Lecture 5

Question 1

Assertions =

Answer 1

Representations by management, explicit or otherwise, embodied in financial statements

Question 2

Auditors use assertions to

Answer 2

Reduce audit risk to acceptably low level

Question 3

3 categories of assertions (ISA 500)

Answer 3

• Classes of transaction eg revenue, costs (PL captions > CEAP
• Account balances eg assets and liabilities (BS items) > CEAVOP
• Presentation and disclosure eg all financial statement notes > CEAVOP

Question 4

Completeness

Answer 4

Is population complete? Right number of transactions? Risk of understatement

Question 5

Existence

Answer 5

Does transaction/ balance exist or is population overstated?

Question 6

Accuracy

Answer 6

Is the £ amount included in the accounts correct?

Question 7

Valuation

Answer 7

Does amount included in accounts have right value?

Question 8

Obligation & rights

Answer 8

Do FSs reflect company’s rights and obligations?

Question 9

Presentation

Answer 9

Are FSs appropriately presented, and disclosures expressed clearly?

Question 10

Assertion rule creditors

Answer 10

No valuation aspect, what you owe = what you owe

Question 11

Assertion rule cash

Answer 11

No valuation aspect

Question 12

Assertion rule P&L items

Answer 12

Historic items have no valuation and ownership aspect

Question 13

Assertion rule C & E

Answer 13

Can’t both be significant risks for 1 item

Question 14

Significant risks =

Answer 14

Areas where auditor considers material misstatement may exist either through fraud or error (identified and assessed risk)

Question 15

Significant risk according to ISA 315

Answer 15

Assessed at assertion level for all categories of assertion. To test assertions we decide which are signif and do more work on these.

Question 16

If significant risk account.. (2)

Answer 16

• Partner must sign off

- Must test controls

Question 17

Areas which give rise to significant risk (3)

Answer 17

• Complex transactions/ outside normal course business
• Related party transactions
• Areas with significant judgment

Question 18

ISAs indicate revenue..

Answer 18

Should have signif risk due to risk of fraud

Question 19

Planning matrix

Answer 19

Lists all account balances, presentation and disclosure items and classes of transactions. Identifies audit approach to take.

Question 20

To work out what to test

Answer 20

Use planning document and planning matrix

Question 21

Benefit of controls approach

Answer 21

Controls can be tested in later part of year and rolled forward > logistically beneficial