Chapter 7 Solutions - Solutions for Chapter 7 Audit...

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Solutions for Chapter 7 Audit Evidence: A Framework Review Questions: 7-1. Audit evidence is all the information used by auditors in arriving at the conclusions on which the audit opinion is based. The basic sources of evidence are knowledge of the business and industry, analytical procedures, tests of controls, and direct tests of account balances and transactions. 7-2. The auditor must decide how much evidence is needed (extent), what kind of evidence is needed (nature), and when to gather the evidence (timing). 7-3. The assertions form the framework for gathering sufficient, competent audit evidence as required by the professional standards. The assertions tie into generally accepted accounting principles in that those assertions are also embodied in GAAP. The five main assertions are defined as: Existence/occurrence. The assets, liabilities, and equity interests exist and all transactions reflected in the financial statements actually occurred. Completeness. All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded, i.e., nothing is left out of the financial statements. Rights/obligations. The entity holds or controls the legal ownership to assets, and liabilities are legally owed by the entity. Valuation/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. Presentation/disclosure. Assets, liabilities, and equity interests are appropriately classified on the financial statements, and are adequately described in the footnotes to the financial statements. 7-4. Valuation is usually one of the most important assertions to address in most audits. The intent of this question is to have the students think about the detail required by GAAP in forming specific assertions to be tested with individual accounts. The basic components of the valuation assertion for investments in marketable securities are these: The securities are initially recorded at cost and are thereafter valued at market. Cost includes all costs, including brokerage fees, to purchase the securities.
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Market is: o Defined as aggregate market value determined either by classes of securities or treating all securities as one class. o Measured by year-end market prices, assuming a liquid market such that sales of the securities would not have a major impact on market value. All gains/losses due to sales during the current period are properly reflected in the accounts. Carrying values of marketable securities sold are removed. All adjustments required for the unrealized adjustments to market value are properly recognized. 7-5 The basic characteristics that distinguish the reliability of audit evidence are: More reliable information Directly observable evidence Evidence derived from well controlled information system Evidence from independent outside sources Documented evidence Original documents
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