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59 Cards in this Set

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How do auditors conduct financial statement audits?
They conduct audits using the cycle approach by performing audit tests of the transactions making up ending balances and also by performing audit tests of account balances and related disclosures.
What do auditors do to increase overall assurance?
In almost all audits, overall assurance can be increased by also auditing the ending balance of accounts receivable. Auditors have found that, generally, the most effecient and effective way to conduct audits is to obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.
What have auditors found to be the most efficient and effective way to audit?
Auditors have found that, generally, the most effecient and effective way to conduct audits is to obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.
Transaction related audit objectives
For any given class of transactions, several audit objectives must be met before the auditor can conclude that the transactions are properly recorded.
Balance related objectives
Several audit objectives must be met for each account balance.
Presentation and disclosure obectives
There are specific related objectives for these.
What are management assertions?
Management assertions are implied or expressed representations by management about classes of transactions and the related amounts and disclosures in the financial statements. Most of the time these are implied.
Are management assertions express or implied?
Implied.
What is an example of management assertions in action?
Management asserts 827,568 was present in financials and in bank account as of balance sheet date. Unless otherwise disclosed in the finanncial statements, management also asserts that the cash was unrestricted and available for normal use. Management also asserts that al required disclosures related to cash are accurate and understandable.
What are management assertions directly related to?
Management assertions are directly related to the financial reporting framework used by the company usually GAAP or IFRS as they are part of the criteria that management uses to record and disclose accounting information in the financial statements.
What three categories do international acct standards and GAAP classify assertions into in regards to management assertions?
1. Assertions about classes of transactions and events for the period under audit.
2. Assertions about account balances at period end.
3. Assertions about presentation and disclosure.
What are the 5 assertions management makes about transactions?
Occurrence
Completeness
Accuracy
Classification
Cutoff
Management transactions Occurrence
This assertion concerns whether recorded transactions included in the financial statements actually occurred during the accounting period. For example, management asserts that recorded sales transactions represent exchanges of goods or services that actually took place.
Management transactions Completeness
Deals with whether all transactions that should be recorded in the financials are in fact included. For example, management asserts that all sales of goods and services are recorded and included in the financial statements.
Management transactions what are the differences between occurrence and completeness?
The completeness assertion addresses matters opposite of the occurrence assertion.

Completeness is concerned with the possibility of omitting transactions which should have been recorded, whereas occurrence is concerned with inclusions of transactions which should not have been recorded.
Thus, a violation of occurrence results in account overstatements, whereas violations of completeness relate to account understatement.
Management transactions what does violation of occurrence result in?
Account overstatement
Management transactions what does violation of completeness result in?
understatements
Management transactions Accuracy
Assertion that addresses whether transactions have been recorded in correct amounts. USing the wrong price to record a sales transactions and an error in calculating the extension of price times quanityt are violations of the accuracy assertion.
Management transactions classification
This assertion addresses whether transactions are recorded in the appropriate accounts. Recording administrative salaries in cost of sales is one example of a violation of classification of accounts.
Management transactions Cutofff
Addresses whether transactions are recorded in the proper accounting period. Recording a sales transaction in december when the goods were not shipped until January violates the cut off assertion.
What are the 4 management assertions about account balances
existence
completeness
valuation and allocation
rights and obligations
Management assertions Account Balances Existence
The existence assertion deals with whether assets, liabilities, and equity interests included in the balance sheet actually existed on the balance sheet date. For example, management asserts that merchandise inventory included in the balance sheet exists and is avail for sale at the balance sheet date.
Management assertions Account Balances Completeness
This assertion addresses whether all accounts and amounts that should be presented in the financial statements are in fact included. For example, management asserts that notes payable in the balance sheet include all such obligations of the entity.
Management assertions Account Balances. How do the completeness and existence assertions differ?
COmpleteness assertion addresses matters opposite of the existence assertion. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included, whereas the existence assertion is concerned with inclusion of amounts that should not have been included. Thus, violations of existence assertion relates to account overstatement. Violations of completeness assertion results in account understatements.
