Accounting Cycle

Question 1

Accounting System

Answer 1

The information system relevant to financial reporting objectives, which includes the accounting system, consists of the procedures and records designed and established to:

initiate, authorize, record, process, and report entity transactions (as well as events and conditions) and maintain accountability for the related assets, liabilities, and equity;
resolve incorrect processing of transactions…;
process and account for system overrides or bypasses to controls;
transfer information from transaction processing systems to the general ledger;
capture information relevant to financial reporting for events and conditions other than transactions, such as the depreciation and amortization of assets and changes in the recoverability of accounts receivables; and
ensure information required to be disclosed by the applicable financial reporting framework is accumulated, recorded, processed, summarized, and appropriately reported in the financial statements.

Question 2

What FS Assertion does obtaining credit approval support?

Answer 2

Obtaining credit approval before shipping goods to customers supports management’s financial statement assertion of valuation. Specifically, the collectibility of accounts receivable is more likely, thus the valuation of accounts receivable is proper.

Question 3

An auditor’s decision whether to apply analytical procedures as substantive tests usually is determined by the:

precision and reliability of the data used to develop expectations.precision and reliability of the data used to develop expectations.

Answer 3

The procedures used to obtain sufficient appropriate audit evidence must be both effective and efficient. When making the decision of whether to apply analytical procedures or tests of details to a certain account balance or class of transactions, the auditor should consider the:

nature of the assertion,
plausibility and predictability of the relationship,
availability and reliability of data, and
precision of the expectation.
The availability of documentary evidence (for example, if it is available only for a short period of time) would cause the auditor to change the timing of substantive tests instead of the nature of the tests.

Each account balance or class of transactions should be addressed individually when determining the nature of the tests to be performed, rather than making the decision based on the overall number of estimates in the financial statements or on the number of transactions before or after year-end.