Question

. Explain the following terms:

                a. Purpose of an audit
                b. Accounting cycle and transaction process
                c. Balances
                d. Presentation and disclosure

Answer 1

Answer.1

The objective of an audit is to form an independent opinion on the financial statements of the audited entity. The opinion includes whether the financial statements show a true and fair view, and have been properly prepared in accordance with accounting standards and presented in accordance with the applicable accounting framework (such as GAAP or IFRS).

This opinion greatly enhances the credibility of the financial statements with users, such as lenders, creditors, and investors. Based on this opinion, users of the financial statements are more likely to provide credit and funding to a business, possibly resulting in a reduced cost of capital for the entity.

The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

Answer.2

The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements.

The accounting cycle is a process designed to make financial accounting of business activities easier for business owners.The accounting cycle generally comprises a year or other accounting period.Accounting software today mostly automates the accounting cycle.

The steps involved in it are as follows:

Step 1: Identify Transactions.
Step 2: Record Transactions in a Journal.
Step 3: Posting.
Step 4: Unadjusted Trial Balance.
Step 5: Worksheet.
Step 6: Adjusting Journal Entries.
Step 7: Financial Statements.
Step 8: Closing the Books.

Answer.3

The following four items are classified as assertions related to the ending balances in accounts, and so relate primarily to the balance sheet:

Completeness. The assertion is that all reported asset, liability, and equity balances have been fully reported.

Existence. The assertion is that all account balances exist for assets, liabilities, and equity.

Rights and obligations. The assertion is that the entity has the rights to the assets it owns and is obligated under its reported liabilities.

Valuation. The assertion is that all asset, liability, and equity balances have been recorded at their proper valuations.

Answer.4

This is the assertion that all appropriate information and disclosures are included in a company's statements and all the information presented in the statements is fair and easy to understand.

The following five items are classified as assertions related to the presentation of information within the financial statements, as well as the accompanying disclosures:

Accuracy. The assertion is that all information disclosed is in the correct amounts, and which reflect their proper values.

Completeness. The assertion is that all transactions that should be disclosed have been disclosed.

Occurrence. The assertion is that disclosed transactions have indeed occurred.

Rights and obligations. The assertion is that disclosed rights and obligations actually relate to the reporting entity.

Understandability. The assertion is that the information included in the financial statements has been appropriately presented and is clearly understandable.