Chapter 5 - Audit Evidence

Financial statements are statements of facts. True or false?

False. Financial statements are claims and assertions, made implicitly or explicitly by management, about the recognition, measurement, presentation, and disclosure of information in the financial statements.

There are 2 categories of assertions made by management. Explain Transactons and Events and Related Disclosures.

Completeness: Did we record everything?

Accuracy: Is the amount correct?

Proper period cutoff: Did we record it in the right period?

Classification: Did we put it in the right account?

Occurrence: Did it happen?

Presentation: Did we show/disclose it correctly?

There are 2 categories of assertions made by management. Explain Account Balances and Related Disclosures.

Completeness: Did we include everything?

Accuracy, Valuation & Allocation: Is the balance measured correctly?

Rights and Obligations: Does the company actually own/owe it?

Existence: Is it actually there?

Presentation: Is it shown/disclosed correctly?

Classification: Is it in the right category?

What are the forms of information used as audit evidence?

Oral info: Auditors pose many questions to client personnel and others external to the client. Verbal responses to these questions are considered audit evidence.

Visual info: Auditors observe many activities at the client, such as the application of internal controls and the observation of physical inventory.

Paper documents: Important business transactions may be documented in paper form, such as sales or lease contracts.

Electronic info: Transactions are manually input or electronically generated in the client’s IT system. Some documents, such as sales contracts, may only be in electronic form.