Assertions Flashcards
Existence occurs when management makes which of the following assertions?
Question 1 options:
a) Inventory that is present is recorded in the general ledger.
b) Inventory is measured at the appropriate value.
c) Inventory occurs.
d) Inventory that is recorded on the general ledger is present in the warehouse.
d) Inventory that is recorded on the general ledger is present in the warehouse.
Existence occurs when management asserts that inventory that is recorded in the general ledger exists in the warehouse.
An auditor asks, “Have the assets, liabilities, and equity of the entity been included in the financial statements at the correct amount?”
Which of the following assertions does the auditor’s question describe?
Question 2 options:
a) Occurrence, and rights and obligations
b) Completeness
c) Classification
d) Accuracy, valuation and allocation
d) Accuracy, valuation and allocation
Confirming that the assets, liabilities, and equity of the entity have been included in the financial statements at the correct amount is the description for accuracy, valuation and allocation.
Which of the following questions addresses the cut-off assertion?
Question 3 options:
a) Have the entity’s revenues and expenses been recorded in the correct reporting period?
b) Have the entity’s revenues and expenses been classified in the appropriate accounts?
c) Have the entity’s revenues and expenses been recorded accurately?
d) Have all the entity’s revenues and expenses been recorded?
a) Have the entity’s revenues and expenses been recorded in the correct reporting period?
Cut-off can be described by the following question: Have the entity’s revenues and expenses been recorded in the correct reporting period?
You are performing an audit engagement. One of the procedures that you are scheduled to perform is to inspect the aged accounts receivable listing and identify for follow-up all balances that are older than 90 days. Which financial statement assertion are you providing assurance over by performing this procedure?
Question 4 options:
a) Accuracy, valuation and allocation
b) Completeness
c) Existence
d) Cut-off
a) Accuracy, valuation and allocation
The accuracy, valuation and allocation assertion addresses whether the account balance has been recorded at the correct amount. Overdue accounts may not be collectable and should be written down to the amount that is expected to be collected. Therefore, the accuracy, valuation and allocation assertion is being tested with this procedure.
A bank confirmation tests which of the following assertions?
Question 5 options:
a) Existence
b) Classification, and existence
c) Cut-off
d) Classification
a) Existence
The existence assertion addresses whether the cash balance per the general ledger actually exists, and a bank confirmation provides third-party evidence to support the cash balance per the bank.
You are auditing the inventory of International Potash. The company stores a significant amount of potash inventory off-site at third-party warehouses. The audit manager would like you to send inventory confirmations to a sample of these off-site, third-party warehouses. The confirmation requests that the third-party warehouse indicate the quantity of inventory held. For the inventory account, which of the following assertions would be covered by this procedure?
Question 6 options:
a) Existence
b) Accuracy and existence
c) Accuracy, valuation and allocation, and existence
d) Rights and obligations, and existence
a) Existence
The rights and obligations assertion addresses whether International Potash holds or controls the rights to the inventory. Third-party confirmation of the quantity of inventory held does not address the rights and obligations assertion, as the third party would not necessarily be aware of any pledging of the inventory or other changes in ownership. Answer a) is correct because the existence assertion addresses whether the inventory exists. The third-party confirmation of the quantity of inventory held will address this assertion.
You are working on the cost of sales section for a farming client, John’s Cow Farm. You have been examining invoices for the purchase cost of cow feed to ensure that the correct amount is recorded in the general ledger. Which of the following assertions are you addressing with this procedure?
Question 7 options:
a) Accuracy, valuation and allocation
b) Completeness
c) Occurrence
d) Accuracy
d) Accuracy
Answer d) is correct because the accuracy assertion addresses whether the cost of sales transactions have been recorded at the appropriate amounts. By ensuring that the correct amount of the purchase cost of cow feed has been recorded in the general ledger through examination of a sample of invoices, you are addressing the accuracy assertion.
In which of the following examples does the procedure best match the listed assertion?
