Chapter 5 Auditing
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