBLIGATION = Inspect, Inquire, ConfirmCOMPLETENESS = Cutoff, Analytical, TraceVALUE = Reconcile, Recalculate, AnalyticalOCCURANCE = Confirm, VouchCLASSIFICATION = Inspect

An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value will result in a misstatement of the income recognized under the equity method and would misstate the return on investment.

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by?By comparing dividends received to publicly available information, the auditor can determine if the dividends recognized by the entity reconciles to the dividends that had been declared and paid to investors during the period. A discrepancy may indicate that dividends were received for securities that were not included in the accounting records, indicating the records may be incomplete.

Assertions are claims in the financial statements made by management. The existence assertion for an asset such as property, plant, and equipment involves determining whether the asset actually exists on a given date. By personally inspecting additions to property, plant, and equipment, the auditor satisfies the existence assertion. The “presentation and disclosure” assertion involves judging whether an asset is properly classified in the financial statements. Visually inspecting an asset does not sufficiently determine whether the financial statements are properly prepared.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:?The key to this type of question is to ask, “What does the evidence obtained by this procedure prove?” and “What question does this procedure help answer?”When the auditor reviews the credit ratings of customers with delinquent accounts receivable, the question being asked is, “Will we really collect this much for this receivable?” or “Is this receivable really worth this much?” Thus, the procedure is providing evidence about the valuation and allocation assertion. The delinquency of receivables indicates that the accounts may not be paid. Thus, the ability of the customers to pay, as reflected in their credit ratings, may corroborate or contradict the carrying amount of accounts receivable; that is, evidence may indicate the need either to allow for the possible uncollectibility of the accounts or to write off the receivable directly, thereby reducing the carrying value of receivables.

The auditor must identify the relevant assertions by determining the source of likely potential misstatements for each significant?The auditor must identify the relevant assertions by determining the source of likely potential misstatements in each significant class of transactions, account balance, and presentation and disclosure. For example, the inventory asset account balance may have a likely potential misstatement due to shipped items that have not been removed from inventory. This potential misstatement would relate to the cutoff assertion.

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:?CutoffAssertions about cutoff deal with recording items in the proper period. Completeness deals with whether all transactions and accounts that should be presented in the financial statements are included.In this case, the sales have been recorded, so the records are complete, but they have been recorded in the incorrect period, which is a cutoff issue.

Assertions are declarations or a set of declarations about whether subject matter is based on or conforms to selected criteria (AT 101.08). Assertions are representations by management that are embodied in the account balance, transaction class, and disclosure components of the financial statements (AU-C 315.A114).Assertions about classes of transactions include the following:OccurrenceCompletenessAccuracyCutoffClassificationAssertions about account balances at the period end include the following:ExistenceRights and obligationsCompletenessValuation and allocationAssertions about presentation and disclosure include the following:Occurrence and rights and obligationsCompletenessClassification and understandabilityAccuracy and valuationThe independent auditor's work in forming an opinion on the financial statements consists primarily of obtaining and evaluating audit evidence concerning these assertions.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be?The key to this type of question is to ask: Which set of items will indicate whether every amount that should be recorded has been? Is the selected item, which should be recorded, actually recorded? Should this selected item, which is not recorded, actually be recorded?In this case, the questions concern the completeness assertion, which states that all amounts are included and none is omitted. With respect to the completeness of accounts payable, you should ask: Which population will indicate where all accounts payable are recorded? Does the auditee owe some amount to anyone else?Thus, the auditor must select from a population containing items that are not included but which possibly should be. For accounts payable, confirmation with vendors with whom the entity has previously done business, but to whom no recorded payable balance is due, is the appropriate population (“If the auditee asks this vendor if any amount is owed, will the answer be zero?”) Responses from a vendor to whom the client does owe a payable would reveal an unrecorded (i.e., incomplete) liability.Keep in mind that the question asks about populations appropriate for confirmation for completeness. The other three populations listed are appropriate for other procedures; mere comparison of amounts recorded in the accounts payable subsidiary ledger to payees of checks drawn in the month after the year-end or to invoices filed in the entity's open invoice file may reveal an unrecorded liability. However, confirmation of a recorded amount is unlikely to provide any additional evidence about completeness.

