John Kenneth E.

Bentir BSA-IV September 26, 2020

Acctg 14: Auditing Theory

Midterm: Seatwork. 1

1. What are the 5 financial statement assertion?

a. Existence or Occurrence
b. Rights and obligation
c. Completeness
d. Valuation and Allocation
e. Presentation and Disclosure

2. What are the categories of assertion?

a. Assertions about classes of transactions and events for the period under audit:
1.Occurrence – transactions and event that have been recorded have occurred
and pertain to the entity.
2.Completeness – all transactions and events that should have been recorded.
3.Accuracy – amounts and other data relating to recorded transactions and
events have been recorded appropriately.
4.Cutoff – transactions and events have been recorded in the correct accounting
period.
5.Classification – transactions and events have been recorded in the proper
accounts.
b. Assertions about account balances at the period end:
1.Existence – assets, liabilities, and equity interest exist.
2.Right and obligation – the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
3.Completeness – all assets, liabilities and equity interests that should have been
recorded have been recorded
4. Valuation and allocation – assets, liabilities, and equity interests are included in
the financial statements and appropriate amounts and any resulting valuation
or allocation adjustments are appropriately recorded.
c. Assertions about presentation and disclosure:
1.Occurrence and rights and obligations – disclosed events, transactions, and
other matters have occurred and pertain to the entity.
2.Completeness – all disclosures that should have been included in the financial
statements have been included.
3.Classification and understandability – financial information is appropriately
presented and described, and disclosures are clearly expressed.
 4.Accuracy and valuation – financial and other information are disclosed fairly and
at appropriate amounts.

3. What are the purposes of audit assertion?

Assertions assist auditors in considering a wide range of issues that are relevant to the
authenticity of financial statements. The consideration of management assertions during the
various stages of audit helps to reduce the audit risk.

