Audit assertions are claims made by the management of a company about certain areas of their financial statements or operations. Auditors verify these claims by performing tests of internal controls. According to the International Federation of Accountants, auditors should use detailed assertions to form a basis for considering the different types of potential misstatements that may occur and to assess the risks of material misstatements. They also must use assertions to design audit procedures that are responsive to the assessed risks.
Existence and Rights Assertions
The assertion of the existence of an asset or liability is the basis for verifying whether that particular asset or liability existed with the small business on the given date. Transactions recorded in the books of accounts are checked to make certain that they actually took place. It is not enough to check the company's books of accounts to confirm existence. Other corroborative procedures have to be performed. Similarly, rights assertions relate to the assets of the enterprise and are checked to ensure that the small business owns or controls the right to those assets.
Physical Inspection
Physical examinations are useful procedures for auditing assertions because they provide highly reliable audit evidence regarding the existence of assets. Inspections go beyond merely scrutinizing the supporting documents. They verify that the items in the documents do, in fact, exist as observed by the auditor. These can be done with assets such as inventory, cash, shares and securities. This physical examination gives small business owners greater assurance that company records represent business assets accurately.
External Confirmation
External confirmations are another useful procedure for auditing management assertions. These involve obtaining corroborative information directly from third parties, such as suppliers, vendors and banks. These confirmations are useful because they can provide reliable audit evidence on the existence of a company's assets. They are more reliable than merely going over company invoices or using analytical processes because a third party’s records are involved. External confirmations can also verify rights assertions made by management, which is an area where physical inspection is lacking.
Documents Inspection
Another useful approach for auditing assertions is the inspection of documents. This is because internal documents contain much of a company's information, including its environment, assets and rights. Internal documents include meeting minutes, reports, manuals, certificates and deeds. For example, to verify the assertion of a right over an asset, an auditor can check the title, transfer deed, lease agreement or insurance contract. This helps determine whether the asset is in the company's name or is subject to the company’s right. Again, this offers a way to increase the reliability of the audit conducted on the business.
Choose the best answer from the choices provided. Indicate your answer with the letter of each question followed by the number. Only one answer per question will be graded.
(2 marks each)
a. How does the timing of an audit procedure affect the audit evidence?
1) The correct timing of an audit procedure provides evidence that is conclusive rather than just persuasive.
2) Evidence that is not obtained at the fiscal year end is not as reliable.
3) Timing affects the appropriateness of the evidence.
4) Timing affects the sufficiency of the evidence.
b. Which of the following would be considered the most reliable evidence?
1) A vendor's invoice, on which the client's accounting staff has noted the cheque and purchase order numbers
2) A receiving report prepared and signed by the client's manager of receiving
3) The auditor's physical observation of an inventory item
4) Interview evidence obtained by the auditor during an interview with the chief executive officer (CEO) of the client
c. Which of the following is false concerning confirmations as an evidence gathering technique?
1) The confirmation should be printed on the audit firm's letterhead and returned directly to the auditor.
2) The request should only seek information that the recipient can supply.
3) The auditor should verify the recipient's address.
4) The confirmations should not be given to the client for mailing.
d. While conducting analytical procedures during the planning stage of the audit, comparing the audit year to previous years, an auditor found that both accounts receivable and days' sales in receivables had increased. Given this evidence, which management assertion would the auditor most likely be concerned with?
1) Existence
2) Valuation
3) Completeness
4) Ownership
e. Which internal control objective is being tested by the following question on an internal control questionnaire:
Are material requisitions reviewed by the production manager after the supervisor prepares them?
1) Validity
2) Classification
3) Accounting
4) Completeness
f. What type of evidence is obtained from the answers to checklists and preformatted internal control questionnaires?
1) External-Internal evidence
2) Verbal evidence
3) Observation evidence
4) Auditor's personal knowledge
g. Which of the following statements is true concerning the management letter?
1) It is issued by management at the end of the audit.
2) It is issued by management prior to the start of the audit.
3) It is issued by the auditor at the end of the audit.
4) It is issued by the auditor prior to the start of the audit procedures.
h. CAS requires that analytical procedures applicable in the circumstances are required at which times during an audit?
1) At the risk assessment phase only
2) At risk assessment, risk response & reporting phases
3) At the reporting phase only
4) At the risk response phase only
i. When would it be appropriate for an auditor to consider using negative confirmations for receivables, instead of positive confirmations?
1) When inherent risk and control risk are low
2) When individual balances are large
3) When accounts are in dispute
4) When the client requests the auditor to use this method
j. Which of the following would be considered to be an application control in an information system?
1) Controls over system software acquisition
2) Controls pertaining to system access security
3) Controls pertaining to the follow-up of exception reports
4) Controls pertaining to application systems maintenance
k. Which of the following types of evidence would an auditor consider to be the least reliable for an external audit?
1) Representations from the CEO of the audit client
2) A sales invoice prepared by the client
3) A sales invoice prepared by a vendor to the client
4) A bank confirmation form signed by the client's bank
l. Which management assertion is the auditor most likely testing by recalculating the interest expense from paid notes payable?
