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In: Accounting

Write three (3) audit objectives for expense and payables. Give all the assertions on which they...

Write three (3) audit objectives for expense and payables. Give all the assertions on which they were based, and write two audit procedures for each objective.

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Expert Solution

Audit evidence and the objectives of an audit

The main objective of the work performed by the auditor in an audit engagement is that of obtaining reasonable assurance as to whether the financial statements, as a whole, are free from material misstatement, so that the auditor is able to express an opinion on the financial statements and report accordingly in the auditor’s report.

To obtain reasonable assurance about the financial statements, which is a high but not absolute level of assurance, the auditor needs to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.   

Sufficient appropriate audit evidence

A large part of the work involved in the performance of an audit consists of obtaining and evaluating audit evidence, which is primarily derived from audit procedures carried out during the course of the engagement, but that can also be gained from other sources. For example sources like previous audits; provided that changes occurred in the meantime have been carefully taken into account; or the firm’s quality control procedures, especially around client acceptance and continuance.

Audit procedures that are used to obtain audit evidence are various and are often applied in combination. They can include inspection, observation, confirmation, recalculation, reperformance and analytical procedures, in addition to inquiry, as the latter does not normally provide sufficient audit evidence on its own.

Designing and performing audit procedures for obtaining audit evidence

A number of ISAs (UK and Ireland), namely ISA 300, ISA 315 and ISA 330, require and explain that audit evidence should be obtained by performing risk assessment procedures and further audit procedures. Further audit procedures include tests of controls and substantive procedures, including tests of details and substantive analytical procedures.

In particular, alongside an overall audit strategy that indicates the scope of the work, the resources of staff allocated to specific areas and the timing of the engagement, a more detailed audit plan should indicate the audit procedures to be performed in respect of specific assertions in the financial statements and their timing.

Assertions about classes of transactions and events for the period under audit ?(usually profit or loss account assertions):

Financial statement assertion Audit objective
Occurrence To form an opinion as to whether transactions and events that have been recorded have occurred and pertain to the entity.
Completeness To form an opinion as to whether all transactions and events that should have been recorded have been recorded.
Accuracy To form an opinion as to whether amounts and other data relating to recorded transactions and events have been recorded appropriately.
Cut-off To form an opinion as to whether transactions and events have been recorded in the correct accounting period.
Classification To form an opinion as to whether transactions and events have been recorded in the proper accounts.

Assertions about account balances at the period end (usually balance sheet assertions):

Financial statement assertion Audit objective
Existence To form an opinion as to whether assets, liabilities, and equity interests exist.

Rights and obligations

(Ownership)

To form an opinion as to whether the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Completeness To form an opinion as to whether all assets, liabilities and equity interests that should have been recorded have been recorded.
Valuation and allocation To form an opinion as to whether assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure (covering both the profit and loss account and balance sheet):

Financial statement assertion Audit objective
Occurrence and rights and obligations To form an opinion as to whether disclosed events, transactions, and other matters have occurred and pertain to the entity.
Completeness To form an opinion as to whether all disclosures that should have been included in the financial statements have been included.
Classification and understandability To form an opinion as to whether financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation To form an opinion as to whether financial and other information are disclosed fairly and at appropriate amounts.

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