&. Allaccounts on the list arose from the normal course of business and are not due from related parties h, Sales cutoff at year-end is proper. Management Assertion about Account Balances 1. Existence 3. Valuation and allocation 2. Completeness 4, Rights and obligations For each specific balance-related audit objective, identify the appropriate management section. (Hint: See Table 6-4 on page 160.) (x (Objectives 6-6, 6-7) The following are specific transaction-related audit objectives plied to the audit of cash disbursement transactions (a through f), management assertions about classes of transactions (1 through 5) and general transaction-related audit objectives (6 through 11). Specific Transaction-Related Audit Objective a. Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded. b, Cash disbursement transactions are properly included in the accounts payable master fle and are correctly summarized. ¢. Recorded cash disbursements are for goods and services actually received. 4. Cash disbursement transactions are properly classified. ¢. Existing cash disbursement transactions are recorded. £. Cash disbursement transactions are recorded on the correct dates. Management Assertion about General TransactionRelated Classes of Transactions Audit Objective 1. Occurrence 6. Occurrence 2. Completeness 7. Completeness 3. Accuracy 8. Accuracy 4. Classification 9. Posting and summarization 5. Cutoff 10. Classification 11, Timing 4. Explain the differences among management assertions about classes of transactions and events, general transaction-related audit objectives, and specific transaction related audit objectives and their relationships to each other. b, For each specific transaction-related audit objective identify the appropriate manage- ment assertion. ¢ For each specific transaction-related audit objective, identify the appropriate general transaction-related audit objective. 6-27 (Objective 6-6) The following ore various management assertions (a through m) related to sales and accounts receivable. Management Assertion a. All sales transactions have been recorded. b. Receivables are appropriately classified as to trade and other receivables in the financial statements and are clearly described. Accounts receivable are recorded at the correct amounts. Sales transactions have been recorded in the proper period - Sales transactions have been recorded in the appropriate accounts. All required disclosures about sales and receivables have been made. All accounts receivable have been recorded. ‘There are no liens or other restrictions on accounts receivable. Disclosures related to receivables are atthe correct amounts. Recorded sales transactions have occurred. . Recorded accounts receivable exist. Sales transactions have been recorded at the correct amounts. . Disclosutes related to sales and receivables relate to the entity. Bervrre meas (CHAPTER 6 / AUDIT RESPONSIBILITIES AND OBJECTIVES Required Required 169a. Explain the differences among management assertions about classes of transactions and events, management assertions about account balances, and management assertions about presentation and disclosure. b. For each assertion, indicate whether it isan assertion about classes of transactions and events, an assertion about account balances, or an assertion about presentation and disclosure. «. Indicate the name of the assertion made by management. (Hint: See Table 6-2 on page 155.) 6-28 (Objective 6-8) The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to is the lst of accounts payable taken from the accounts payable master fle. The total ofthe list equals the accounts payable balance on the general ledger. 1. All accounts payable included on thelist represent amounts due to valid vendors. 2. There are no unrecorded accounts payable. Required a. Explain the difference between these two specific balance-related audit objectives. 'b. Which of these two specific balance-related audit objectives applies to the general balance-related audit objective of existence, and which one applies to completeness? ¢. For the audit of accounts payable, which of these two specific balance-related audit objectives is usually be more important? Explain, 6-29 (Objectives 6-6, 6-9) The following are specific presentation and disclosure-related audit objectives applied to presentation and disclosure for fixed assets (a through d) and ‘management assertions (1 through 4). Specific Presentation and Disclosure-Related Audit Objective a. All required disclosures regarding fixed assets have been made. . Footnote disclosures related to fixed assets are clear and understandable. . Methods and useful lives disclosed for each category of fixed asset are accurate. Disclosed fixed asset dispositions have occurred. Management Assertion about Presentation and Disclosure 1. Occurrence and rights and obligations Completeness Accuracy and valuation Classification and understandability Required For each specific presentation and disclosure-related audit objective, identify the appro: priate management assertion. (Hint: See Table 6-5 on page 161.) V 6-30 (Objective 6-8) The following (1 through 18) are the balance-related, transaction related, and presentation and disclosure related audit objectives. Balance-Related TransactionRelated Presentation and Dis- Audit Objectives Audit Objectives closure Audit Objectives 1. Existence 9. Occurrence 15, Occurrence and 2. Completeness 10. Completeness rights 3. Accuracy I. Accuracy 16, Completeness 4. Classification 12. Classification 17. Accuracy and Catoft 13. Timing valuation Detail 14. Posting and 18, Classification and Realizable value summarization understandability 8. Rights and obligations Required Identify the specific audit objective (1-18) that each of the following specific audit pro- cedures (a. through h.) satisfies in the audit of sales, accounts receivable and cash receipts for fiscal year ended December 31, 2009, 170 PARTTWO / THE AUDIT PROCESSa, Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. b. Add all customer balances in the accounts receivable trial balance and agree the amount to the general ledger. c. 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 subledger. 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. £. Discuss with credit department personnel the likelihood of collection of all accounts as of December 31, 2009 with a balance greater than $100,000 and greater than 90 days old as of year end. ¢. Examine sales invoices for the last five sales transactions recorded in the sales journal in 2009 and examine shipping documents to determine they are recorded in the correct period. h, For a sample of customer accounts receivable balances for December 31, 2009, ‘examine subsequent cash receipts in January 2010 to determine whether the customer paid the balance due, {6-31 (Objectives 6-1, 6-3) Hakim Mabarak opened a small cotton and textiles store in 1985 with money he had saved working as a Tayseer Mardini store manager. He named it Mabarak Baladi. Because of the excellent location and his fine management skills, Mabarak Baladi grew to three locations by 1991. By that time, he needed additional capital. He “obtained financing through a local bank at 3 percent above prime, under the condition that he submits quarterly financial statements reviewed by a CPA firm approved by the bank. After interviewing several firms, he decided to use the firm of El-Gazzar & Abu-Elenien CPAs, after obtaining approval from the bank. In 1994, the company expanded to five stores, and Hakim developed a business plan to add another 10 stores over the course of six years. Mabarak’s capital needs had also grown, 0 Hakim decided to add two business partners who both had considerable capital and some expertise in textile stores. After further discussions with the bank and continued conversations with future business partners, he decided to have an annual audit and ‘quarterly reviews done by Abdullah & Elhakeem, even though the additional cost was ‘almost $50,000 annually. The bank agreed to reduce the interest rate on the $10,000,000 of loans to 2 percent above prime. By 1999, things were going smoothly, with the two business partners heavily involved in day-to-day operations and the company adding two new stores each year. The company ‘was growing steadily and was more profitable than they had expected. By the end of 2000, ‘one of the business partners, Malik Zaater, had taken over responsibility for accounting and finance operations, as well as some marketing. Annually Abdullah & Elhakeem did an in- depth review of the accounting system, including internal controls, and reported their conclusions and recommendations to the board of directors. Specialists in the firm provided tax and other advice. The other partner, Fatina El Sayid, managed most of the stores and was primarily responsible for building new stores. Hakim was president and managed four stores. “The company went public in 2005. The partners hoped that this would enable them to ‘add more stores and update their original buildings. The public offering was a major (CHAPTER 6 / AUDIT RESPONSIBILITIES AND OBJECTIVES 17