This document discusses audit assertions and the audit of financial statements. It defines audit assertions as claims made by management regarding the appropriateness of financial statement elements and disclosures. There are five types of audit tests that can be used, including tests of controls and substantive tests. The document then discusses auditing various accounts, such as revenue/receipts, purchases, inventory, payroll, and fixed assets. It describes the types of evidence and assertions auditors consider when auditing these accounts.
Understanding Audit Assertion - Overview, Types & Importance #learnauditing
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𝐊𝐓𝐏 (𝐀𝐮𝐝𝐢𝐭,𝐓𝐚𝐱, 𝐀𝐝𝐯𝐢𝐬𝐨𝐫𝐲)
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Understanding Audit Assertion - Overview, Types & Importance #learnauditing
Read the full story in our blog
https://lnkd.in/g8mHjEQE
𝐕𝐢𝐬𝐢𝐭 𝐮𝐬
Wisma 𝐊𝐓𝐏, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
Wisma 𝐓𝐇𝐊, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
𝐊𝐓𝐏 (𝐀𝐮𝐝𝐢𝐭,𝐓𝐚𝐱, 𝐀𝐝𝐯𝐢𝐬𝐨𝐫𝐲)
An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients
Website www.ktp.com.my
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𝐓𝐇𝐊 (𝐒𝐞𝐜𝐫𝐞𝐭𝐚𝐫𝐢𝐚𝐥, 𝐀𝐜𝐜𝐨𝐮𝐧𝐭/𝐏𝐚𝐲𝐫𝐨𝐥𝐥, 𝐀𝐝𝐯𝐢𝐬𝐨𝐫𝐲)
A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsource booking, accounting and payroll services to clients
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This is a step-by-step process on how to plan and carry out Auditing. This shall be useful for Accountants , professionals,small businesses,big businesses.
An exercise whose objective is to enable auditors to express an opinion on whether the financial statements give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit or loss (or income and expenditure) for the period then ended and have been properly prepared in
accordance with the applicable reporting framework (e.g. relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribe the term, whether the financial statements “present fairly”.
This presentation is an overview of SA 320 (R). Prepared with Prof. S. Sircar.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This presentation is an overview of SA 220 (R). Prepared with Prof. S. Sircar.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
The role of chartered accountants in the capacity of auditors assures a smooth-running business that helps to reduce fraud and accounting. The article unfolds its crucial role in terms of the stock audit process.
This is a step-by-step process on how to plan and carry out Auditing. This shall be useful for Accountants , professionals,small businesses,big businesses.
An exercise whose objective is to enable auditors to express an opinion on whether the financial statements give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit or loss (or income and expenditure) for the period then ended and have been properly prepared in
accordance with the applicable reporting framework (e.g. relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribe the term, whether the financial statements “present fairly”.
This presentation is an overview of SA 320 (R). Prepared with Prof. S. Sircar.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This presentation is an overview of SA 220 (R). Prepared with Prof. S. Sircar.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
The role of chartered accountants in the capacity of auditors assures a smooth-running business that helps to reduce fraud and accounting. The article unfolds its crucial role in terms of the stock audit process.
In general, the objective of an audit is to assess the risk of mater.pdfanjanacottonmills
In general, the objective of an audit is to assess the risk of material misstatements in the financial
statements. Material misstatements can arise from inadequacies in internal controls and from
inaccurate management assertions. Thus, testing the validity of the various implicit managerial
assertions is a key objective of an auditor.
Existence and Completeness
Auditing standards require that auditors test basic underlying management assertions implicit in
the financial statements. Key among these various assertions are existence or occurrence, which
describe a singular concept: Journal entries are not fiction. As the name implies, an auditor will
conduct various procedures to verify that assets do in fact exist and that recorded transactions did
in fact occur. Additionally, an auditor will seek evidence of completeness, so that the financial
statements include all material transactions that occurred, and so the records do not omit material
transactions for any reason.
Rights and Obligations
The various rights and obligations of the company are important management assertions inherent
in the financial statements. Thus, an auditor will obtain evidence regarding a company\'s rights,
such as proper title to assets and status of intellectual property. An auditor will be concerned
with assertions relating to the company\'s obligations, such as accounts payable balances, long-
term debts and tax liabilities. Thus, the audit objectives will be fulfilled upon validating these
specific assertions.
Valuation or Allocation
Valuation or allocation are managerial assertions which are often material to the financial
statements; thus, an auditor will diligently conduct audit procedures relating to these objectives.