1) Validity of notes payable
2) Accuracy of interest expense
3) Classification of notes payable
4) Classification of interest expense
Answer & Explanation
Solved by verified expert
a. How does the timing of an audit procedure affect the audit evidence?
1) The correct timing of an audit procedure provides evidence that is conclusive rather than just persuasive.
All information used by the auditor in reaching the conclusions on which the auditor's opinion is based, whether obtained through audit processes or other sources, is referred to as audit evidence. Material that supports and corroborates management's assertions about the financial statements or internal control over financial reporting, as well as information that contradicts such assertions, makes up audit evidence.
b. Which of the following would be considered the most reliable evidence?
3) The auditor's physical observation of an inventory item
When audit evidence is in the form of a document, whether paper, electronic, or other medium, it is more dependable for example, a contemporaneously written record of a meeting is more reliable than a subsequent oral representation of the matters discussed. Photocopies or facsimiles are used to offer audit proof.
c. Which of the following is false concerning confirmations as an evidence gathering technique?
2) The request should only seek information that the recipient can supply.
Consider the various methods in which a company might keep data these days, emails, chat programs, cloud-based documents, recorded phone calls or teleconferences, text messages, and even paper papers. They could all contain evidence that you'll need to present your auditor to prove you've completed your compliance obligations. Obtaining accreditation from a third party is becoming increasingly vital for most businesses. External audits are frequently required for certification, but they are costly and time consuming. Conducting an internal audit in advance of an external audit might assist your firm in obtaining relevant certifications or verifying compliance efforts.
d. Given this evidence, which management assertion would the auditor most likely be concerned with?
2) Valuation
Accounting valuation is a standard process for determining the value of an asset for financial reporting purposes. Although determining the present value of certain types of assets may appear to be a simple process in general, it can necessitate complicated computations and a complete understanding of applicable legislation. There are set standards and regulations that define how value is determined and reported, as with most commercial accounting methods. However, depending on the circumstances, accountants making the appraisal have a variety of ways to choose from.
e. Which internal control objective is being tested by the following question on an internal control questionnaire:
4. Completeness
Completeness is the assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period.
f. What type of evidence is obtained from the answers to checklists and preformatted internal control questionnaires?
1) External-Internal evidence
Documented processes, policy documents, financial records, invoices, system logs, and reports are all examples of internal audit evidence. Information from banks, debtors, suppliers, stock exchanges, and the Internal Revenue Service can all be used as external sources of audit evidence.
Step-by-step explanation
g. Which of the following statements is true concerning the management letter?
4) It is issued by the auditor prior to the start of the audit procedures.
The Management Letter is intended to convey essential information about their business to management and others in charge of governance. When used correctly, the Management Letter can be a useful tool for supporting management or those in charge of governance in carrying out their duties. A management letter is a letter sent by an auditor that highlights findings and recommendations for internal control improvements discovered during the audit but not needed to be included in the auditor's internal control report, as well as other management concerns.
h. CAS requires that analytical procedures applicable in the circumstances are required at which times during an audit?
2) At risk assessment, risk response & reporting phases
Analytical procedures should be applied to some extent for the purposes referred to in and above for all audits of financial statements made in accordance with generally accepted auditing standards. In addition, in some cases, analytical procedures can be more effective or efficient than tests of details for achieving particular substantive testing objectives.
i. When would it be appropriate for an auditor to consider using negative confirmations for receivables, instead of positive confirmations?
1) When inherent risk and control risk are low
The lower the combined assessed level of inherent and control risk, the less assurance the auditor needs from substantive tests to form a conclusion about a financial statement assertion. Consequently, as the combined assessed level of inherent and control risk decreases for a particular assertion, the auditor may modify substantive tests by changing their nature from more effective but costly tests to less effective and less costly tests. For example, if the combined assessed level of inherent and control risk over the existence of cash is low, the auditor might limit substantive procedures to inspecting client-provided bank statements rather than confirming cash balances.
j. Which of the following would be considered to be an application control in an information system?
2) Controls pertaining to system access security
System access control is a security strategy that limits who or what can view or utilize resources in a computer. It's a basic security idea that reduces the risk to a company or organization. Access to campuses, buildings, rooms, and physical IT assets is restricted via physical access control.
k. Which of the following types of evidence would an auditor consider to be the least reliable for an external audit?
1) Representations from the CEO of the audit client
Direct and personal knowledge of auditors- A physical inspection of inventory to verify its existence is an example of an auditor's direct and personal knowledge. Paper or electronic bank confirmations from a third-party source are examples of external evidence that should support management's argument for their cash balance. External-internal evidence includes paid vendor bills submitted by the audit client to the auditors. Internal evidence for example, bank reconciliations created by internal accountants and utilized in cash audit procedures are an example of internal evidence.
l. Which management assertion is the auditor most likely testing by recalculating the interest expense from paid notes payable?
4) Classification of interest expense
Interest expense is a non-operating expense shown on the income statement. It represents interest payable on any borrowings - bonds, loans, convertible debt or lines of credit. It is essentially calculated as the interest rate times the outstanding principal amount of the debt.