Obtaining and understanding internal controls involves which of the following?Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented.Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements. The auditor should consider the design of a control in determining whether to consider its implementation. An improperly designed control may represent a material weakness in the entity's internal control and the auditor should consider whether to communicate this to those charged with governance and management.Implementation of a control means that the control exists and that the entity is using it.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that?Accounts receivable turnover is affected by the balance in accounts receivable, so fictitious credit sales could be the cause. The other answer choices would not cause the turnover ratio to decrease.If fictitious sales were recorded, the net credit sales (numerator) would increase. Since the sales are not real, the ending accounts receivable balance would also be higher than normal. These “fake” receivables are also not being repaid. This in turn, means that the average receivables (denominator) would get larger. This would in all likelihood result in a lower receivable turnover ratio.

Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA?CPAs are independent contractors, not employees; as a result, they have legal title to their workpapers. The CPA's ownership of the workpapers is custodial and cannot be transferred without the client's permission. Exceptions include subpoena by a federal court or agency, or inspection by an AICPA or state society quality review team. A seller of an accounting practice must obtain permission of the client before transfer to a buyer of the practice.

A primary advantage of using data extraction software packages to audit the financial statements of a client that uses an EDP system is that the auditor may?Data extraction programs have the following advantages:They allow the CPA a high degree of independence.They reduce the CPA's required level of EDP expertise and training.They access a wide variety of client records interchangeably without special programming and only a limited knowledge of the client's hardware and software features.They allow the CPA to totally control program execution.They use the speed and accuracy of the computer.

When a disbursement is reported on January of 1 period and the receipt in December of the preceding period, it indicates that either the disbursement was recorded too late or the receipt too early. In either case, cash would be overstated as a result of showing money in without showing money out. When transfers are recorded in the same period by the receiver as by the disbursing entity, cash will not be misstated. When the bank records the amounts is not relevant.

The statement of cash flows converts the income statement and changes in balance sheet items into cash receipts and disbursements. The auditor should be able to reconcile amounts on the statement of cash flows to the other financial statements. The auditor may vouch a sample of cash receipts and disbursements to obtain evidence about revenues, expenses, or internal controls, but not to evaluate the statement of cash flows. A reconciliation of the bank cutoff statement will provide information about the bank balance but not cash flows. The auditor may confirm the ending balance with the entity’s financial institution, but not the individual

Information about dividends paid by publicly-held entities is a matter of public record. The most reliable and efficient way to obtain evidence about dividend income received from public entities would be to access the information on the Internet. Decisions to purchase or sell securities might be discussed at a board meeting but dividends are not likely to be a topic of discussion.

Depending on the fluctuating value of an underlying, a derivative can represent an asset or an obligation. An auditor would examine derivative documentation to determine if there are obligations that require disclosure or accrual.

When securities are held by an independent custodian on behalf of an entity, the custodian can confirm the existence of the investment securities and their ownership. Custody of securities provides evidence of ownership, which the auditor will obtain by observation of securities on hand.?An auditor is establishing procedures for testing management’s assertion regarding rights and obligations in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about rights and obligations?

When equipment is sold at a significant gain, it raises question as to the useful life, salvage value, and method of depreciation that was being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.

Principal limitations concerning analytical procedures include (1) The guidelines for evaluation may be inadequate (e.g., Why is an industry average good? Why should the ratio be the same as last year?)(2) It is difficult to determine whether a change is due to a misstatement or is the result of random change in the account.(3) Cost-based accounting records hinder comparisons between firms of different ages and/or asset compositions.(4) Accounting differences hinder comparisons between firms (e.g., if one firm uses LIFO and another uses FIFO the information is not comparable).(5) Analytical procedures present only "circumstantial" evidence in that a "significant" difference will lead to additional audit procedures as opposed to direct detection of a misstatement.

