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Unformatted text preview: ol environment. Investigate the past history of the
firm and its management. Discuss the possibility of fraudulent
financial reporting with previous
auditor and company legal counsel
after obtaining permission to do so
from management. 2. Industry conditions. 3. Operating characteristics and financial
stability. Research current status of industry
and compare industry financial
ratios to the company’s ratios.
Investigate any unusual differences. Read AICPA’s Industry Audit Risk
Alert for the company’s industry, if
available. Consider the impact of
specific risks that are identified on
the conduct of the audit.
Perform analytical procedures to
evaluate the possibility of business
failure. Investigate whether material
transactions occur close to yearend. 6-7
The cycle approach is a method of dividing the audit such that closely
related types of transactions and account balances are included in the same
cycle. For example, sales, sales returns, and cash receipts transactions and the
accounts receivable balance are all a part of the sales and collection cycle. The
advantages of dividing the audit into different cycles are to divide the audit into
more manageable parts, to assign tasks to different members of the audit team,
and to keep closely related parts of the audit together. 6-17 6-8
GENERAL LEDGER ACCOUNT CYCLE Sales
Repairs & Maintenance Sales & Collection
Acquisition & Payment
Capital Acquisition & Repayment
Sales & Collection
Inventory & Warehousing
Acquisition & Payment 6-9
There is a close relationship between each of these accounts. Sales,
sales returns and allowances, and cash discounts all affect accounts receivable.
Allowance for uncollectible accounts is closely tied to accounts receivable and
should not be separated. Bad debt expense is closely related to the allowance for
uncollectible accounts. To separate these accounts from each other implies that
they are not closely related. Including them in the same cycle helps the auditor
keep their relationships in mind.
6-10 Management assertions are implied or expressed representations by
management about classes of transactions and the related accounts and
disclosures in the financial statements. These assertions are part of the criteria
management uses to record and disclose accounting information in financial
statements. AU 326 classifies assertions into three categories:
1. Assertions about classes of transactions and events for the period
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
6-11 General audit objectives follow from and are closely related to management
assertions. General audit objectives, however, are intended to provide a framework
to help the auditor accumulate sufficient appropriate evidence required by the
third standard of field work. Audit objectives are more useful to auditors than
assertions because they are more detailed and more closely related to helping
the auditor accumulate sufficient appropriate evidence.
OBJECTIVE VIOLATED RECORDING MISSTATEMENT
Fixed asset repair is recorded on the wrong
date. Timing Repair is capitalized as a fixed asset
instead of an expense. Classification 6-18 6-13 The existence objective deals with whether amounts included in the
financial statements should actually be included. Completeness is the opposite of
existence. The completeness objective deals with whether all amounts that should
be included have actually been included.
In the audit of accounts receivable, a nonexistent account receivable will
lead to overstatement of the accounts receivable balance. Failure to include a
customer's account receivable balance, which is a violation of completeness, will
lead to understatement of the accounts receivable balance.
6-14 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 objective for each general audit
objective and in many cases there should be more. Specific audit objectives for a
class of transactions, account balance, or presentation and disclosure should be
designed such that, once they have been satisfied, the related general audit
objective should also have been satisfied for that class of transactions, account,
or presentation and disclosure.
6-15 For the specific balance-related audit objective, all recorded fixed assets
exist at the balance sheet date, the management assertion and the general
balance-related audit objective are both "existence."
6-16 Management assertions and general balance-related audit objectives are
consistent for all asset accounts for every audit. They were developed by the
Auditing Standards Board, practitioners, and academics over a period of time.
One or more specific balance-related audit objectives are developed for...
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- Fall '13