Question

Management assertions for the financial statements referenced in PCAOB Auditing Standards are:

Existence, occurrence

Completeness

Rights, obligations

Valuation, allocation

Presentation and disclosure

The purpose of tests of controls is to permit the auditor to assess whether properly designed controls operate effectively enough to prevent or detect material misstatements that would make these managements assertions wrong.

Required:

For each of the following audit procedures identify whether the procedure is:

(a) directed at a control or at an amount or disclosure, or both, and

(b) what assertion (or assertions) is (are) targeted.

Accounts, Classes of Transactions	Audit Procedure	Directed at:	Assertion:
All	Inquire who controls passwords for IT access.
Sales, Receivables, Inventory	Examine document packages for items that have been shipped for inclusion of a customer order, credit approval, and shipping document. Make sure the documents are properly matched and complete, with all required signatures and trace amounts to the sales journal, accounts receivable subsidiary ledger, and inventory files.
Payroll	For the Hourly Payroll Expense account, multiply the average number of workers times the average number of hours worked per year times the average hourly rate. Compare to the total posted annual amount.
Cash	Inspect the client-prepared bank reconciliation for each month of the year, recalculate the amounts, examine the supporting bank statements, and trace the cash amount to the general ledger.
Fixed assets	Obtain a list of fixed assets and physically look at the assets.
Long-term debt	Read the contract related to each of the company’s long-term borrowings and agree the terms of the contracts to the financial statements notes.
Cash, Long-term debt	For each item of long-term debt that existed both at the beginning and end of the year, inspect the debt contracts and the company’s analysis of the discounted debt amount and its analysis of violation of debt covenants and look for whether the details agree. Recalculate the amounts, and examine recorded entries and bank statements for cash disbursements for debt repayments. Using that information, determine whether the company has been in violation of any debt covenants during the year.
Prepaid rent	Using the beginning financial statement amount, cash receipts and cash disbursements evidence, and the lease agreement, calculate year-end prepaid rent and agree that amount to what is shown in the general ledger.
Inventory	At the end of the last day in the fiscal year, go to the client’s shipping area and record the last shipment; trace the shipment into the client’s records.

Answer 1

Under PCOAB Auditing standards while representing that the financial statements are presented fairly in conformity with the applicable financial reporting framework, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of the various elements of financial statements and related disclosures. Those assertions can be classified into the following categories:

• Existence or occurrence – Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.
• Completeness – All transactions and accounts that should be presented in the financial statements are so included.
• Valuation or allocation – Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.
• Rights and obligations – The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.
• Presentation and disclosure – The components of the financial statements are properly classified, described, and disclosed.

Accounts, Classes of Transactions	Audit Procedure	Directed at:	Assertion:
All	Inquire who controls passwords for IT access.	Control	Rights and obligations
Sales, Receivables, Inventory	Examine document packages for items that have been shipped for inclusion of a customer order, credit approval, and shipping document. Make sure the documents are properly matched and complete, with all required signatures and trace amounts to the sales journal, accounts receivable subsidiary ledger, and inventory files.	Control and Amount	Completeness
Payroll	For the Hourly Payroll Expense account, multiply the average number of workers times the average number of hours worked per year times the average hourly rate. Compare to the total posted annual amount.	Amount	Valuation
Cash	Inspect the client-prepared bank reconciliation for each month of the year, recalculate the amounts, examine the supporting bank statements, and trace the cash amount to the general ledger.	Control and Amount	Existence
Fixed assets	Obtain a list of fixed assets and physically look at the assets.	Control and Disclosure	Existence
Long-term debt	Read the contract related to each of the company’s long-term borrowings and agree the terms of the contracts to the financial statements notes.	Disclosure	Presentation and Disclosure
Cash, Long-term debt	For each item of long-term debt that existed both at the beginning and end of the year, inspect the debt contracts and the company’s analysis of the discounted debt amount and its analysis of violation of debt covenants and look for whether the details agree. Recalculate the amounts, and examine recorded entries and bank statements for cash disbursements for debt repayments. Using that information, determine whether the company has been in violation of any debt covenants during the year.	Disclosure	Valuation and allocation
Prepaid rent	Using the beginning financial statement amount, cash receipts and cash disbursements evidence, and the lease agreement, calculate year-end prepaid rent and agree that amount to what is shown in the general ledger.	Amount and Disclosure	Occurrence
Inventory	At the end of the last day in the fiscal year, go to the client’s shipping area and record the last shipment; trace the shipment into the client’s records.	Control	Rights and obligations