Assertions, Evidence, & Audit Procedures
Summary
TLDRThe script discusses auditing procedures, focusing on linking assertions to evidence and audit processes. It explains the importance of testing asset existence and occurrence of transactions, using examples like inspecting inventory and confirming accounts receivable. The script highlights why auditors trace sales journal entries to shipping documents to prevent overstatement of sales, rather than starting with shipping documents to check for understatement. It also touches on rights and obligations, emphasizing third-party confirmations as evidence and the need for clear presentation and disclosure in financial statements.
Takeaways
- 🔍 Audit assertions are tied to evidence and audit procedures to verify the accuracy of financial statements.
- 🏢 Existence assertion ensures that recorded assets truly exist, like physical inventory or confirmed accounts receivable.
- 📦 Occurrence assertion checks if recorded transactions actually took place, such as sales transactions backed by shipping documents.
- 🔄 The auditor's concern is with overstatement, hence the procedure starts with the sales journal to trace back to shipping documents, not the other way around.
- 📄 Completeness is about ensuring all transactions that should be recorded are indeed recorded, which is why auditors trace from shipping documents to sales journal.
- 🤝 Rights and obligations assertion verifies that the entity owns the assets and has identified legal responsibilities.
- 📑 Third-party confirmations are crucial for verifying ownership and existence of assets and liabilities.
- 📊 Presentation and disclosure assertion ensures that financial statements are understandable to users, including the format and related disclosures.
- 📋 Audit evidence includes management-prepared financial statements, which auditors review for accuracy and compliance with presentation standards.
- 🔎 Inquiry is a part of gathering audit evidence to understand the context and details of financial statement presentations and disclosures.
Q & A
What is the main focus of the transcript?
-The transcript focuses on explaining the relationship between audit assertions, evidence, and procedures, particularly in the context of financial statements.
What does the term 'existence' refer to in audit assertions?
-In audit assertions, 'existence' refers to the confirmation that the recorded assets truly exist, such as physical inventory or tangible property, plant, and equipment.
How does an auditor confirm the existence of accounts receivable?
-An auditor confirms the existence of accounts receivable by obtaining evidence such as confirmation from customers or analyzing aging reports.
What is the auditor's concern when testing the occurrence of sales transactions?
-The auditor's concern is to ensure that all recorded sales transactions have actually occurred and are not overstated.
Why does the auditor trace sales from the sales journal back to shipping documents?
-The auditor traces sales from the sales journal back to shipping documents to ensure that every recorded sale in the journal is supported by a corresponding shipping document, thus confirming the occurrence of the sale.
Why is it not appropriate to start with shipping documents to test for overstatement?
-Starting with shipping documents to test for overstatement is not appropriate because it would only confirm completeness, not overstatement. The auditor is more concerned with ensuring that all recorded sales are valid and not fictitious.
What is the significance of third-party audit evidence?
-Third-party audit evidence, such as confirmations from banks or legal counsel, is significant because it provides an independent verification of the existence of assets or liabilities.
What is the auditor's approach to testing the completeness of sales transactions?
-The auditor's approach to testing the completeness of sales transactions involves starting with shipping documents and ensuring they are properly reflected in the sales journal, indicating that all sales have been recorded.
What is the auditor's concern regarding the presentation and disclosure of financial statements?
-The auditor's concern is to ensure that the presentation and disclosure of financial statements are understandable to users and accurately reflect the amounts recorded in the financial statements.
How does the auditor verify the assertion of rights and obligations?
-The auditor verifies the assertion of rights and obligations by obtaining evidence such as legal documents, contracts, or third-party confirmations that confirm the entity's ownership of assets and identification of legal responsibilities.
What is the role of management in the preparation of financial statements?
-Management is responsible for preparing the financial statements, and auditors review these statements, including the presentation, format, and related disclosures, to ensure they meet the standards for understandability and accuracy.
Outlines
📊 Audit Assertions and Evidence for Existence and Occurrence
The paragraph discusses the process of auditing financial statements, specifically focusing on the assertion of existence and occurrence. Auditors verify the existence of assets by physically inspecting inventory, property, plant, and equipment, and confirming accounts receivable and cash. To test the occurrence of transactions, auditors examine sales transactions to ensure they have actually occurred. They do this by selecting a sample of sales from the sales journal and tracing them back to shipping documents. The rationale behind starting with the sales journal rather than the shipping documents is to ensure that all recorded sales are valid and not overstated. The auditor is concerned with both overstatement and understatement, but the focus here is on confirming that recorded sales have actually taken place.
📜 Audit Evidence for Completeness and Rights and Obligations
This paragraph continues the discussion on auditing, focusing on the completeness of sales transactions and the rights and obligations of assets. It emphasizes the importance of using shipping documents as evidence that a sale has occurred. The auditor's goal is to ensure that all sales that should be recorded are indeed recorded, which relates to the completeness assertion. The paragraph also touches on the audit evidence needed to verify that the entity owns the assets and has the associated legal responsibilities. Examples of third-party audit evidence include confirmations from attorneys about liabilities and bank confirmations about cash balances. Additionally, the paragraph mentions the importance of presentation and disclosure, ensuring that financial statements are understandable to users.
Mindmap
Keywords
💡Audit Assertions
💡Existence
💡Occurrence
💡Completeness
💡Overstatement
💡Vouching
💡Rights and Obligations
💡Third-Party Confirmation
💡Shipping Documents
💡Sales Journal
Highlights
The importance of tying audit assertions to evidence and audit procedures.