4. Give the 5 assertion for audit of:

a. Cash
1.Rights and obligation – Management asserts that cash reported on balance
sheet belongs to client.
 Inquire of management if there are restriction on cash
 Confirm with bank, using AICPA Standard Bank Confirmation, that there
are no restrictions on cash such as compensating balances.
2.Valuation and Allocation – Management asserts that cash is reported on
balance sheet in correct amount.
 Confirm balance per bank using AICPA Standard Bank Confirmation.
 Compare amount on confirmation to amount on bank reconciliation.
 Compare ending balance on bank reconciliation to schedule of cash
balances
 Compare total amount from schedule of cash balances to amount
reported on balance sheet.
 Observe counts of cash on hand.
 Recalculate amounts on bank reconciliation.
 Examine interbank transfer schedule to verify absence of kiting.
3.Completeness – Management asserts that cash reported on balance sheet
represents all of the company’s cash and that all transactions involving cash
were recorded in the appropriate period.
 Confirm that reconciling items are reported in appropriate period using
bank cutoff statement.
 Compare deposits in transit on bank reconciliation to deposits reported
in the cutoff statement.
 Compare outstanding checks on bank reconciliation to checks cleared in
the cutoff statement.
4.Existence or Occurrence – Management assert that cash reported on the
balance sheet actually exists.
 Confirm bank deposit using AICPA Standard Bank Confirmation
 Confirm certificates of deposit and other cash equivalents held by bank
or others.
 Observe cash on hand.
 Examine certificates of deposit and other cash equivalents on hand.
 5.Presentation and Disclosure – Management asserts that cash equivalent are
properly classified, and any pertinent information is adequately disclosed.
 Inquire of management about compensating balance or other
restrictions on cash.
 Confirm restriction on cash using AICPA Standard Bank Confirmation.
 Examine financial statements and disclosures to make certain that cash
is properly presented and disclosed.
b. Account receivable
1.Rights and obligation – Management asserts that company is entitled to the
amounts reported as accounts receivable.
 Inquire of management if accounts receivables have been pledged,
assigned, or sold.
 Examine loan agreements for indications of accounts receivable
financing.
 Examine minutes of meeting of board of directors for indication of
accounts receivable financing.
2.Valuation and Allocation – Management asserts that accounts receivable is
reported at its net realizable value.
 Inquire of management as to policies for collecting and writing off
delinquent accounts.
 Confirm balance in accounts receivable using positive or negative
confirmations.
 Compare amounts reported on confirmations to accounts receivables
schedule.
 Compare total of accounts receivable schedule to amount reported on
balance sheet.
 Recalculate balances of the allowance for uncollectible accounts and
allowances for sales discounts and sales returns and allowances.
 Examine subsequent collections and shipping documents for receivables
for which positive confirmations were not returned.
 Apply analytical procedures to determine if accounts receivable balance
is reasonable in relation to sales and other factors.
3.Completeness – Management asserts that all amounts owed to the company
resulting from sales on account are included in accounts receivable and that all
transactions related to sales and accounts receivable were recorded in the
appropriate period.
 Compare shipping documents to amounts recorded as sales to
determine if sales were recorded.
 Examine numerical sequence of prenumbered shipping documents and
invoices to make certain that all numbers are accounted for.
 Examine shipping logs and shipping documents for shipments at or near
year-end to verify appropriate cutoff.
4.Existence or Occurrence – Management asserts that amounts reported as
accounts receivable exist and reported sales transactions actually occurred.
  Confirm amounts reported in accounts receivable using positive or
negative confirmations.
 Compare recorded sales to invoices and shipping documents to
determine that goods were sold and shipped.
 Compare deposits to dates receipts were recorded to verify absence of
lapping
 Examine subsequent collections and shipping documents for receivables
for which positive confirmations were not returned.
5.Presentation and Disclosure – Management asserts that amounts reported as
sales and accounts receivable are properly classified on the financial statements
and any pertinent information is adequately disclosed.
 Inquire of management as to whether any accounts receivables are
pledged as collateral for a loan.
 Ascertain whether receivables from related parties are identified for
disclosure purposes.
 Examine accounts receivable listing to verify that loans from officers and
other amounts are not included.
 Examine loan agreements for indication of pledging of receivables.
 Examine financial statements and disclosures to make certain that
accounts receivable is properly presented and disclosed.
 Examine minutes of directors’ meeting for indications of accounts
receivable financing.
c. Inventory
1.Rights and obligation – Management asserts that the company owns the
inventory reported and that it has not been pledge as collateral for a loan.
 Inquire of management if inventory is being held on consignment or has
been pledged as security.
 Examine loan agreements to determine if inventory is pledged as
security.
 Examine purchase invoices to verify that inventory is owned rather than
held on consignment.
 Examine minutes of directors’ meeting for indication of inventory
financing.
2.Valuation and Allocation – Management asserts that inventory is properly
reported using an appropriate inventory valuation method and at the lower of
cost or market when appropriate.
 Inquire as to the inventory valuation method in use.
 Compare amounts resulting from test count to amounts reported on
inventory schedules
 Compare inventory cost to amounts on purchase invoices.
 Compare total from inventory schedule to amount reported on balance
sheet.
 Observe counts of inventory to verify accuracy.
  Recalculate selected amounts and the totals on inventory schedule
using costs and qualities to verify accuracy.
 Examine inventory schedules to verify proper application of inventory
cost method.
 Apply analytical procedures to determine if inventory is reasonable in
relation to cost of sales and other related items.
3.Completeness – Management asserts that all inventory owed by the company is
included in the report balance and that all transactions related to inventory are
recorded in the appropriate period.
 Inquire of management as to inventories stored outside the entity.
 Confirm inventories held by consignees, warehouses, and others outside
the entity.
 Compare amounts from test counts to inventory schedules.
 Compare totals of inventory schedules to amount reported on balance
sheet.
 Examine shipping documents for goods in transit to determine if
appropriately included or excluded from inventory.
4.Existence or Occurrence – Management asserts that all inventory that is
reported in the financial statements actually exists.
 Confirm inventories held by consignees, public warehouses and other
outside the entity.
 Observe the counting of inventory.
 Examine shipping documents for inventory in transit.
5.Presentation and Disclosure – Management asserts that amounts reported as
inventory in the financial statement are properly classified and any pertinent
information has been adequately disclosed.
 Inquire of management if inventory is pledged as security for a loan.
 Examine loan agreements for indication of financing of inventory.
 Examine financial statements and disclosures to make certain that
inventory is properly presented and components and inventory
valuation method are properly disclosed.
 Examine minutes of directors’ meeting for indications of inventory
financing.

