Question

In: Accounting

Management assertions for the financial statements referenced in PCAOB Auditing Standards are: Existence, occurrence Completeness Rights,...

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

Solutions

Expert Solution

Accounts, classes of transactions

Audit procedure

Directed at

Assertion

All

Inquire who controls passwords

for IT access

Control

ALL

Sales, receivables, inventory

Examine document packages

for items that have been

shipped for inclusion of a

customer order, credit approval,

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

Existence, cut off valuation

Payroll

For the Hourly Payroll Expense

account multiply the average

number of workers times

average number of hours

worked per year times the

average hourly rate.

Amount

Completeness, 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

Contlrol and amounts

Existence valuation, presentation and disclosure, cut off rights and obligations

Fixed asset

Obtain a list of fixed assets and

physically look at the assets

Control

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

notes to the financial

statements

Disclosure

Rights and obligation, 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, 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

Control, Amount and disclosure

Valuation, presentation and disclosure, Rights and obligation

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

Existence, valuation, rights and obligations and completeness

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, amount

Existence, cut off, completeness


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