Introduction to MPAcc 5P37 CAS 300 – Planning an audit of financial statements

Key Points Management assertions Management assertions give rise to Audit Objectives What type of tests? Thus have N.B. For each audit objective there must be an audit test

Management Assertions Transaction (Events) Occurrence Completeness Accuracy Cutoff Classification

Management Assertions Balances Existence Rights and Obligations (Ownership) Completeness Valuation and Allocation

Management Assertions Presentation and Disclosure Occurrence Rights & Obligations (Ownership) Completeness Valuation & Accuracy Classification & Understandability

Transaction-Related Audit Objectives Specifically for transactions or events There are five audit objectives for transactions Occurrence Completeness Accuracy Posting and summarization Classification Timing (Cutoff)

Balance Related Audit Objectives To see if a balance is fairly stated Five objectives Existence Rights and Obligations (Ownership) Completeness Valuation (or realizable value) Allocation

Presentation & Disclosure Related Audit Objectives Used to examine financial statements Seven objectives Occurrence Rights and Obligations (Ownership Completeness Accuracy Valuation Classification Understandability

Examples Asset Existence Inventory Completeness Sales Occurrence The test Inventory Completeness Sales Occurrence Sales timing

(1) From another text The following are two balance-related audit objectives in the audit of accounts payable. All accounts payable included on the list represent amounts due to valid vendors. There are no unrecorded accounts payable. The list referred to in the objectives is the aged accounts payable balance produced using the supplier master file. The total of the list equals the accounts payable balance on the general ledger. REQUIRED Explain the difference between theses two balance-related audit objectives For the audit of accounts payable, which of these two balance-related audit objectives would usually be more important? Explain.

(2) From another text The following (1 through 17) are the balance-related, transaction-related, and presentation- and disclosure-related audit objectives. Assertions About Classes of Transactions and Events Assertions About Account Balances Assertions About Presentation and Disclosure 1. Occurrence 6. Existence 11. Occurrence and 7. Rights and Obligations 12. Rights and Obligations 2. Completeness 8. Completeness 13. Completeness 3. Accuracy 14. Accuracy and 9. Valuation and 15. Valuation 10. Allocation 4. Cutoff 5. Classification 16. Classification 17. Understandability

(2) - continued REQUIRED Identify the audit object (1 through 17) of each of the following audit procedures for the audit of sales accounts receivable., and cash receipts for the current fiscal year. Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. Add all customer balances in the accounts receivable trial balance and agree the account to the general ledger. For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct customer account in the accounts receivable total field of the customer master file. Inquire of the client whether any accounts receivable balances have been pledged as collateral on long-term debt and determine whether all required information is included in the footnote description for long-term debt. For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal. Discus with credit department personnel the likelihood of collection of all accounts with a balance greater then $100,000 and greater than 90 days old as of the year-end. Examine sales invoices for the last five sales transactions recorded in the sales journal in the current year and examine shipping documents to determine that they are recorded in the correct period. For a sample of customer accounts receivable balances at the year-end, examine subsequent cash receipts in the following month to determine whether the customer paid the balance due. Determine whether all risks related to accounts receivable are adequately disclosed. Foot the sales journal for the month of July (hallway through the fiscal year and trace posting to the general ledger. Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at the fiscal year-end. Determine whether long-term receivables and related party receivables are reported separately in the financial statements.