Auditing chapter 4

Question 1

What are management assertions in financial statements?

Answer 1

Statements made by management regarding the accuracy and completeness of financial statements

These assertions provide the foundation for the auditor’s evaluation of the financial statements.

Question 2

List the management assertions about classes of transactions and events.

Answer 2

• Completeness
• Occurrence
• Authorization
• Accuracy
• Cutoff
• Classification
• Presentation

Question 3

List the management assertions about account balances.

Answer 3

• Accuracy, valuation, and allocation
• Existence
• Rights and Obligations
• Completeness
• Classification
• Presentation

Question 4

What does ‘completeness’ in management assertions refer to?

Answer 4

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

This applies to both the financial statements and related disclosures.

Question 5

Define ‘existence’ in the context of management assertions.

Answer 5

Assets, liabilities, and equity interests exist

This assertion confirms that recorded assets and liabilities are real.

Question 6

What does ‘sufficiency’ of audit evidence refer to?

Answer 6

The measure of the quantity of audit evidence

Greater risk of misstatement requires a higher quantity of audit evidence.

Question 7

Define ‘appropriateness’ of audit evidence.

Answer 7

A measure of the quality of audit evidence

It includes factors such as relevance and reliability.

Question 8

What are the types of audit procedures?

Answer 8

• Risk assessment procedures
• Test of controls
• Substantive procedures

Question 9

What is an audit program?

Answer 9

A set of audit procedures prepared to test assertions for a component of the financial statements

It outlines the specific acts performed by the auditor.

Question 10

True or False: Evidence obtained from external documents is more reliable than evidence obtained from internal documents.

Answer 10

True

Question 11

What is ‘vouching’ in audit procedures?

Answer 11

Evaluations of financial information through source documentation from a third party

It is used to verify the occurrence of transactions.

Question 12

What is the purpose of analytical procedures in auditing?

Answer 12

To assist the auditor in understanding the business and planning audit procedures

They can also be used for substantive testing and final reviews.

Question 13

List the types of analytical procedures.

Answer 13

• Trend Analysis
• Ratio Analysis
• Reasonableness Analysis

Question 14

What is the ‘current ratio’?

Answer 14

A short-term liquidity ratio indicating the entity’s ability to meet current obligations

It is calculated as current assets divided by current liabilities.

Question 15

What is the definition of ‘profitability ratios’?

Answer 15

Ratios indicating the entity’s success or failure for a given period

Examples include Gross Profit Percentage and Return on Equity.

Question 16

What are coverage ratios used for?

Answer 16

To provide information on the long-term solvency of the entity

They help assess the ability to continue as a going concern.

Question 17

What does ‘recalculation’ involve in audit procedures?

Answer 17

Checking the mathematical accuracy of documents or records.

Question 18

What is the role of audit documentation?

Answer 18

To record audit procedures performed, relevant evidence obtained, and conclusions reached

It supports the audit report and aids in planning and supervision.

Question 19

What is meant by ‘quantification’ in investigative procedures?

Answer 19

Determining whether an explanation or error can explain the observed difference

It is part of the process for investigating differences identified in analytical procedures.

Question 20

What is a ‘tolerable difference’?

Answer 20

The size of the acceptable difference between the expectation and recorded amount

It typically aligns with the account’s tolerable misstatement.