Management assertions Account Balances Valuation and Allocation
The valuation and allocation assertion deals with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, including any valuation adjustments to reflect asset amounts at net realizable value. MAnagement asserts that property is recorded at historical cost and that such cost is systematically allocated to appropriate accounting periods through depreciation.
Management assertions Account Balances Rights and obligations
This assertion addresses whether disclosed events have occurred and are the rights and obligations of the entity. For example, if the client discloses that it has acquired another company or that amounts capitalized for leases in the balance sheet represent the cost of the entity's rights to leased property and that the corresponding lease liability represents an obligation of the entity.
Why are assertions about presentation and disclosure becoming more important?
BEcause of the increased complexity in transactions and the need for expanded disclosure about these transactions.
What are the 4 Management assertions about presentation and disclosure?
Occurrence and rights and obligations
Completeness
accuracy and valuation
classification and understandability
Management assertions Presentation and Disclosure Occurrence and rights and obligations
THis assertion addreses whether disclosed events have occurred and are the rights and obligations of the entity. For example, if the client discloses that it has acquired another company, it asserts that the transaction has been completed.
Management assertions Presentation and Disclosure Completeness
This section deals with whether all required disclosures have been included in the financial statements. As an example, managment asserts that all material transactions with related parties have been disclosed in the financial statements.
Management assertions Presentation and Disclosure Accuracy and valuation
The accuracy and valuation assertion deals with whether financial information is disclosed fairly and at appropriate amounts. Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of this assertion.
Management assertions Presentation and Disclosure Classification and Understandability
This assertion relates to whether amounts are appropriately classified in the financial statements and footnotes, and whether the balance descriptions and related disclosures are understandable. For example, management asserts that the classification of inventories as finished goods, work in progress, and raw materials is appropriate, and the disclosures of the methods used to value inventory are understandable.
Why do relative assertions have meaningful bearing and what are they used for
They have meaningful bearing o nwhether the account is fairly stated and are used to assess the risk of material misstatement and the design and performance of audit procedures. For example, valuation is likely to be a relevant assertion for A/R but not for cash.
What does the auditor do once all relevant assertions have been identified?
After identifying relevant assertions, the auditor can then develop audit objectives for each category of assertions. The auditpr's audit objectives follow and are closely related to management's assertions
Why does it make sense that audit objectives follow and are closely related to management assertions?
Because auditpr's primary responsibility is to determine whether management assertions about financial statements are justified.
What is the difference between general transactions related audit objectives and specific transcation related audit objectives?
The six general transaction related audit objectives are applicable to every cass of transcactions and are stated in broad terms. Specific transaction related audit objectives are also applied to each class of objectives but are stated in general terms.
General Transaction-Related Audit Objectives Ocurrence - recorded transactions exist
Ths objective deals with whether recorded transactions have actually occurred. Inclusion of a sale in the sales journal when no sale occurred violates the occurrence objective. This objective is the auditor's counterpart to managemnt assertion of transactions.
General Transaction-Related Audit Objectives Ocurrence Completeness-Existing transactions are recorded
This onjective deals with whether all transactions that should be included in journals have actually been included. Failure to include a sale in the sales journal and general ledger when one occurred violates completeness objective. This objective is the counterpart to managemnet assertion of completeness for classes of transactions
General Transaction-Related Audit Objectives Ocurrence-Accuracy-recorded transactions are stated at correct amounts
This objective addresses accuracy of info for accounting transactions and is one part of accuracy assertion for classes of transactions. For sales transactions, this objective is violated if the quantity of goods shipped was different from the quantity billed, the wrong selling price was used for billing, extension or adding errors occured in biling or wrong amount was included in sales journal.
General Transaction-Related Audit Objectives Ocurrence - Posting and summarization
Recorded transactions are properly included in master files and are properly summarized. This objective deals iwth accuracy of the transfer of info from recorded transactions in journals to subsidiary records and the general ledger. It is part of the accuracy assertion for classes of transactions. For example, if a sales transaction is recorded in the wrong customer's record or at the wrong amount in the master file or if the sum of all sales transactions posted from sales journal to general ledger is inaccurate, this objective is violated.
