Chapter 5

What are audit assertions?

Satatements regarding the recognition, measurement, presentation, and disclosure of items included in the financial statements.

6 Assertions about Class of Transactions

1. Occurrence

2. Completeness

3. Accuracy

4. Cut-Off

5. Classification

6. Presentation

What is Occurrence?

When is it most important?

Auditor gathers evidence that the transaction and disclosures recorded by the client actually took place and relate to the entity.

Most important where there is risk of overstatement (ie. revenue)

What is Completeness?

When is it most important?

Auditor gathers evidence that all transactions and disclosures have been recorded by the entity.

Most important where there is risk of understatement (e.g., expenses)

What is Accuracy?

When is it most important?

Auditor gathers evidence that transactions and disclosures are recorded by the client at the appropriate amounts

Most important where there is higher risk of inaccuracy (e.g., complex foreign exchange transactions)

What is Cut-Off?

When is it most important?

Auditor gathers evidence that the transactions have been recorded by the client in the correct period

Most important for transactions near year end

What is Classification?

When is it most important?

Auditor gathers evidence that transaction is in correct

account.

Always!

What is Presentation?

Auditor ensures events/transactions appropriately aggregated or disaggregated (ie. has every amount been properly added or subtracted)

6 Assertions about Account Balances at Y/E

1. Existence

2. Rights and Obligations

3. Completeness

4. Accuracy, Valuation, Allocation

5. Classification

6. Presentation

What is Existence?

When is it most important?

Auditor gathers evidence that recorded asset, liability, and equity items actually exist

Most important where there is risk of overstatement (e.g., assets)

What are Rights and Obligations?

When is it most important?

Auditor gathers evidence that recorded assets are owned by entity and that recorded liabilities represent commitments of the entity

Most important where there is risk that items are held but not owned (e.g., inventory on consignment)

What is Completeness?

When is it most important?

Auditor gathers evidence that asset, liability, and equity items and disclosures have been recorded by the client

Most important where there is risk of understatement (e.g., unrecorded liabilities)

What is Accuracy? Valuation? Allocation?

When are these most important?

Auditor gathers evidence that asset, liability, and equity items and related disclosures have been recorded at appropriate amounts and allocated to the correct accounts by the client

Most important where there is risk of over- or undervaluation (e.g., inventory at lower of cost and NRV, adequacy of doubtful accounts or other provisions)

What is Classification?

When is it most important?

Auditor gathers evidence that assets, liabilities, and equity interests are recorded in proper accounts

What is Presentation?

When is it most important?

Auditor ensures assets, liabilities, and equity interests are appropriately aggregated or disaggregated

What is Audit Evidence?

The information that an auditor uses when arriving at their opinion on the fair presentation of their client’s financial statements

What is sufficient appropriate evidence?

• Sufficiency relates to quantity of evidence

• Appropriateness relates to quality of evidence

• Audit risk determines what evidence is required

Consider a High-Risk Account…

What are the levels of inherent risk? Control risk? Detection risk? How much evidence is required?

Inherent = High

Control = High

Detection = Low

Evidence = More

Consider a Low-Risk Account…

What are the levels of inherent risk? Control risk? Detection risk? How much evidence is required?

Inherent = Low

Control = Low

Detection = High

Evidence = Less

What should be considered when evaluating the reliability of information?

• Source of information, specifically, independence of external third parties

• Expertise of respondent

• Consistency of information

• Source of information and if it is produced in an environment where the internal controls operate effectively

What is included in documentary evidence?

Invoices, suppliers’ statements, bank statements, minutes of meetings, correspondence, legal agreements

What is a legal letter?

Sent by client to its lawyers to complete and return directly to auditor

Can include opinions on legal matters, details of disagreements with client

What is a management representation letter?

contains acknowledgement of management’s responsibilities, undertaking about legal compliance, confirmation of discussions

What are the types of audit evidence? (8)

1. External confirmations

2. Documentary evidence

3. Legal letter

4. Management representation letter

5. Verbal evidence

6. Computational evidence

7. Physical evidence

8. Electronic evidence

Rank the following types of evidence from least to most persuasive:

Externally generated evidence held by client, internally generated evidence, and externally generated evidence sent directly to auditor

Least: Internally generated evidence

Externally generated evidence held by client

Most: Externally generated evidence sent directly to auditor

What is included in a working paper?

• Client name, audit period

• Title describing contents of paper, file reference

• Details identifying preparer/reviewer and work dates

• Cross references to other documents