Generally accepted accounting principles, or GAAP, require that certain balance sheet items be
presented using different valuation methodologies. Meeting these standards is a key audit
objective, as the risk of material misstatement is low in probability, but high in magnitude. Thus,
among other things, the historical cost of assets is verified, depreciation methods are scrutinized
and the fair value of investments are calculated to satisfy this objective.
Presentation and Disclosure
Another specific audit objective is validating the presentation of the financial statements and the
adequacy of the disclosures therein. Financial statements should conform to certain requirements
and expectations, and should include the balance sheet, income statement, statement of cash
flows and the statement of owner\'s equity. Relating to disclosure, the auditor will consider the
sufficiency and clarity of footnotes and the transparency in management discussion and analysis,
so he can assess the risk of material misstatement and fulfill the audit objective.
Specific audit objectives are the application of the general audit objectives to a given class of
transactions, account balance, or presentation and disclosure. There must be at least one specific
audit object.
Practical approach to auditing is a presentation intended to help new auditors to quickly grab the skills and approach to audit engagements. The material touched on the attributes of auditors, audit planning, work programmes, audit journaling, working papers, audit test procedures, compliance and substantive test, elements of an audit report, file referencing etc..
1
WEEK 2 TEAM ASSIGNMENT
Week 2 Team Assignment
Learning Team B
ACC/492
7/24/16
Introduction
AUDIT PROGRAM FOR CASH
Risks
· Cash transactions may not be documented correctly
· Does cash exist
· Fraud
Steps
1. Discuss and document the routine for receiving and disbursing cash.
a) Sources of cash
b) Frequency of bank deposits
c) The person making the deposit
d) The various levels of cash received, is it appropriate
e) Documentation of expenditures (check requests, agreements, invoices…)
f) The approval process
2. Confirm selected bank accounts and special activities
For the petty cash funds (Is the petty cash voucher maintained properly?)
Are physical cash counts:
a) Conducted regularly by a person or people who are not direct guardians of the petty cash funds?
b) Reconciled with the petty cash voucher?
c) Documented the counts and reconciled against the petty cash voucher?
d) Are the petty cash funds restricted to only authorized personnel? Who has contact to funds?
For all checking accounts
a) Identify how many signatures are mandatory on each check.
b) Identify the process by which cash is received and how often.
c) Acquire bank statements for each bank account.
d) Identify the frequency and timing of the bank reconciliations. Who is responsible for the reconciliations?
e) Acquire bank reconciliations and test for accuracy.
f) Affirm if an additional person reviews bank reconciliations on a regular monthly basis. The review document should include the date of examination and a signature of the second person reviewing the bank reconciliation.
3. Test bank reconciliations
Choose bank accounts for confirmation in order to obtain a moderate to low level of assurance that the above mentioned audit purposes are achieved.
a) Test the mathematical accuracy of bank reconciliations
b) Trail-back to the book balances on the client’s bank reconciliation to the summary.
c) Trail-back to the balances on the client’s bank reconciliation to the bank statement.
d) Test reconciling items on the bank reconciliation by performing the following:
i) acquire previous month bank statement and supporting documents
ii) trace outstanding items listed on the bank reconciliation.
iii) trace deposits in transit listed on the bank reconciliation.
iv) get explanation of big, uncommon reconciling items and trace to supporting documents.
v) investigate any other unusual items.
Confirmation requests should be sent under our control and, second requests and, where warranted, third requests should be mailed when responses to confirmation requests have not been received within a reasonable time.
Consider sending a special inquiry letter to ascertain the existence of special arrangements or restrictions, for example, compensating balance arrangements, security arrangements, written guarantees.
4. Review confirmations received
For confirmations received:
a) compare account information and account balance to matching summary.
...
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Assertions in the Audit of Financial Statements (Audit)
1. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Definition
Audit Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.
Elementsofthe financial statements include Assets,Liabilities,Equity,Income &Expenses. The
firstthree elementsrelate tothe statementof financial positionwhereasthe lattertworelate tothe
income statement.
Audit Assertions are also known as Management Assertions and Financial Statement
Assertions.