Timing (1) The higher the risk of material misstatement, the more likely it is that the auditor may decide it is more effective to (a) Perform substantive procedures nearer to, or at, the period end rather than at an earlier date, or(b) Perform audit procedures unannounced or at unpredictable times (2) If the auditor performs tests of operating effectiveness of controls or substantive procedures before period end, the auditor should consider the additional evidence that is needed for the remaining period (3) Other timing considerations (a) Control environment strength(b) When relevant information is available (e.g., electronic files may subsequently be overwritten)(c) Nature of risk (e.g., risk of inflated revenues to meet earnings expectations)(d) Period or date to which audit evidence relates

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice? Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

Long-Term Debt a. Special audit considerations for long-term debt (1) Overall approach. Despite the fact that this account’s turnover rate is low, considerable analysis is performed on its ending balance. Confirmations are frequently used; recall that when the debt is owed to banks, confirmation is obtained with the standard bank confirmation. In addition, minutes of director and/or stockholder meetings will be reviewed to determine whether new borrowings have been properly authorized.The proceeds of any new borrowings are traced to the cash receipts journal, deposit slips, and bank statements. Repayments are traced to the cash disbursements journal, canceled checks, and canceled notes. If a debt trustee is used, it will be possible to obtain information through use of a confirmation whether the repayments have been made.

Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide?Corroborative audit evidence.

1.Type 1—make an adjusting entry to adjust the financial statements a. Examples (adsbygoogle = window.adsbygoogle || []).push({}); (1) Settlement of litigation for an amount different from the liability recorded in the accounts, assuming the event causing the litigation occurred before year-end (2) Loss on an uncollectible account receivable as a result of a customer’s deteriorating financial condition that led to bankruptcy subsequent to the balance sheet date NOTE: Think about the above example. Although the customer filed for bankruptcy after year-end, an adjustment is appropriate because filing for bankruptcy was simply the conclusion of the condition—deteriorating financial position—which began prior to year-end. 2.Type 2—disclose in notes to the financial statementsa.Examples(1)Sale of bond or stock issue(2)Purchase of a business(3)Litigation settlement, but only when the litigation is based on a post-balance-sheet event (a) Because of the time involved with litigation, this would presumably be rare (4)Fire or flood loss(5)Receivable loss, but only when the loss occurred due to a post-balance-sheet event such as a customer’s major casualty arising after the balance sheet date

Auditors typically confirm consigned inventory and inventory in warehouses. Some companies store inventory items in public warehouses. In such a situation, the auditor should confirm in writing with the custodian that the goods are being held. Additionally, if such holdings are significant, the auditor should apply one or more of the following procedures: (a) Review the client's control procedures relating to the warehouseman.(b) Obtain a CPA's report on the warehouseman's internal control.(c) Observe physical counts of the goods.(d) If warehouse receipts have been pledged as collateral, confirm with lenders details of the pledged receipts.

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?Auditor judgment.This answer is correct because the measure of the validity of evidence for audit purposes is based upon the judgment of the auditor. This audit judgment is used to estimate levels of materiality, and relative risk.

To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?This answer is correct because a debit to sales returns with a credit to accounts receivable is a normal entry for returns and is one which would not appear questionable. Therefore, the auditor would expect an experienced bookkeeper to charge sales returns in a defalcation involving accounts receivable.

Subsequent period auditing procedures 1. Certain procedures are applied to transactions after year-end a. To assure proper year-end cutoffb. To help evaluate asset and liability valuation 2. In addition, the CPA should perform other procedures near completion of fieldwork to identify subsequent events a. Read latest interim statements (1) Make comparison with other data b. Discuss with management (1) Existence of contingent liabilities(2) Significant changes in shareholders’ equity items(3) Statement items accounted for on tentative data(4) Unusual adjustments in the subsequent period c. Read minutes of Board of Directors and other committees (1) Make inquiries when minutes are not available d. Obtain lawyer’s letter on (1) Litigation(2) Impending litigation, claims(3) Contingent liabilities

CloseUsing analytical procedures at various stages of the audit Risk assessment (also referred to as analytical procedures used to plan the audit) —Identify aspects of the entity of which the auditor was unaware and assist in assessing the risks of material misstatement. As such these tests help the auditor to determine the nature, timing, and extent of tests. Substantive procedures —Obtain relevant and reliable audit evidence to substantiate accounts for which overall comparisons are helpful. Near the end of the audit —Assist the auditor when forming an overall conclusions about whether the financial statements are consistent with the auditor's understanding of the entity. NOTE: GAAS requires the use of analytical procedures during the risk assessment and near the end of the audit. Analytical procedures are not a required substantive test.

Before applying procedures at an interim date, an auditor should consider the incremental audit risk involved as well as whether performance of such interim procedures is likely to be cost-effective. As an illustration of a substantive test applied at an interim date, consider the confirmation of receivables as of November 30, one month prior to the client’s year-end.

