The nature of audit evidence

Question 1

Describe what the existence (occurrence) assertion means.

Answer 1

The existence (occurrence) assertion means that the recorded transactions are valid economic events of the period in which they are reported (i.e., the recorded transactions/items are properly recorded).

Question 2

Describe what the completeness assertion means.

Answer 2

The completeness assertion means that there are no omissions of transactions that should have been reported.

Question 3

Describe what the rights and obligations assertion means.

Answer 3

The rights and obligations assertion means that the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed.

Question 4

Describe what the valuation or allocation assertion means.

Answer 4

The valuation or allocation assertion means that the dollar amounts attributed to the elements of the company’s financial statements are appropriate and in accordance with generally accepted accounting principles (GAAP) or other applicable financial reporting framework.

Question 5

Define “audit evidence.”

Answer 5

All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information.

Question 6

Define “assertion.”

Answer 6

Implicit or explicit statements of fact by management that are associated with the entity’s financial statements

Question 7

List the three broad categories of assertions under AICPA professional standards.

Answer 7

1. )Account balances at the end of the period (there are four assertions related to the balance sheet)
2. )Classes of transactions and events during the period (there are five assertions related to the income statement)
3. )Presentation and disclosure (there are four assertions related to the footnotes applicable to any of the financial statements)

Question 8

List the four assertions about account balances at the end of the period (balance sheet).

Answer 8

1. )Existence
2. )Completeness
3. )Rights and obligations
4. )Valuation and allocation

Question 9

List the five assertions about classes of transactions and events during the period (income statement).

Answer 9

1. )Accuracy
2. )Occurrence
3. )Completeness
4. )Cutoff
5. )Classification

Question 10

List the four assertions about presentation and disclosure (footnotes).

Answer 10

1. )Occurrence and rights and obligations
2. )Completeness
3. )Classification and understandability
4. )Accuracy and valuation

Question 11

What is meant by “sufficient” and “appropriate” when “sufficient appropriate audit evidence” is mentioned?

Answer 11

“Sufficient” refers to the quantity of evidence that is required.
“Appropriate” refers to the quality of the evidence involved, in terms of “relevance” and “reliability.”

Question 12

What are the AICPA’s guidelines to rank the reliability of audit evidence?

Answer 12

1. )Direct personal knowledge by the auditor is the most reliable audit evidence.
2. )Evidence obtained from an independent outside source is the next most reliable.
3. )Evidence obtained from the entity under effective internal control is next.
4. )Documentary evidence is more reliable than verbal responses to inquiries (and original documents are more reliable than faxes and photocopies).