Managementassertionabout
-existence, -completeness, -valuation, -rights, -presentationand –disclose
Financial assertion about
-Transaction (time,posting,summarization, accuracy,classification, completeness,existence)
-Balance (accuracy, classification,completeness,existence,cutoff, value,right,obligation,
disclose)
Component of financial Statements
a. The primary statements
Balance sheet
Income statements
Statements of change in equity
Cash flow statement
The note to account & schedule
b. The directors report
c. The auditor’s report
Five Types of Audit Tests
1.) Risk Assessment Procedures
2.) Test of Controls
3.) Substantive Tests of Transactions
4.) Analytical Procedures
5.) Tests of Details of Balances
AUDIT OF THE REVENUE AND RECEIPT
NATURE:
REVENUE – exchange of goods and services with customer for receipts.
RECEIPT
- collection of Financing Revenue in cash
- Conversion Receipt Cycle Expenditure
- Disbursement Cycle
2. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
3 types of transactions associatedwith Revenue and Receipt Cycle:
1.Sale of goods or rendering of a service (cash/credit)
2.Receipt of cash from customers
3.Return of goods
Basis oftesting
Testing requires existence of audit documents, their sufficiency and appropriateness. It also
requires assertions as to obtaining evidence.
Usingcategoriesfor test
Occurrence
Completeness
Accuracy
Cutoff
Classification
Existence
A. Documents (Evidence)
Types ofdocuments used and accounting records:
1.Customer order 2. Sales order 3. Credit approval order 4. Open-order report 5. Shipping 8.
Customer statement 9. Accounts receivable subsidiary ledger 10. Customer remittance advice 11.
Cash receipts journal
Two core aspects to be assured:
Sufficiency: The measure of the qualityof audit
Appropriateness: The measure of the qualityof auditi.e. relevance andreliabilityof audit
evidence.
B. Assertions in obtaining Audit evidence
-Class of transaction
-Account balance at the period end
-Presentation & disclose
Primary technique as to testing
1. Numbering
2. Date andparticulars
3. Relationwithbusiness
4. Passingauthority
5. Use of revenue stamp
6. Paperanalysis
7. Similaritybetweenwordsandfigures
8. Cancellationof evidence
9. Duplicate
3. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Income from interest:
Interestincome isthe revenueearnedbyalenderforuse of hisfundsor an investorontheir
investmentoveraperiodof time.
Source of interest
Bank voucher
Rate of interest
InterestPeriod
Tax deduction
Securities&otherrelateddocument
Rent Received:
The amount of moneycollectedbyalandlordfroma tenantor groupof tenantsforusinga particular
space.
Amountof rent
Receivable
Date,repair& collection
Carboncopy of receipt
Checkedwithrentrolls
Outstanding&advance rent
Relationwithfigure andactual received
Commissionreceived:
Commissionincomereferstofeesearnedbybrokersandagentsinmakinga sale or closingadeal.
Carboncopy of receipts
Agreementdocuments
Rate of commission
Actual calculationof commission
Purchases System
Purchasesorder ≥ Goodsreceivednote ≥ Goods returnnote ≥ Purchasesinvoice ≥ Creditnote
≥ Payable ledger≥Payable ledgercontrol
Inventory
Inventorycanbe one of the largestassetof an enterprisespeciallyinmanufacturingconcern.
Inventorynormallycomprises:
o Raw materials
o Work inprocess
o Finishedgoods
o Maintenancessupply
o Store and spares
o Loss tools
The audit procedure forinventoryandrelatedcostof salesaccountare frequentlyextensive inaudit
engagement. Duringaudit
- Ensure staff are followinginventory
- Testcounts frominventorytoinventorysheet
- Note damaged,old.
- Reviewworkinprocess
- Inventoryholdbyclientforthirdparty
- Photocopythe inventorysheet
4. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Payroll system
A listof a company’semployeesandthe amountof moneytheyare to be paid.
Managementcontrol objectives
Control procedures-wagesandsalaries
- Approval &control of documents
- Arithmetical accuracy
- Control accounts
- Accessto assetsand records
Substantive testing isan auditprocedure thatexaminesthe financial statementsand
supportingdocumentationtosee if theycontainerrors.These testsare neededasevidence
to supportthe assertionthatthe financial recordsof an entityare complete,valid,and
accurate.