An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertion of:?Assertions tested by the auditor for account balances at period end:Existence—Assets, liabilities, and equity interests exist.Rights and obligations—The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.Completeness—All assets, liabilities, and equity interests that should have been recorded have been recorded.Valuation and allocation—Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.The auditor would be testing for valuation and allocation by scanning the investment records just before and just after the year-end to determine that transfers have been recorded correctly. The question that this procedure helps answer is, “Are the investments recorded at the correct amount at year-end?”To obtain evidence regarding management's assertion of rights and obligations, the auditor would perform a procedure such as viewing stock certificates or other original evidence of purchases or sales. To obtain evidence regarding management's assertion of existence, the auditor would perform a procedure such as a confirmation with the investment company. The assertion of classification and understandability refers to financial statement disclosures. The auditor would be performing procedures that would determine if the investments were properly classified as long term and if the notes to the financial statements were clear and understandable.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of:?Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed (AU-C 315.A114). The auditor should determine that the retained earnings have been properly appropriated in accordance with the restrictions and that such restrictions have been disclosed.

Management's letter of representation would ordinarily include references to the following:Management's responsibilities, as set out in the terms of the audit engagement for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting frameworkManagement's acknowledgment of their responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or errorAcknowledgment of their responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraudSignificant assumptions used in making accounting estimates, including those measured at fair value, are reasonable.Related party relationships and transactions have been appropriately accounted for and disclosed.All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with the applicable financial reporting framework.Management provided the auditor with:access to all information, of which they are aware, that is relevant to the preparation and fair presentation of the financial statements such as records, documentation and other matters;additional information requested for the purpose of the audit; andunrestricted access to persons within the entity the auditor determined it necessary to obtain audit evidence.All transactions have been recorded in the accounting records and are reflected in the financial statements.Disclosure of the results of management's assessment of the risk that the financial statements may be materially misstated as a result of fraudManagement has no knowledge of any (or disclosed to the auditor all information that they are aware of regarding) fraud or suspected fraud that affects the entity and involves:management,employees who have significant roles in internal control, orothers when the fraud could have a material effect on the financial statements.Management's acknowledgement of (or no knowledge of any; or disclosure to the auditor of all information that they are aware of regarding) allegations of fraud, or suspected fraud, affecting the entity's financial statements communicated by employees, former employees, analysts, regulators or othersManagement's disclosure of all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statementsDisclosure of (have disclosed to the auditor all known actual or possible; or are not aware of any pending or threatened) litigation, claims, and assessments whose effects should be considered when preparing the financial statements (and management has not consulted legal counsel concerning litigation, claims, or assessments)Management's acknowledgment of disclosing the identity of the entity's related parties and all the related party relationships and transactions of which they are aware

In order to obtain evidence about subsequent events, the auditor would be interested in events occurring after year-end but before the date of the auditor's report that would have a material effect on the financial statements. Only one of these choices represents a procedure that would uncover an event after the balance sheet date that could potentially have a material effect. Generally accepted auditing standards (GAAS) suggest that, as part of the subsequent-period auditing procedures, the auditor should read the latest available interim financial statements, compare them with the financial statements being reported upon, and make any comparisons considered appropriate in the circumstances.

Substantive tests of payroll should be extended when overpayments are discovered in performing tests of details. Since the auditor has substantial doubts concerning the validity of payroll transactions, he should obtain additional audit evidence to remove this doubt. When payroll is extensively audited by the state government, the auditor may consider a higher acceptable level of detection risk (i.e., fewer substantive tests). The fact that payroll expense is substantially higher than in the prior year and that employees complain about too much overtime does not necessarily result in material misstatements of payroll expense.

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of:?An organization follows up on errors to the monthly statements to determine the accounts receivable dollar amount that the organization has the right to receive. The presentation assertion deals with whether components of the financial statements are properly listed and disclosed. The presentation would not be affected by management's following-up on errors reported by customers.

A weakness in internal control over recording retirements of equipment may cause an auditor to:?Since the primary concern is whether equipment remaining on the records as assets has been retired (resulting in an overstatement of equipment), the auditor would select items of equipment from the accounting records for testing. These equipment items would then be located in the plant to determine whether they are still in use.

