B not rely on internal controls that are designed to

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Unformatted text preview: r: The auditor should first consider the effects of the illegal act on the financial statements, including the adequacy of disclosures. If the auditor concludes that disclosures are inadequate, the audit report should be modified accordingly. The auditor should also consider the effect of the illegal act on its relationship with management, and management’s trustworthiness. Next, the client’s audit committee or others of equivalent authority should be informed of the illegal act. If the client does not deal with the illegal act in a satisfactory manner, the auditor should consider withdrawing from the engagement. Finally, if the client is publicly held, the auditor may need to report the matter to the SEC. 75. medium There are three broad categories of management assertions. Identify each of these categories. Answer: • Assertions about classes of transactions and events for the period under audit. • Assertions about account balances at period end. • Assertions about presentation and disclosure. 76. medium Briefly explain each management assertion related to classes of transactions and events for the period under audit. Answer: • • • • • 77. medium Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity. Completeness. All transactions and events that should have been recorded have been recorded. Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately. Classification. Transactions and events have been recorded in the proper accounts. Cutoff. Transactions and events have been recorded in the correct accounting period. Briefly explain each management assertion related to account balances at period end. Answer: • • • • Existence. Assets, liabilities, and equity interests exist. 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 adjustments are appropriately recorded. Rights and obligations. The entity holds or controls the rights to assets, and liabilities 1-101 are the obligation of the entity. 1-102 78. medium Briefly explain each management assertion related to presentation and disclosure. Answer: • • • • 79. medium Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity. Completeness. All disclosures that should have been included in the financial statements have been included. Accuracy and valuation. Financial and other information are disclosed appropriately and at appropriate amounts. Classification and understandability. Financial and other information is appropriately presented and described and disclosures are clearly expressed. Discuss three reasons why auditors are responsible for “reasonable” but not “absolute” assurance. Answer: • • • 80. medium Most audit evidence results from testing a sample of a population. Sampling involves some risk of not uncovering material misstatements. Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. As a result, the auditor has to rely on evidence that is persuasive but not convincing. Fraudulently prepared financial statements are often very difficult for the auditor to detect, especially when there is collusion among management. Distinguish between management’s responsibility and the auditor’s responsibility for the financial statements under audit. Answer: Management is responsible for adopting appropriate accounting policies, maintaining adequate internal control, and making fair representations in the financial statements. The auditor’s responsibility is to perform an audit designed to provide reasonable assurance of detecting any material misstatements in the financial statements and to express an opinion on those financial statements at the conclusion of the audit. 81. medium In the context of the audit of sales, distinguish between the existence and completeness transaction-related audit objectives. State the effect on the sales account (overstatement or understatement) of a violation of each objective. Answer: When testing the existence objective for sales, the auditor’s 1-103 focus is on whether the sales that have been recorded in the sales journal actually occurred. In contrast, tests of the completeness objective are concerned with determining whether all sales that actually occurred have been recorded in the sales journal. Violations of the existence objective result in overstatements of sales; violations of the completeness objective result in understatements of sales. 1-104 82. challenging Discuss the differences in the auditor’s responsibilities for discovering (1) material errors, (2) material fraud (3) direct-effect illegal acts, and (4) indirect-effect illegal acts. Answer:...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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