There are manysubstantive teststhatanauditorcan use. The followinglistisasamplingof the
available tests:
- Issue a bank confirmationtotestendingcashbalances
- Contact customerstoconfirmthat accountsreceivable balancesare correct
- Observe the period-endphysical inventorycount
- Confirmthe validityof inventory valuationcalculations
- Physicallymatchfixedassetstofixedassetrecords
- Contact supplierstoconfirmthataccountspayable balancesare correct
- Contact lenderstoconfirmthatloanbalancesare correct
- Reviewboardof directorsminutestoverifythe existence of approveddividends
Compliance test isan auditthat determineswhetheranorganizationisfollowingitsown
policiesandproceduresinaparticulararea. Anauditorengagesincompliance testsin
orderto be assuredthatthe evidence being reviewedaspartof an auditisvalid.If a
compliance testrevealsthatthe policiesandproceduresare functioningproperly,the
auditorcan reduce the amountof analytical review andvalidationproceduresthatwould
otherwise be used.
The activitiescommonlyusedinacompliance testare:
- Askingemployeesabouttheirduties
- Observingemployeesinthe conductof theirduties
- Reviewingdocumentationtosee if procedureshave beenfollowed
The accounts receivable confirmation: When an auditor is examining the
accounting records of a client company, a primary technique for verifying the
existence of accounts receivable is to confirm them with the company's customers.
There are two forms of confirmation, which are:
Positive confirmation. This is a request to provide a response to the auditor, whether
or not the customer agrees with the receivable information listed in the confirmation.
Negative confirmation. This is a request to contact the auditor only if the customer
has an issue with the accounts receivable information contained within the
confirmation.
Confirmation letter: The entity concerned may send to creditors to confirm balance. This
letter can be send by entity or even by auditor, if auditor thinks it necessary.
5. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Verification means 'Proving the truth' or 'Confirmation'. Verification is an auditing
process in which auditor satisfy himself with the actual existence of assets and
liabilities appearing in the Statement of Financial position. Verification is usually
conducted through examination of existence, ownership, title, possession, proper
valuation and presence of any charge of lien over assets.
Thus, verification includes verifying:
1. The existence of the assets and liabilities.
2. Legal ownership and possession of the assets
3. Correct valuation, and
4. Ascertaining that the asset is free from any charge
Stepsfor the verificationof assets: Guideline & plan
1. Making comparison
2. Verificationof openingassets
3. Verificationthe acquisitionorimprovement
4. Self-construction
5. Examiningseparationbetweencapital andrevenue
6. Examine the verificationprocess
7. Evaluate verificationsystem
8. Examine the title deeds
Verificationtechnique
Inspection
Observation
Enquiry
Computation
Analytical procedure
Audit fixedassets
1. Plant,machineryand equipment
a. Analytical procedures
i. Compare prior balance
ii. Compute the ratio of depreciation
iii. Compute the ratio of repair and maintenance
iv. Evaluate the ratio of insurance
v. Review the capital budget and spent money
b. Testof balance (substantive approach)
i. Validity- verify the existence
ii. Completeness- physically examine
iii. Cutoff- examine the purchaseand sales
iv. Ownership- examine confirmdeeds, title.
v. Accuracy- obtain a listof schedule
c. Pointof attention
I. Document to be examine
II. Depreciation charge
III. Maintenances register
IV. Experts opinion
2. Furniture andfixture
a. Managementcontrol aspect
b. Analytical procedures
c. Testof balance
3. Investment
I. Analytical approach
II. Substantive procedure
6. Assertions in the Audit of Financial Statements
ArtlessShakhawat. Studentof DBA,IIUC
Inventory Accounting:salesinvoices (w/ cost information);salesorder;shippingdocuments.
General Accounting:salesare recordedinsalesjournal andpostedtogeneral ledger;comparing
dailytotalsof salesjournal entriesanddailysalessummariesof Billing.
Accounts Receivable:salesare postedtoindividual customeraccountsinsubsidiaryledger.
SalesSystem: O D I R R B
O= Order D= Delivery I= Invoice R= Receivednote R= ReturnNote B= Bad debt
Debenture
A long-termsecurityyieldingafixedrate of interest,issuedbyacompanyand securedagainst
assets.
Share capital
The part of the capital of a company thatcomesfrom the issue of shares.
Goodwill
the establishedreputationof abusinessregardedasaquantifiableassetandcalculatedaspart of its
value whenitissold.
Wagesand salary
Salary isa fixedamountpaidortransferredtothe employeesatregularintervalsfortheir
performance andproductivity,atthe endof the monthwhereas wagesare hourlyor daily-based
paymentgiventothe laborfor the amountof workfinishedinaday.
Salesrevenue
The amountrealizedfromsellinggoodsorservicesinthe normal operationsof acompanyina
specifiedperiod.
Cash sale
An occasionwhensomethingissoldandpaymentismade immediately.