Chapter 5 Auditing

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Define Audit documentation

Audit documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

The primary source of evidence about pending litigation is the attorney ______

letter

Assets, liabilities, equity, revenues, and expenses are appropriately valued and are allocated to the proper accounting period (Assertion?)

Valuation or allocation

Documentary Evidence (Audit Evidence)

Variety of records in support of the company's business and accounting information system

Client representation (Audit Evidence)

Written documentation and representation from clients

The assets and liabilities exist, and the recorded transactions have occurred (Assertion?)

Assistance or occurrence

Representation letters are dated as of the date of the

audit report

Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

Assertions about classes of transactions and events (Category) Cutoff (Assertion)

What are the three management assertions?

1) Assertions about classes of transactions and events for the period under audit 2) Assertions about account balances at the period end 3) Assertions about presentation

The three functions of Audit Documentation

1. Provide principal support for the representation I the auditor's report that the audit was conducted in accordance with GASS 2. To aid in the planning, performance, and supervision of the audit 3. To provide the basis for the review of the quality of the work by providing a written documentation of the evidence supporting the auditors significant conclusions

Define Assertions

Assertions are expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statement and related disclosures.

Comparing the current-year gross profit percentage with the gross profit percentage for the last four years. (type of audit?)

Analytical procedures

Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity.

Assertions about account balances (Category) Completeness/Existence (Assertion)

Performing test counts of the warehouse personnel's count of the raw material.

Assertions about account balances (Category) Completeness/Existence (Assertion)

Examining a new plastic extrusion machine to ensure that this major acquisition was received.

Assertions about account balances (Category) Existence (Assertion)

Sending a written request to the entity's customers requesting that they report the amount owed to the entity.

Assertions about account balances (Category) Existence (Assertion)

Watching the entity's warehouse personnel count the raw materials inventory.

Assertions about account balances (Category) Existence (Assertion)

Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

Assertions about account balances (Category) Valuation and allocation (Assertion)

Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

Assertions about account balances (Category) Valuation and allocation (Assertion)

Reviewing the general ledger for unusual adjusting entries.

Assertions about account balances (Category) Valuation and allocation (Assertion)

Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list.

Assertions about classes of transactions and events (Category) Accuracy (Assertion)

Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

Assertions about classes of transactions and events (Category) Completeness (Assertion)

Establish the existence of assets (general objective)

Cash can be verified by physical inspection

Data Interrelationships (Audit Evidence)

Comparison between the relationships among financial or non financial data

The accounts and transactions that should be included are included, thus the financial statements are complete (Assertion?)

Completeness

Computations (Audit Evidence)

Computations made independently to prove arithmetical accuracy of client records

Establish the completeness of the recorded assets (general objective)

Examining shipping documents helps to determine if assets are properly recorded

Obtaining a letter from the entity's attorney indicating that there were no lawsuits in progress against the entity. (type of audit?)

Confirmation

Sending a written request to the entity's customers requesting that they report the amount owed to the entity. (type of audit?)

Confirmation

Bank statements. (Internal of External)

External

Long-term debt agreements. (Internal of External)

External

Remittance advices. (Internal of External)

External

Vendors' invoices. (Internal of External)

External

Bank statements. (high, moderate, or low reliability)

High because it comes from an external party.

Long-term debt agreements (high, moderate, or low reliability)

High because it comes from an external party.

Vendors' invoices (high, moderate, or low reliability)

High because it comes from an external party.

Duplicate copies of sales invoices. (high, moderate, or low reliability)

High if internal control is excellent, moderate to low otherwise.

Materials requisition forms. (high, moderate, or low reliability)

High if internal control is excellent, moderate to low otherwise.

Overhead cost allocation sheets. (high, moderate, or low reliability)

High if internal control is excellent, moderate to low otherwise.

Purchase orders. (high, moderate, or low reliability)

High if internal control is excellent, moderate to low otherwise.

Shipping documents. (high, moderate, or low reliability)

High if internal control is excellent, moderate to low otherwise.

Payroll checks. (high, moderate, or low reliability)

High to moderate because the document has been circulated to a party outside the entity.

Remittance advices. (high, moderate, or low reliability)

High to moderate because the document has been circulated to a party outside the entity.

Verify the cutoff of transactions (general objective)

auditors examine transactions just before and just after year end

Discussing the adequacy of the allowance for doubtful accounts with the credit manager. (type of audit)

Inquiry

Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period. (type of audit?)

Inspection of records

Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account. (type of audit?)

Inspection of records & Reperformace

Tracing the prices used by the entity's billing program for pricing sales invoices to the entity's approved price list. (type of audit?)

Inspection of records or documents & re-performance

Examining a new plastic extrusion machine to ensure that this major acquisition was received. (type of audit?)

Inspection of tangible assets

Duplicate copies of sales invoices. (Internal of External)

Internal

Materials requisition forms. (Internal of External)

Internal

Overhead cost allocation sheets (Internal of External)

Internal

Payroll checks. (Internal of External)

Internal

Purchase orders. (Internal of External)

Internal

Shipping documents. (Internal of External)

Internal

Analytical procedures are the primary way to test data ________

Interrelationships

Who is responsible for the fair presentation of the financial statements?

Management

Accounting Information System (Audit Evidence)

Methods and records to process, summarize, and report the company's transactions

Watching the entity's warehouse personnel count the raw materials inventory. (type of audit?)

Observation

Performing test counts of the warehouse personnel's count of the raw material. (type of audit?)

Reperformance

Third Party Representations (Audit Evidence)

Representations or evidence from outside parties

Determine the appropriate financial statement presentation and disclosure of the asset (general objective)

Reviewing subsequent events is an important step

The assets are the rights of the entity, and the liabilities are its obligations. (Assertion?)

Rights and obligations

Establish that the company has rights to the asset (general objective)

Rights to cash can be verified by sending a confirmation

Reviewing the general ledger for unusual adjusting entries. (type of audit?)

Scanning

_____ may be involved in some testing of calculations

Specialists

Physical Evidence (Audit Evidence)

Tangible asset from examination

The activity in a particular account for the period is generally included ________ working paper.

account analysis

Inventory can be observed as it is ______ by client personnel.

counted

Because documents like checks, shipping documents, and receiving reports are usually _______, it is easier for auditors to verify cutoff.

numbered

The amount appearing as an asset on a financial statement is usually the accumulation of many ________ items.

smaller

a cutoff test that relates to plant assets typically affects ____

the balance sheet

Determine the appropriate valuation of the assets (general objective)

vouch the cost of acquisition to paid checks


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