Chapter 5 Audit (class examples)

Sending a written request to customers asking them to confirm the amount owed to the entity.

External confirmation → Assertions: Existence, Valuation

Examining large sales invoices for a period of two days before and after year end.

Inspection → Assertions: Completeness, Cut-off

Agreeing the total of the A/R subsidiary ledger to the A/R general ledger.

Reperformance → Assertion: Completeness

Discussing adequacy of allowance for doubtful accounts with credit manager.

Inquiry → Assertion: Valuation

Comparing current year's gross profit % with last 4 years.

Analytical review → Assertions: All (red flags)

Examining a new machine to ensure acquisition was received.

Inspection → Assertion: Existence

Watching personnel count raw materials inventory.

Observation → Assertions: Existence, Completeness, Valuation

Testing the controls of personnel’s inventory count.

Reperformance → Assertions: Existence, Completeness

Obtaining a letter from the entity’s attorney re: lawsuits.

Confirmation → Assertions: Completeness, Valuation (Contingent Liabilities)

Tracing invoice prices to approved price list.

Inspection of documents → Assertion: Valuation

Reviewing G/L for unusual adjusting entries.

Scanning → Assertions: Existence, Valuation

Inventories are properly stated at lower of cost or market.

Assertion: Valuation & Allocation

Inventories on the balance sheet are present in the warehouse at year end

Assertion: Existence

Inventory quantities include all items on hand.

Assertion: Completeness

Liens on inventory disclosed in notes.

Assertion: Presentation & Disclosure

The client has legal title to inventories.

Assertion: Rights & Obligations

FS disclose raw materials, WIP, and finished goods.

Assertion: Presentation & Disclosure

Inventories include intransit items at year end

Assertion: Completeness / Cut-off

Inventories shipped to customers on consignment.

Assertion: Rights & Obligations

Inventories received on consignment excluded from inventory.

Assertion: Rights & Obligations

Inspect and count securities on hand.

Inspection/Reperformance → Assertion: Existence

Confirm inventories in public warehouses.

Confirmation → Assertion: Existence, Completeness

Obtain report from engineer on gasoline grades.

Expert evidence → Assertion: Existence

Recompute depreciation charges.

Recalculation → Assertion: Valuation

Learn about lawsuit from legal counsel.

Inquiry → Assertions: Completeness, Valuation, Rights & Obligations

Compute & compare gross profit rates.

Analytical review → Assertions: Multiple

Examine truck titles.

Inspection of documents → Assertion: Existence

Obtain management letter on asset pledges.

Confirmation → Assertion: Rights & Obligations

Vouch sales journal entries to invoices.

Inspection of documents → Assertion: Existence

Observe client’s cash count.

Observation → Assertion: Existence

Trace paid checks to check register.

Inspection → Assertion: Completeness

Scan file to see all numbered docs accounted for.

Scanning → Assertion: Completeness

Allowance for doubtful accounts fairly presented.

Assertion: Valuation

All A/P as of balance sheet date included.

Assertion: Completeness

All purchase returns recorded are valid.

Assertion: Existence

Purchases in last week of month might be recorded in next period.

Assertion: Cut off/ completness

Client may have factored A/R.

Assertion: Rights & Obligations

SPE financing for building omitted from FS.

Assertion: Completeness

Retail client values inventory using retail method.

Assertion: Valuation

Construction client uses % completion for revenue.

Assertion: Valuation

Client lacks staff to write pension plan footnote disclosures.

Assertion: Presentation

Acquisition with high goodwill during market peak.

Assertion: Valuation

Preferred stock mandatorily redeemable in 1 year.

Assertion: Presentation (liability vs equity)