d. Investment
1.Rights and obligation – Management asserts that company is entitled to the
amounts reported as accounts receivable.
 Inquire of management if accounts receivables have been pledged,
assigned, or sold.
 Examine loan agreements for indications of accounts receivable
financing.
 Examine minutes of meeting of board of directors for indication of
accounts receivable financing.
2.Valuation and Allocation – Management asserts that accounts receivable is
reported at its net realizable value.
 Inquire of management as to policies for collecting and writing off
delinquent accounts.
 Confirm balance in accounts receivable using positive or negative
confirmations.
 Compare amounts reported on confirmations to accounts receivables
schedule.
 Compare total of accounts receivable schedule to amount reported on
balance sheet.
 Recalculate balances of the allowance for uncollectible accounts and
allowances for sales discounts and sales returns and allowances.
 Examine subsequent collections and shipping documents for receivables
for which positive confirmations were not returned.
 Apply analytical procedures to determine if accounts receivable balance
is reasonable in relation to sales and other factors.
3.Completeness – Management asserts that all amounts owed to the company
resulting from sales on account are included in accounts receivable and that all
transactions related to sales and accounts receivable were recorded in the
appropriate period.
 Compare shipping documents to amounts recorded as sales to
determine if sales were recorded.
 Examine numerical sequence of prenumbered shipping documents and
invoices to make certain that all numbers are accounted for.
 Examine shipping logs and shipping documents for shipments at or near
year-end to verify appropriate cutoff.
4.Existence or Occurrence – Management asserts that amounts reported as
accounts receivable exist and reported sales transactions actually occurred.
 Confirm amounts reported in accounts receivable using positive or
negative confirmations.
 Compare recorded sales to invoices and shipping documents to
determine that goods were sold and shipped.
 Compare deposits to dates receipts were recorded to verify absence of
lapping
 Examine subsequent collections and shipping documents for receivables
for which positive confirmations were not returned.
5.Presentation and Disclosure – Management asserts that amounts reported as
sales and accounts receivable are properly classified on the financial statements
and any pertinent information is adequately disclosed.
 Inquire of management as to whether any accounts receivables are
pledged as collateral for a loan.
 Ascertain whether receivables from related parties are identified for
disclosure purposes.
  Examine accounts receivable listing to verify that loans from officers and
other amounts are not included.
 Examine loan agreements for indication of pledging of receivables.
 Examine financial statements and disclosures to make certain that
accounts receivable is properly presented and disclosed.
 Examine minutes of directors’ meeting for indications of accounts
receivable financing.

e. Accounts Payable
1.Rights and obligation – Management asserts that company is obligated to pay
accounts payable.
 Compare amounts showing as payable to vendors invoices, receiving
reports and purchases orders to verify that payables are goods ordered
and receive.
 Examine vendors’ invoices, receiving reports, and purchase orders.
2.Valuation and Allocation – Management asserts that accounts payable is
reported at the amount that the company is obligated to pay.
 Confirm amounts reported as payables with vendors
 Compare amounts reported as payable to vendors’ invoices, receiving
reports, and purchases orders.
 Compare amount schedule of accounts payable to amount reported on
financial statement.
 Recalculate totals of accounts payable schedule.
 Apply analytical procedures to determine if relationships between
accounts payable and purchases, inventory cost of goods sold, and
other items are reasonable
3.Completeness – Management asserts that all amounts owed to vendors for
purchases on account are included in accounts payable and that all transactions
related to accounts payable and purchases are reported in the appropriate
period.
 Confirm with vendors that balances are complete.
 Confirm with vendors with zero balances to determine if amounts are
owed.
 Compare receiving reports to vendors’ invoices and amounts recorded
in accounts payable.
 Examine payments made shortly after year-end to determine if goods or
services were received before year-end.
4.Existence or Occurrence – Management asserts that the obligation to pay a
accounts payable exist and that all purchase transactions did occur.
 Confirm accounts payable with vendors.
 Compare amounts reported in accounts payable to vendors’ invoices,
receiving reports and purchase orders.
 Examine payments after year-end to verify obligation existing at year-
end
 5.Presentation and Disclosure – Management asserts that amounts reported as
accounts payable are properly classified on the financial statements and any
pertinent information is adequately disclosed.
 Examine financial statements and disclosures to make certain that
accounts receivable is properly presented and disclosed.
 Ascertain whether payables to related parties are identified for
disclosure purposes.

