4. Accuracy The accuracy assertion addresses whether amounts and other data relating torecorded transactions and events have been recorded appropriately. Generally accepted accounting principles establish the appropriate method for recording a transaction or event. For example, the amount recorded for the cost of a new machine includes its purchase price plus all reasonable costs to install it. 5. Cutoff The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period. For example, the auditor may want to test proper cutoff of revenue transactions at December 31, 2015. The auditor can examine a sample of shipping documents and sales invoices for a few days before and after year-end to test whether the sales transactions are recorded in the proper period. The objective is to determine that all 2015 sales and no 2016 sales have been recorded in 2015. Thus, the auditor examines the shipping documents to ensure that no 2016 sales have been recorded in 2015 and that no 2015 sales are recorded in 2016. 6. Classification The classification assertion is concerned with whether transactions and events have been recorded in the proper accounts. For example, management asserts that maintenance costs to repair a machine that do not add to its usefulness are properly charged to the repairs and maintenance expense account and not to the machine asset account.
Question 23. List TWO inherent risk factors that directly affect the purchasing process should be considered by the auditor in assessing the inherent risk 1. Industry-Related Factors When auditing the purchasing process, the auditor should consider two important industry related factors in assessing inherent risk: whether the supply of raw materials is adequate and how volatile raw material prices are . If the entity deals with many vendors and prices tend to be relatively stable, there is less risk that the entity’s operations will be affected by raw material shortages or that production costs will be difficult to control. Some industries, however, are subject to such industry-related factors. For example, in the high-technology sector, there have been situations in which an entity was dependent on a single vendor to supply a critical component, such as a specialized computer chip. When the vendor has been unable to provide the component, the entity suffered production shortages and shipping delays that significantly affected financial performance. Other industries that produce basic commodities such as oil, coal, and precious metals can find their financial results significantly affected by swings in the prices and availability of their products. The auditor needs to assess the effects of such industry- related inherent risk factors in terms of assertions such as valuation. 2. Misstatements Detected in Prior Audits Generally, the purchasing process and its related accounts are not difficult to audit and do not result in contentious accounting issues. However, auditing research has shown that the purchasing process and its related accounts are likely to contain material misstatements. The auditor’s previous experience with the entity’s purchasing process should be reviewed as a starting point for determining inherent risk.
Question 24. List the THREE major steps in setting control risk in the inventory
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- Fall '19