Mcconnel Auditing Chapter 6 Midterm

Front 1

How do auditors conduct financial statement audits?

Back 1

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.

Front 2

What do auditors do to increase overall assurance?

Back 2

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.

Front 3

What have auditors found to be the most efficient and effective way to audit?

Back 3

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.

Front 4

Transaction related audit objectives

Back 4

For any given class of transactions, several audit objectives must be met before the auditor can conclude that the transactions are properly recorded.

Front 5

Balance related objectives

Back 5

Several audit objectives must be met for each account balance.

Front 6

Presentation and disclosure obectives

Back 6

There are specific related objectives for these.

Front 7

What are management assertions?

Back 7

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.

Front 8

Are management assertions express or implied?

Back 8

Implied.

Front 9

What is an example of management assertions in action?

Back 9

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.

Front 10

What are management assertions directly related to?

Back 10

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.

Front 11

What three categories do international acct standards and GAAP classify assertions into in regards to management assertions?

Back 11

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.

Front 12

What are the 5 assertions management makes about transactions?

Back 12

Occurrence
Completeness
Accuracy
Classification
Cutoff

Front 13

Management transactions Occurrence

Back 13

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.

Front 14

Management transactions Completeness

Back 14

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.

Front 15

Management transactions what are the differences between occurrence and completeness?

Back 15

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.

Front 16

Management transactions what does violation of occurrence result in?

Back 16

Account overstatement

Front 17

Management transactions what does violation of completeness result in?

Back 17

understatements

Front 18

Management transactions Accuracy

Back 18

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.

Front 19

Management transactions classification

Back 19

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.

Front 20

Management transactions Cutofff

Back 20

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.

Front 21

What are the 4 management assertions about account balances

Back 21

existence
completeness
valuation and allocation
rights and obligations

Front 22

Management assertions Account Balances Existence

Back 22

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.

Front 23

Management assertions Account Balances Completeness

Back 23

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.

Front 24

Management assertions Account Balances. How do the completeness and existence assertions differ?

Back 24

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.

Front 25

Management assertions Account Balances Valuation and Allocation

Back 25

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.

Front 26

Management assertions Account Balances Rights and obligations

Back 26

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.

Front 27

Why are assertions about presentation and disclosure becoming more important?

Back 27

BEcause of the increased complexity in transactions and the need for expanded disclosure about these transactions.

Front 28

What are the 4 Management assertions about presentation and disclosure?

Back 28

Occurrence and rights and obligations
Completeness
accuracy and valuation
classification and understandability

Front 29

Management assertions Presentation and Disclosure Occurrence and rights and obligations

Back 29

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.

Front 30

Management assertions Presentation and Disclosure Completeness

Back 30

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.

Front 31

Management assertions Presentation and Disclosure Accuracy and valuation

Back 31

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.

Front 32

Management assertions Presentation and Disclosure Classification and Understandability

Back 32

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.

Front 33

Why do relative assertions have meaningful bearing and what are they used for

Back 33

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.

Front 34

What does the auditor do once all relevant assertions have been identified?

Back 34

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

Front 35

Why does it make sense that audit objectives follow and are closely related to management assertions?

Back 35

Because auditpr's primary responsibility is to determine whether management assertions about financial statements are justified.

Front 36

What is the difference between general transactions related audit objectives and specific transcation related audit objectives?

Back 36

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.

Front 37

General Transaction-Related Audit Objectives Ocurrence - recorded transactions exist

Back 37

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.

Front 38

General Transaction-Related Audit Objectives Ocurrence Completeness-Existing transactions are recorded

Back 38

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

Front 39

General Transaction-Related Audit Objectives Ocurrence-Accuracy-recorded transactions are stated at correct amounts

Back 39

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.

Front 40

General Transaction-Related Audit Objectives Ocurrence - Posting and summarization

Back 40

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.

Front 41

General Transaction-Related Audit Objectives Ocurrence-Classification Transactions included in the client's journals are properly classified

Back 41

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.

Front 42

General Transaction-Related Audit Objectives Ocurrence- Timing transactions are recorded on the correct dates

Back 42

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.

Front 43

What can you do once you have established general audit objectives?

Back 43

Once general audit objectives have been determined, specific transaction related audit objectives for each material class of transactions can be developed.

Front 44

How many specific audit objectives should you have for each general audit objective?

Back 44

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.

Front 45

Why does the accuracy assertion have 2 objectives?

Back 45

Because of the need to provide auditors with guidance in testing transaction accuracy.

Front 46

What do balance related audit objectives do?

Back 46

These follow from management assertions as well and work to help the auditor accumulate sufficient appropriate evidence related to account balances.

Front 47

What are the differences between balance related and transaction related objectives?

Back 47

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.

Front 48

What accounts do balance related audit procedures sometimes apply to?

Back 48

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.

Front 49

General Balance related audit objectives-Existence

Back 49

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.

Front 50

General Balance related audit objectives-Completeness

Back 50

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

Front 51

General Balance related audit objectives-Accuracy amounts included are stated at correct amounts

Back 51

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.

Front 52

General Balance related audit objectives-Classification - amounts included in the client's listing are properly classified

Back 52

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

Front 53

What is the classification closely related to?

Back 53

CLosely related to presentation and disclosure but relates to haow balances are classified so they can be properly disclosed.

Front 54

General Balance related audit objectives-Cutoff

Back 54

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.

Front 55

What is the difference between balance objectectives cutoff and timing objective for transactions?

Back 55

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.

Front 56

General Balance related audit objectives - Detail Tie In

Back 56

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.

Front 57

General Balance related audit objectives - Realizable value

Back 57

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.

Front 58

General Balance related audit objectives -Rights and obligations

Back 58

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.

Front 59

Presentation and disclosure related audit objectives

Back 59

these are identical to the management assertions for presentation and disclosure.