5. What are audit procedures?

Audit procedure are the means used by auditor to obtain sufficient appropriate evidence.

6. What is audit evidence?

Audit evidence refers to the information obtained by the auditor in arriving at the conclusions
on which the audit opinion is based.

7. Give 6 audit procedures used by auditors to gather sufficient evidence

a. Inspection – involves examining of records, documents, or tangible assets.

b. Observation – consist of looking at a process or procedure being performed by other
c. Inquiry – consists of seeking information from knowledgeable person inside or outside
the entity.
d. Confirmation – consists of the response to an inquiry to corroborate information
contained in the accounting records.
e. Computation – consists of checking the arithmetical accuracy of source documents and
accounting records or performing independent calculations.
f. Analytical Procedures – consist of the analysis of significant ratios ad trends including
the resulting investigation of fluctuations and relationships that are inconsistent wit
other relevant information or deviate from predicted amounts.

8. Give the six (6) audit process.

a. Accepting an Engagement
b. Audit Planning
c. Considering Internal Control
d. Performing Substantive Tests
e. Completing the Audit
f. Issuing a Report
9. What are the preliminary planning activities?

a. Performing procedures regarding the continuance of the client relationship and the
specific audit engagement.
b. Evaluating compliance with ethical requirements, including independence.
c. Establishing an understanding of the terms of the engagement.

10. What is the purpose of test control?

The auditor should give adequate consideration to the entity’s internal control because the
condition of the entity’s internal control directly affects the reliability of the financial
statements. The stronger the internal control, the more assurance it provides about the
reliability of accounting data and financial statements.

11. What is the purpose of substantive tests?

Using the information obtained in audit planning and consideration of internal control, the
auditor performs substantive test to determine whether the entity’s financial statements are
presented fairly in accordance with financial reporting standards. These procedures would
involve examination of the documents and evidence supporting the amounts and disclosures in
the financial statements.

12. What are the additional procedures performed by the auditor to complete the audit?

a. Review of subsequent events and contingencies

b. Assessing the going concern assumption
c. Performing overall analytical review procedures
d. Obtaining written representation from the client’s management

13. How does the auditor communicate the conclusion on its audit?

On thee basis of audit evidence gathered and evaluated the auditor forms a conclusion about
the financial statements. This conclusion is communicated to various interested users through
an audit report.

14. What are the things the auditing firm should consider in accepting an engagement?

a. Competence
b. Independence
c. Ability to serve the client properly
d. Integrity of management
15. What is an engagement letter?

It serves as the written contract between the auditor and the client.

16. What are inclusions in engagement letter?

a. The objectives of the audit of financial statements which is to express an opinion on the
financial statements.
b. The management’s responsibility for the fair presentation of the financial statements.
c. The scope of audit
d. The forms or any reports or other communication that the auditor expects to issue.
e. Billing arrangements
f. Expectations of receiving management representation letter.
g. Arrangement concerning the involvement of others (experts, other auditors, internal
auditors and other client personnel).
h. Request for the client to confirm the terms of the engagement.

17. What are the importance of an engagement letter?

a. Avoid misunderstandings with respect to the engagement.

b. Document and confirm the auditor’s acceptance of the appointment.

18. What are the factors that the auditor would send new engagement letter?

a. Any indication that the client misunderstands the objective and the scope of the audit
b. Any revised or special terms of the engagement
c. A recent change of senior management, board of directors or ownership
d. A significant change in the nature or size of the client’s business.
e. Legal requirements and other governments and other government agencies’
pronouncements.

19. What are the factors to be considered in decision of whether to send a separate letter to the
component?

a. Who appoints the auditor of the component.

b. Whether a separate audit report is to be issued on the component.
c. Legal requirements.
d. The extent of any work performed by other auditor.
e. Degree of ownership by parent.
f. Degree of independence of the component’s management.

20. What is a component?

When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component).