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:?The completeness assertion deals with whether or not all of the transactions and events that should have been recorded have been recorded. If an order was shipped, were the corresponding revenue and receivable recorded? In order to determine that the control is in place, the auditor would make sure that an invoice has been prepared for each shipping document.Determining whether each receivable is collected subsequent to the year-end would provide evidence about the valuation of the accounts receivable balance. This procedure would be a substantive test, not a test of controls. (adsbygoogle = window.adsbygoogle || []).push({}); Ensuring that each invoice is supported by a purchase order may help the auditor determine if the sale is from a valid customer, but the revenue still would not be recorded until the order has been shipped.Examining the approval of credit memos would assist the auditor with testing the controls over the existence of sales returns.

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?Testing the operating effectiveness of the relevant controls is usually the most efficient methodology for the auditor to evaluate specific relevant assertions and risks. When circumstances exist that indicate testing the operating effectiveness of the relevant controls is not possible or would not be efficient, the auditor would use only substantive procedures to evaluate specific relevant assertions and risks.If the relevant internal control components are not well documented, the internal auditor already has tested the relevant controls and found them effective, or the cost of substantive procedures will exceed the cost of testing the relevant controls, testing the operating effectiveness of the relevant controls would be more efficient than using only substantive procedures.

Confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor would most likely gather evidence in support of management's financial statement assertions of existence and:?The assertion of rights and obligations concerns itself with whether assets are rights of the entity and liabilities are obligations of the entity at balance sheet date. An auditor confirms with an outside agent that the agent is holding investment securities in the client's name to verify whether an asset claimed by the client is in fact the client's as of a certain date. This assures that the security is a right of the entity, and, thus would be an evaluation of management's assertion regarding rights and obligations.

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?Testing the entity's computation of standard overhead ratesThe key to this type of question is to match the correct procedure to the assertion specified in the question (since all answer choices could be appropriate procedures). Assurance about the valuation (i.e., the dollar value assigned to each unit) of a manufacturing entity's inventory is provided by testing the entity's computation of standard overhead rates. Valuation is concerned with inventory (an asset) being stated at the proper amount. Acquisition (materials) costs are relatively easy to verify. However, labor and overhead can also be considered inventoried cost, which are added to the materials costs of work-in-progress and finished goods. Thus, application of the correct amount of overhead is crucial to the valuation of manufactured inventory.Confirmation of inventories pledged under loan agreements provides assurance about presentation and disclosure. (Note that this is a very specific type of confirmation. Confirmation of inventories at locations outside the entity provides assurance concerning existence, completeness, and rights or ownership.)Review of shipping and receiving cutoff procedures for inventories pertains to the completeness and rights/obligations assertions. Tracing test counts to the entity's inventory listing is directed to the existence assertion.

Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero's balance sheet date, but one month before the issuance of the financial statements and the auditor's report. Under these circumstances:the financial statements should be adjusted.the event requires financial statement disclosure, but no adjustment.the auditor's report should be modified for a lack of consistency.Only financial statement disclosure is required when a material loss occurs after the balance sheet date but before the issuance of the auditor's report. No adjustment is required since the condition (the customer's bankruptcy due to a natural disaster) did not exist at the balance sheet date. Disclosure is required to keep the financial statements from being misleading. Consistency in the application of generally accepted accounting principles is not affected.

The procedure, “The accountant should make inquiries about events subsequent to the date of the financial statements that would have a material effect on the financial statements,” is:?The accountant is required to make inquiries about events subsequent to the date of the financial statements that would have a material effect on the financial statements when performing a review of the financial statements of a nonissuer, but not when performing a compilation.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:?Reviewing the numerical sequence of shipping documents and invoices would determine whether the documents represented transactions incurred and that none of the documents were missing. This procedure would ensure the transactions are complete and, thus, relate to the assertion of completeness (AU-C 315.A114).

The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor's report.

Rule 3522 of the Public Company Accounting Oversight Board prevents registered public accounting firms from marketing, planning, or opining in favor of tax treatment of a transaction. Should public accounting firms violate this rule, they will no longer be considered independent.

The Fair Labor Standards Act law requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of 1.5 times the regular rate of pay. This act also restricts the hours that children under the age of 16 may work and forbids the employment of children in jobs deemed to be dangerous.

