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Unformatted text preview: Chapter 04 - Audit Evidence and Audit Documentation CHAPTER 4 AUDIT EVIDENCE AND AUDIT DOCUMENTATION Answers to Review Questions 4-1 Auditors typically divide the financial statements into components or segments in order to make the audit more manageable. A component can be a financial statement account or a business (transaction) process. This approach allows the auditor to gather evidence by examining the processing of related transactions through the accounting system from their origin to their ultimate disposition in the accounting journals and ledgers. Thus, the auditor can examine an accounting transaction from the time it is initiated by the entity until its final recording in the financial statement accounts. 4-2 The financial statements contain management's assertions about the various financial statement components. The auditor tests management’s assertions by conducting audit procedures that provide evidence on whether each relevant assertion is supported. The results from applying audit procedures provide the evidence that supports the fair presentation of management’s assertions and the auditor's report (see Figure 4-1). 4-3 Assertions about classes of transactions and events for the period under audit: Assertion Definition Occurrence Transactions and events that have been recorded have occurred and pertain to the entity (sometime referred to as validity). Completeness All transactions and events that should have been recorded have been recorded. Authorization All transactions and events have been properly authorized. Accuracy Amounts and other data relating to recorded transactions and events have been recorded appropriately and properly accumulated from journals and ledgers. Cutoff Transactions and events have been recorded in the correct accounting period. Classification Transactions and events have been recorded in the proper accounts. 4-1 Chapter 04 - Audit Evidence and Audit Documentation 4-4 Assertions about account balances at the period end: Assertion Definition Existence Assets, liabilities, and equity interests exist. Rights and Obligations The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Completeness All assets, liabilities, and equity interests that should have been recorded have been recorded. Valuation and Allocation Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. 4-5 Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information. Accounting records include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries, and other adjustments to the financial statements that are not...
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- Summer '09