Audit Chapter 5

Question 1

Assertions

Answer 1

Occurrence, Completeness, Classification, Accuracy, Valuation, Authorization, Rights and Obligations, Cutoff, Existence

Question 2

Occurrence-Transactions (Existence)

Answer 2

Transactions and events that have been recorded have occurred and pertain to the entity (starting at the Journal where it is recorded and tracing to documents)

Question 3

Completeness

Answer 3

All transactions and events that should have been recorded have been recorded ( starting at a sample of documents and tracing back to Journal record)

Question 4

Authorization

Answer 4

All transactions and events that should have been recorded have been properly authorized

Question 5

Existence- Balances (Occurrence)

Answer 5

Everything that is recorded actually exists and pertains to the entity (balances)

Question 6

Accuracy

Answer 6

Mathematical-Amounts and other data relating to recorded transactions and events have been recorded properly (columns foot) checking amounts is accuracy

Question 7

Cutoff

Answer 7

Transactions are recorded in the proper period depending on FOB-shipping point or FOB-destination whether sale is recorded in right period and revenue is recognized correctly

Question 8

Cutoff

Answer 8

Transactions are recorded in the proper period depending on FOB-shipping point or FOB-destination whether sale is recorded in right period and revenue is recognized correctly

Question 9

Classification

Answer 9

Transactions are recorded in proper accounts

Question 10

Rights and Obligations

Answer 10

(Balances) The entity holds and controls the rights to assets and liabilities are the obligations of the entity- the assets are owned by the company and the liabilities are the entities (didn’t sell off receivables)

Question 11

Valuation

Answer 11

Assets. Liabilities and equity interests in the financial statements are appropriate amounts and any valuation or allocation adjustments are recorded (inventory carried at cost or market value on the balance sheet) (cost of capital assets allocated appropriately with depreciation)

Question 12

Existence- Balances (Occurrence)

Answer 12

Everything that is recorded actually exists and pertains to the entity (balances) Accounts receivable- most concern that they exist Starting at A/R or A/P trial balance tracing back to documents

Question 13

Classification

Answer 13

Transactions are recorded in proper accounts (common miss-classifications long-term, short-term, current, non-current)

Question 14

Valuation

Answer 14

Assets. Liabilities and equity interests in the financial statements are appropriate amounts and any valuation or allocation adjustments are recorded (inventory carried at cost or market value on the balance sheet) (cost of capital assets allocated appropriately with depreciation)

Question 15

Audit evidence (anything we can use to prove or disprove assertions)

Answer 15

Nature-type of information looking at
Sufficiency-quantity (enough of the right stuff)
the greater the risk the higher the quantity lower the risk lower quantity
Evaluation-are we comfortable that what we have collected is enough

Question 16

Appropriateness of Audit Evidence (quality)

Answer 16

Relevance-does it relate to assertion being tested
Reliability-how much can we rely on it (Independence of source, effectiveness of internal control, auditors direct personal knowledge, documentary evidence, original document)

Question 17

Audit Procedures

Answer 17

Risk assessment (where could something go wrong) Test of controls (are the controls effective), Substantive procedures (tests of the details)

Question 18

Confirmations

Answer 18

Positive blank, Positive amount, Negative

Question 19

9 categories of audit evidence

Answer 19

inspection of tangible assets, re-performance, recalculation, confirmation, inspections of records or documents, analytical procedures, scanning, inquiry, observation

Question 20

9 categories of audit evidence

Answer 20

inspection of tangible assets, re-performance, recalculation, confirmation, inspections of records or documents, analytical procedures, scanning, inquiry, observation

Question 21

positive blank confirmation (most persuasive evidence of the confirms)

Answer 21

asking for an amount to affirm balance

Question 22

positive amount confirmation (easier for client)

Answer 22

amount included to affirm balance (if the balance is less than what the client has on their books they just got a deal!)

Question 23

negative confirmation (NOT USED OFTEN, DOESN’T PROVIDE ASSURANCE)

Answer 23

asking for a response (co xyz owes $$ is that true) how do you know if they got it and just didn’t respond

Question 24

negative confirmation (NOT USED OFTEN, DOESN’T PROVIDE ASSURANCE)

Answer 24

asking for a response (co xyz owes $$ is that true) how do you know if they got it and just didn’t respond

Question 25

Audit documentation (working papers)

Answer 25

demonstrate how the audit complied with professional practice standards, support conclusions, show that records agreed with financial statements

Question 26

Audit documentation should

Answer 26

include a written audit programs detailing procedures, enable a knowledgeable reviewer to understand the nature, timing, extent and results of the audit procedures, evidence obtained, and conclusions reached and determine who performed, reviewed the work as well as dates of work and reviews

Question 27

Audit documentation should

Answer 27

include a written audit programs detailing procedures, enable a knowledgeable reviewer to understand the nature, timing, extent and results of the audit procedures, evidence obtained, and conclusions reached and determine who performed, reviewed the work as well as dates of work and reviews

Question 28

Analytical Procedures (testing relationships between financial and non-financial data)

Answer 28

Preliminary, Substantive, Final
Trend analysis-changes in the account over time (last years or many years with current)
Ratio analysis- comparison across time or to a benchmark of relationships between financial statement accounts (more effective than trend because can identify unusual patterns)
Reasonableness analysis- development of a model to form an expectation using financial data, non-financial data or both (more precises than trend and ratio)

Question 29

Preliminary Analytical Procedures (objective)

Answer 29

to better understand the business and plan the nature, timing, extent of audit procedures, to identify financial statement accounts likely to have errors

Question 30

Substantive Analytical Procedures (objective)

Answer 30

used to obtain evidence about assertions related to account balances or classes of transactions,

Question 31

Final Analytical Procedures (objective)

Answer 31

used as an overall review of the financial information in the final review stage of the audit

Question 32

Substantive Analytical Procedures Steps

Answer 32

1. Develop an expectation of amount or account balance
2. Define a Tolerable Difference
3. Compare Expectation to recorded
4. Investigate the difference greater than tolerable difference