Existence assertion and verifying the physical presence of assets.
Audit procedures for confirming accounts receivable and cash.
Occurrence assertion and the auditor's focus on transaction validity.
The significance of shipping documents as evidence for sales transactions.
Auditor's approach to testing occurrence by starting from the sales journal.
The rationale behind not starting with shipping documents to test occurrence.
Concerns over overstatement in sales and how auditors address it.
The role of completeness in auditing and its relation to shipping documents.
The difference between testing for understatement and overstatement in sales.
The necessity of starting with the sales journal to test occurrence.
The concept of rights and obligations in financial statements.
Audit evidence from third parties such as confirmations and legal liabilities.
The presentation and disclosure assertion and its impact on financial statement users.
Management's responsibility in preparing financial statements and its audit implications.
The role of inquiry in gathering audit evidence.
Transcripts
financial statements so if you look at
just relaying or or tying audit
assertions to evidence and audit
procedures for example let's focus here
on this column dealing with the ASB
assertions you'll see that for example
existence I'm not going to go through
all of these we've kind of covered them
but existence do the assets record it
really exists and so examples of that
would be the physical presence of the
asset so for example the auditor might
inspect inventory might inspect property
plant and equipment they will confirm
accounts receivable they will confirm
cash but because they're trying to test
the existence of that asset occurrence
those who transaction related so did the
recorded sales transactions really occur
right that's the key question the
auditor is asking so they want to get
evidence of the client shipping
documents as I pointed out in an earlier
example right because shipping documents
would suggest that ownership of that
asset has now transferred to the
customer once we ship it fov right and
so the auditor would vouch they would
select a sample of shipping documents
from the clients books and records and
tie those I'm sorry they would select a
sample of sales from the sales journal
and trace those back to shipping
documents right because what they're
concerned about is did it occur do is it
I've recorded this sale in my sales
journal so now I want to make sure that
it's actually a valid sale that it
occurred so that's why I'm going to
start with my sales journal and tie that
back to the shipping document why
wouldn't I do it the other way
why wouldn't I go from the shipping
document to the sales journal to test
occurrence
why would that not be the appropriate
procedure what do you think what am i
concerned about what occurrence well
it's recorded right current snows were
current insane what's recorded actually
occurred I want management and saying
what I've recorded actually happened but
what's my concern as an auditor that it
actually happened so I'm concerned about
overstatement with respect to sales
right so why wouldn't I go from the
shipping documents back to the sales
journal why wouldn't that make sense why
would why am I not starting with the
shipping document to test occurrence
if I'm concerned about overstatement
shipping to sales right it should be it
is that's the right way
sales you're shipping but why is the
other way not right
John
right well that exists anyway right that
exists going the other way the reason
that you're not gonna start with
shipping because if we go with the
premise that is it's been shipped it's
an accurate sell right that's gonna tell
me completeness that's gonna tell me
because the shipping documents tells me
right if I go with that premise shipping
tells me that it should be recorded
right shipping says I sent I saw
something and it should be in my sales
journal that gets to completeness right
that tells me that when I start with the
shipping document and tie it back to the
sales journal that tells me that
everything that I pushed out the door is
properly reflected in my sales journal
that gets to understatement that doesn't
tell me anything about overstatement
right because I want to know that
everything that's recorded over here in
the sales journal is valid right so the
only way to know that is to randomly
select from the sales journal and ensure
that there's a shipping documents are
supported wait we don't want to start
with the shipping document to test
occurrence we want to start the other
way we want to know because we're
concerned about overstatement so we want
to know that everything that's recorded
here in this sales journal has a
corresponding shipping document to
support it
well right but evil you would want it
too right but that but that gets to
completeness right because the shipping
document is telling me a sale occurred
right if we go with the premise that
shipping documents it's a proxy for a
valid sale which is a good proxy that is
just telling us that a sale occurred
right that happened so now I want to
know should it be with it I want to make
sure from going from the shipping
document that is reflected that tells me
that gets the understatement that's
saying I want to make sure that
everything that should be recorded has
been recorded the other way
the overstatement I'm concerned that
they might have put some ship some fake
sales in there some fictitious sales in
there because if it's a fictitious sell
and assuming that they haven't doctored
up with shipping document right to
support it assuming that it's a
fictitious sale there won't be that
means that no snow shipment occurred
right that means that no shipment
occurred or a shipment no shipment
occurred for a valid customer or
shipment wasn't made to a valid customer
right so that's why when you are testing
occurrence you're gonna start with the
sales journal does that make sense okay
all right so again that's just kind of
relating the assertions and the evidence
in the audit procedures let's look at
one more rights and obligations so here
the key question is does the entity
really own the assets are related legal
responsibilities identified so in this
case a key examples of audit evidence
would be audit evidence from third
parties third party audit evidence such
as confirmations such as getting
confirmation from attorneys about
liabilities that exist legal liabilities
that
since so our cash confirmations from the
bank about the bank balance alright
notice also I just want to point this
out here we'll talk about presentation
and disclosure again the ASB assertion
related to that would be
understandability and basically are the
presentations and disclosures
understandable to the users and so your
audit evidence is management prepared
financial statements right because it's
management's responsibility to prepare
the financial statements and auditors
are going to review the financial
statements and what the disclosures that
matter how the the presentation and
format of the financial statements as
well as the disclosures related to the
amounts recorded in the financial
statements and that's inquiry so some of
your audit evidence is obviously going
to come through in the four
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