Assertions, Evidence, & Audit Procedures

Rutgers Accounting Web

15 Jul 201508:05

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

00:00

📊 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.

05:06

📜 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

Audit assertions refer to claims made by management regarding the financial statements. These include assertions about existence, completeness, rights and obligations, and presentation. In the video, the speaker connects assertions to the audit evidence gathered, such as testing whether recorded assets truly exist or whether recorded transactions occurred, which is key to verifying the accuracy and reliability of the financial data.

💡Existence

Existence is an audit assertion that verifies whether the assets and liabilities listed in the financial statements actually exist at a given date. For example, the auditor may physically inspect inventory or confirm accounts receivable. This assertion ensures that what is reported in the financial records is not overstated or fictitious.

💡Occurrence

Occurrence relates to whether the transactions recorded in the financial statements actually took place. The auditor verifies that recorded sales or other transactions have supporting evidence, such as shipping documents. The video emphasizes testing occurrence by starting with the sales journal to ensure that recorded sales truly occurred, addressing concerns of overstatement.

💡Completeness

Completeness is another audit assertion that checks whether all relevant transactions and assets that should be included in the financial statements are recorded. In the video, completeness is discussed in the context of starting with shipping documents and tracing them to the sales journal, ensuring that all sales are properly recorded and there are no understatements.

💡Overstatement

Overstatement refers to recording transactions or assets that inflate the financial results, making the financial position appear better than it actually is. The speaker discusses the risk of overstatement when testing sales, emphasizing the need to verify that every recorded sale has corresponding shipping documents to prove it occurred.

💡Vouching

Vouching is an audit procedure where the auditor selects transactions from the financial records (e.g., sales journal) and traces them back to supporting evidence (e.g., shipping documents). This is used to test the occurrence assertion, ensuring that recorded sales or expenses actually happened. In the video, the speaker describes vouching as a method to confirm that sales in the journal are supported by valid shipping documents.

💡Rights and Obligations

Rights and obligations is an assertion that verifies whether the entity has legal ownership of its assets and whether the liabilities it records are its actual obligations. For instance, an auditor might seek confirmation from a bank to verify a company's cash balance or from a lawyer regarding legal liabilities. The video mentions this as an important part of gathering audit evidence.

💡Third-Party Confirmation

Third-party confirmation refers to the auditor's use of external evidence, such as confirmations from banks or legal counsel, to verify the accuracy of certain financial statement items. In the video, the speaker gives examples such as bank confirmations for cash balances or legal confirmations for liabilities, which provide independent verification of the company’s claims.

💡Shipping Documents

Shipping documents are used as audit evidence to verify the occurrence of sales transactions. They prove that goods have been shipped to the customer, supporting the auditor's conclusion that the sales recorded in the financial statements are legitimate. The video discusses the use of shipping documents to test whether recorded sales in the journal are real.

💡Sales Journal

The sales journal is a record of all sales transactions made by a company. It is a primary source of information for auditors when testing the occurrence of sales. In the video, the speaker explains that auditors begin by sampling from the sales journal and then tracing back to shipping documents to ensure the accuracy of recorded sales and address the risk of overstatement.

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.