Question 8 options:
a) Completeness of inventory — Select a random sample of items on the inventory list and locate the inventory item on the warehouse floor.
b) Completeness of inventory — Recount the inventory on a test basis and ensure that the recorded counts match the inventory quantities per the inventory list.
c) Accuracy of inventory — Recalculate the quantities per the inventory list; foot the inventory list to ensure accuracy of the list total.
d) Rights and obligations — Examine counted inventory to make sure that it is tagged.
Answer b) is correct because the completeness assertion addresses whether the inventory that should have been recorded on the list has actually been recorded. By recounting the inventory on a test basis and ensuring that the recorded counts match the inventory quantities per the list, the completeness assertion is being addressed.
You are working on the audit of Smith’s Shovels Inc. Your audit manager has assigned you the revenue section and has asked you to obtain the last five shipping documents for the year. You are to trace these shipping documents to the related invoices and to the general ledger. Which of the following assertions, with respect to revenues, is best addressed by this procedure?
Question 9 options:
a) Accuracy, valuation and allocation
b) Accuracy
c) Cut-off
d) Occurrence
Answer c) is correct because, by tracing shipping documents to the related invoices and to the general ledger, you are determining whether the revenue transactions were recorded in the correct period, not whether the revenue transactions were recorded at the correct amount.
You are reviewing your colleague’s work on their audit of AAA Carpets’ financial statements. AAA follows ASPE.
Your audit team is concerned with the completeness of AAA’s note on lease commitments. The amounts recorded in the notes are derived from a separate schedule created by AAA’s controller. The controller obtains the lease information from AAA’s legal department. In the audit file, your colleague documented that he addressed completeness of the note by simply reading through it. You conclude that additional work is needed for this presentation assertion.
Which procedure best addresses completeness?
a) Select a sample of lease agreements from AAA’s legal department and ensure they are included in the controller’s schedule and the note.
b) Ask the controller if the note includes all of the necessary lease information.
c) Select a sample of lease agreements from the controller’s schedule and determine if they were properly accounted for as either capital or operating.
d) Compare the current year lease note to the same note that AAA has presented in the previous four financial statements.
Answer a) is correct. Selecting a sample from the legal department and tracing it to the controller’s schedule helps ensure that all leases are included accordingly in the note.
Blake Hudson is the audit senior on the Blueberry Limited engagement. Blueberry Limited manufactures and distributes a full range of electronic educational toys for young children. This is a challenging industry to operate in due to quickly evolving technology with high development costs. When costs incurred to develop new products meet the six criteria for internally generated intangible assets, they are capitalized on the statement of financial position (SFP). Blake is developing the audit program for deferred development costs and is currently designing procedures to address the accuracy, valuation and allocation assertion.
Which procedure best addresses accuracy, valuation and allocation of deferred development costs?
a) Inquire with management to ascertain whether Blueberry Limited holds the title to the intellectual property for its product offerings.
b) Inspect the product area where the toys are being developed.
c) Inspect supporting documents for expenditures capitalized in the deferred development costs account.
d) Inquire with management about up-and-coming technology in the industry and what that means for the current product offerings of Blueberry Limited.
Answer c) is correct. This procedure enables the auditor to determine whether expenditures capitalized relate to product development and whether the amounts capitalized are supported. This provides evidence to support the accuracy, valuation and allocation of the asset on the SFP.
You are auditing the property, plant, and equipment account on XYZ Widgets Inc.’s balance sheet. You have noted the following inherent risks regarding the entity’s equipment:
The selling price of the inventory made directly from the equipment has decreased.
The equipment is kept in the basement of the entity’s main office. There have been multiple floods in the past two years.
Which assertion is primarily impacted by these inherent risks?
a) Rights and obligations
b) Completeness
c) Accuracy, valuation and allocation
d) Existence
Answer c) is correct. Both risks would impact the value of the equipment as presented on the financial statements. If inventory prices decrease, then cash flows derived from the equipment will decrease. A reduction in cash flows may cause a reduction in the equipment’s value-in-use. Flooding in the basement may damage the equipment, also reducing the value.
