Unit 5 - Audit Evidence Flashcards
(35 cards)
What are the five assertions about classes of transactions and events for the period under audit?
- Occurrence
- Completeness
- Accuracy
- Cutoff
- Classification
Define Assertion (1) Occurrence (about classes of transactions and events for the period under audit)
Transactions and events that have been recorded have occurred and pertain to the entity
ex. a client may record revenues prematurely in error, or management might record fictitious sales to overstate revenues and profit.
Define Assertion (2) Completeness (about classes of transactions and events for the period under audit)
All transactions and events that should have been recorded have been recorded
ex. a client may have incurred an expense but not recorded it because the vendor’s invoice had not been received, or because management intended to understate expenses and overstate profit
Define Assertion (3) Accuracy (about classes of transactions and events for the period under audit)
Amounts and other data relating to recorded transactions and events have been recorded appropriately
ex. a client might inadvertently use the wrong price on an invoice or may have complex foreign exchange calculations where errors can easily occur
Define Assertion (4) Cutoff (about classes of transactions and events for the period under audit)
Transactions and events have been recorded in the correct accounting period
ex. a client may record a sale before year-end that actually occurred after year-end, or a client may record an expense after year-end that was actually incurred before year-end. Unintential cutoff mistakes may happen when internal controls are poor. Alternatively, a client may be motivated to record an expense or revenue in the wrong period to manipulate net income for the period
Define Assertion (5) Classification (about classes of transactions and events for the period under audit)
Transactions and events have been recorded in the proper accounts
ex. a client may have recorded a routine maintenance expense in a fixed asset account with it should be recorded in an expense account. Auditors should be alert to misstatements that result in capitalizing an amount that should be expensed.
What are the four assertions about account balances at the period-end?
6) Existence
7) Rights and obligations
8) Completeness
9) Valuation and allocation
Define Assertion (6) Existence (about account balances at the period-end)
Assets, liabilities, and equity interests exist
ex. a client may miscount inventory, resulting in an overcount and overstatement, or a client may attempt to overstate inventory or accounts receivable to improve financial ratios for the period
Define Assertion (7) Rights and obligations (about account balances at the period-end)
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity
ex. An example of inventory that physically exists but does not satisfy the rights and obligations assertion is inventory held on consignment in the client’s warehouse (and therefore not owned by the entity), which is incorrectly recorded as an asset.
Define Assertion (8) Completeness (about account balances at the period-end)
All assets, liabilities, and equity interest that should have been recorded have been recorded.
ex. a client may fail to record various accrued liabilities due to an error or an attempt to improve reported financial ratios for the period
Define Assertion (9) Valuation and allocation (about account balances at the period-end)
Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.
ex. an auditor verifies that inventory has been appropriately recorded at the lower of cost or net realizable value (risk of overstatement)
ex. an auditor tests for the adequacy of the allowance for doubtful accounts (risk of understatement or overstatement depending on the client’s motivation)
ex. an auditor verifies that equipment used in operations has been appropriately marked down if it is impaired (risk of overstatement)
What are the four assertions about presentation and disclosure?
10) Occurrence and rights and obligations
11) Completeness
12) Classification and understandability
13) Accuracy and valuation
Define Assertion (10) Occurrence and rights and obligations (about presentation and disclosure)
Disclosed events, transactions, and other matters have occurred and pertain to the entity.
Define Assertion (11) Completeness (about presentation and disclosure)
All disclosures that should have been included in the financials statements have been included
Define Assertion (12) Classification and understandability (about presentation and disclosure)
Financial information is appropriately presented and described, and disclosures are clearly expressed
Define Assertion (13) Accuracy and valuation (about presentation and disclosure)
Financial and other information are disclosed fairly and in appropriate amounts.
Define Relevant Assertions
Assertions that have a reasonable possibility of containing a material misstatement that would cause the financial statements to be materially misstated and, therefore, have a meaningful impact on whether the account is fairly stated.
What is the Audit Program?
A listing of details of the audit procedures to be used when testing controls, conducting detailed substantive audit procedures, and completing the audit.
When auditing accounts receivable, what will an auditor search for when testing for rights and obligations?
When testing the rights and obligations assertion for accounts receivable, the auditor should ensure the company has the right to receive the payments on receivables. The auditor could examine sales invoices and other documentation that shows the company sold and delivered goods or services to customers at a certain price, and therefore, the company has the right to be paid.
What does the accuracy assertion mean? Use an example in the context of purchases of inventory.
The accuracy assertion states that amounts and other data relating to recorded transactions and events have been recorded appropriately.
Ex. when a company purchases inventory from a vendor, the vendor’s invoice will have the cost of the items purchased. When entering the cost of the items purchased, an employee typed $12 instead of $21 for an item which causes an accuracy problem.
What is the auditor trying to ensure when considering the cutoff assertion? Use an example in the context of payroll transactions.
The cutoff assertion ensures that transactions and events have been recorded in the correct accounting period.
Ex. To test the cutoff assertion for payroll, an auditor should examine employee time cards from before and after year-end and compare with the payroll report to determine if the time worked (wages expense) was recorded in the proper period.
When auditors use the phrase “sufficient appropriate evidence,” what do they mean by “appropriate?”
Appropriate refers to the quality of audit evidence gathered.
Typically, the higher the quality of the evidence, the less quantity that may be required.
AU-C 500.A5 and AS 1105.06 state the quality of audit evidence is determined by its relevance and reliability in providing support for the conclusions on which the auditor’s opinion is based.
When auditors use the phrase “sufficient appropriate evidence,” what do they mean by “sufficient?”
Sufficient refers to the quantity of audit evidence gathered.
Essentially, auditors determine at what point they have gathered enough evidence to support their opinion on the financial statements.
AU-C 500.A4 and AS 1105.05 state the quantity of evidence needed is affected by the risk of material misstatement in a relevant assertion for an account balance or class of transactions. In other words, as risk increases, the amount of evidence the auditor should gather also increases.
Describe the relationship between the risk of material misstatement and sufficient appropriate audit evidence.
The risk of material misstatement affects the quantity and quality of evidence gathered by an auditor during the risk response phase. To elaborate, if detection risk is set to low, then the auditor will perform more substantive procedures that result in a higher quality and possibly increased quantity of evidence.
Ex. assume there is a high risk that the client’s internal controls are not operating effectively. In fact, the auditor believes that high-ranking company executives are able to circumvent controls related to revenue. This will cause the auditor to set risk of material misstatement as high and detection risk as low, performing more substantive procedures since test of controls related to revenue cannot be relied upon.
