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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
Occurrence
Completeness
Accuracy
Cut-Off
Classification
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
Existence
Rights and Obligations
Completeness
Accuracy, Valuation, Allocation
Classification
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)
External confirmations
Documentary evidence
Legal letter
Management representation letter
Verbal evidence
Computational evidence
Physical evidence
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