Tests of details of transactions can be performed as tests of controls or as substantive tests. The objective of tests of details of transactions performed as tests of controls is the same as that of any test of controls: to evaluate whether controls operated effectively.The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the account balances of the financial statements.Monitoring the design and use of entity documents such as prenumbered shipping forms is a type of control procedure. In planning the audit, the auditor's understanding of the entity's internal control includes its design and determining whether controls have been placed in operation.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:A. valuation and allocation.B. presentation and disclosure.C. existence.D. rights and obligations.

The key to this type of question is to ask, “What does the evidence obtained by this procedure prove?” and “What question does this procedure help answer?”When the auditor reviews the credit ratings of customers with delinquent accounts receivable, the question being asked is, “Will we really collect this much for this receivable?” or “Is this receivable really worth this much?” Thus, the procedure is providing evidence about the valuation and allocation assertion. The delinquency of receivables indicates that the accounts may not be paid. Thus, the ability of the customers to pay, as reflected in their credit ratings, may corroborate or contradict the carrying amount of accounts receivable; that is, evidence may indicate the need either to allow for the possible uncollectibility of the accounts or to write off the receivable directly, thereby reducing the carrying value of receivables.

Which of the following elements should the auditor not consider in evaluating the entity's control environment?A. Communication and enforcement of integrity and ethical valuesB. Participation of those charged with governanceCorrect C. Measurements and review of the entity's financial performanceD. Assignment of authority and responsibility

The control environment involves those factors that set the tone for the entire entity. In evaluating the entity's control environment, the auditor should consider the following elements and how they have been incorporated into the entity's processes:Communication and enforcement of integrity and ethical valuesCommitment to competenceParticipation of those charged with governanceManagement's philosophy and operating styleOrganizational structureAssignment of authority and responsibilityHuman resource policies and practicesMeasurements and review of the entity's financial performance would be classified as control activities.

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for:A. segregation of duties of employees in the accounts payable department.B. authorization by the board of directors of significant equipment acquisitions.Correct C. investigation of variances within a formal budgeting system.D. independent verification of invoices for disbursements recorded as equipment acquisitions.

The auditor’s emphasis is on identifying and obtaining an understanding of control activities that address the areas where the auditor considers that material misstatements are more likely to occur. The auditor’s primary consideration is whether, and how, a specific control activity prevents, or detects and corrects, material misstatements in classes of transactions, account balances, or disclosuresOf the answer choices given, the investigation of variances within a formal budgeting system is the only procedure that would help detect the misclassification. The other answer choices may help prevent the misclassification, but are not really designed to detect the misclassification once it has occurred.

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:A. each receivable is collected subsequent to the year-end.Correct B. an invoice is prepared for each shipping document.C. each invoice is supported by a customer purchase order.D. each credit memo is properly approved.

The completeness assertion deals with whether or not all of the transactions and events that should have been recorded have been recorded. If an order was shipped, were the corresponding revenue and receivable recorded? In order to determine that the control is in place, the auditor would make sure that an invoice has been prepared for each shipping document.Determining whether each receivable is collected subsequent to the year-end would provide evidence about the valuation of the accounts receivable balance. This procedure would be a substantive test, not a test of controls.Ensuring that each invoice is supported by a purchase order may help the auditor determine if the sale is from a valid customer, but the revenue still would not be recorded until the order has been shipped.Examining the approval of credit memos would assist the auditor with testing the controls over the existence of sales returns.

In determining whether transactions have been recorded, the direction of the audit testing should be from the:A. general ledger balances.B. adjusted trial balance.Correct C. original source documents.D. general journal entries.

To verify that transactions have been recorded, the direction of the audit testing should be from a point as close to the transaction as possible. In the form of documentation, this is represented best by the original source documents.

What are the 5 management assertions?

There are generally five accounting assertions that the preparers of financial statements make. They are accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure.

Which audit assertion relates to sales?

Sufficient and proper disclosure related to sale revenues have been made. In the audit of revenue, the occurrence assertion may be one of the most relevant audit assertions here. This is especially true if the client has incentives to overstate revenues.

What are the 7 assertions of audit?

There are numerous audit assertion categories that auditors use to support and verify the information found in a company's financial statements..

Existence. ... .

Occurrence. ... .

Accuracy. ... .

Completeness. ... .

Valuation. ... .

Rights and obligations. ... .

Classification. ... .

Cut-off..

What are the most important assertions for revenue?

The primary relevant accounts receivable and revenue assertions are: Existence and occurrence. Completeness. Accuracy.