General Transaction-Related Audit Objectives Ocurrence-Classification Transactions included in the client's journals are properly classified
This addresses whether transactions are included in the appropriate accounts, and is the auditor's counterpart to management's classification assertion for classes of transactions. Examples of misclassifications of sales are including cash sales as credit salse, recording a sale of operating fixed assets as revenue ect.
General Transaction-Related Audit Objectives Ocurrence- Timing transactions are recorded on the correct dates
The timing objective for transactions is the auditor's counterpart to management's cutoff assertion. A timing error occurs if a transaction is not recorded on the day it takes place. A sales transaction, should be recorded on the date of shipment.
What can you do once you have established general audit objectives?
Once general audit objectives have been determined, specific transaction related audit objectives for each material class of transactions can be developed.
How many specific audit objectives should you have for each general audit objective?
At least one specific should be related for each general objective unless auditor believes general transaction related audit objective is not relevant or is unimportant in the circumstances.
Why does the accuracy assertion have 2 objectives?
Because of the need to provide auditors with guidance in testing transaction accuracy.
What do balance related audit objectives do?
These follow from management assertions as well and work to help the auditor accumulate sufficient appropriate evidence related to account balances.
What are the differences between balance related and transaction related objectives?
First, balance related objectives are applied to account balances such as accounts receivable and inventory rather than transactions such as sales transactions.
2. There are 8 balance related objectives vs 6 transaction objectives.
What accounts do balance related audit procedures sometimes apply to?
Sometimes apply to income statement accounts in the case of unpredictable expenses such as legal expense. Other income statement accounts that are closely related to balance sheet accounts such as depreciation expense are also audited.
General Balance related audit objectives-Existence
Amounts included exist. This deals with whether amounts included should actually be on the financial statements. For example an a/r from a customer in the trial balance if there is no A/R from the customer violates existnece. This ties into management's existence assertion.
General Balance related audit objectives-Completeness
Existing amounts are included This makes sure all amounts that should be included are actually included. Failure to include an A/R from a customer in the A/R trial balance when one exists violates the completeness objective. Goes with management's assertion for completeness
General Balance related audit objectives-Accuracy amounts included are stated at correct amounts
The accuracy objective refers to amounts being included atthe correct amount. An inventory item on a client's inventory listing can be wrong because the number of units of inventory on hand was misstated, the unit price was wrong, or the total was incorrectly extended.
General Balance related audit objectives-Classification - amounts included in the client's listing are properly classified
Classification involves determining whether items included on a client's listing are included in the correct general ledger account. for edxample, on the A/R listing, receivables must be separated into short-term and long-term
What is the classification closely related to?
CLosely related to presentation and disclosure but relates to haow balances are classified so they can be properly disclosed.
General Balance related audit objectives-Cutoff
This deals ONLY with transactions near the balance sheet date and making sure they are recorded in the proper period. In testing for this the objective is to see if trans were recorded and included in account balances in proper period. An account balance is likely to be misstated by trans during the end of the year.
What is the difference between balance objectectives cutoff and timing objective for transactions?
The timing objective for transactions relates to proper timing of recording transactions throughout the year. The cutoff objective for balance related audit objectives relates only to transactions near year end.
General Balance related audit objectives - Detail Tie In
Details in the account balance agree with related master file accounts, foot to the total in the account balance, and agree with the total in the general ledger. Account balances are suported by details in the master files and schedules prepared by cleitns. The detail tie in objective is concerned that the details on lists are accurately prepared, correctly added, and agree with the general ledger. An individual a/r listing on a listing of A/R should be the same in the A/R master file, and the total should equal the general ledger control account.
General Balance related audit objectives - Realizable value
assets are included at amounts estimated to be realized. Objective concerns whether an account balance has been reduced for declines from historical cost to net realizable value or when accounting standards require fair market value accounting treatment. Examples when the objective applies are considering the adequacy of the allowance for uncollectible accounts receivable and write downs of inventory for obsolescence.
General Balance related audit objectives -Rights and obligations
In addition to existing, most assets must be owned before it is acceptable to include them in the financial statements. Similarly, liabilities belong to the entity. Rights are always associated with assets and obligations with liabilities. Objective is auditor's counterpart to management's rights and obligations for account balanches.
Presentation and disclosure related audit objectives
these are identical to the management assertions for presentation and disclosure.