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6-11
6-26 (continued)
The auditor normally assesses the likelihood of material
misappropriation of assets as a part of understanding the entity’s
internal control and assessing control risk. Audit evidence should
Because the auditor’s responsibility is limited to material
misstatements, we believe that the auditor’s responsibility is
The independent auditor is not an insurer or guarantor. The
negligence on the auditor’s part.
6-27 a. Professional skepticism primarily consists of two components: a
questioning mind and a critical assessment of the audit evidence. A
questioning mindset means the auditor approaches the audit with a
to inconsistencies.
b. Because the vendor allowance agreements were unwritten, this
should have increased the auditor’s professional skepticism. In
c. Auditors may be inclined to accept client representations because
of a natural bias to want to trust the client. In addition, if these
d. The following are example of three probing questions related to the
vendor allowances:
Are there written agreements or other corroborating evidence
vendor allowances?
6-12
Copyright © 2017 Pearson Education, Inc.
6-28 1. When Chen Li saw that the recorded balance for the allowance
followed the client’s allowance policy and the fact that AHA’s policy
of recording an allowance for patient receivables equal to the
amount of receivables over 180 days old had historically
approximated subsequent write-offs, Chen Li likely had difficulty
considering an amount different from what was already recorded,
despite the effect of recent regulatory changes on patients’ ability to
pay. This is an example of the anchoring judgment trap.
2. Sherry Zipersky’s judgment was likely impacted by the complexity
extensive information and detailed schedules likely convinced her
of the availability judgment trap.
3. Jason Jackson’s judgment was likely impacted by the confirmation
judgment trap. The contracts and other documentation, including
on the emails that suggested potential concerns about side
agreements that might impact their recording as sales. In this case
disconfirming.
4. Allison Garrett’s judgment about the inventory obsolescence
reserve was likely negatively impacted by the overconfidence
judgment trap. Allison’s experience in auditing clients in the
6-29 a.
CYCLE
BALANCE SHEET ACCOUNTS
INCOME STATEMENT
ACCOUNTS
SALES AND
COLLECTION
Accounts receivable
Allowance for doubtful accounts
Cash
Notes receivable—trade
Bad debt expense
Sales
6-13
6-29 (continued)
CYCLE
BALANCE SHEET ACCOUNTS
INCOME STATEMENT
ACCOUNTS
ACQUISITION
AND PAYMENT
Accounts payable
Accumulated depreciation—
furniture and equipment
Cash
Furniture and equipment
Income tax payable
Inventory
Prepaid insurance
Property tax payable
Advertising expense
Depreciation expense—
furniture and equipment
Income tax expense
Insurance expense
Property tax expense
Purchases
Rent expense
Telecommunications
expense
PAYROLL AND
PERSONNEL
Cash
Accrued sales salaries
Salaries, office and general
Sales salaries expense
INVENTORY AND
WAREHOUSING
Inventory
Purchases
CAPITAL
ACQUISITION
AND
REPAYMENT
Accrued interest expense
Cash
Common stock
Loans payable
Notes payable
Retained earnings
Interest expense
accounts, rather than sales. They are also likely to have such things
as drug expense, laboratory supplies, etc. At the same time, even a
6-14
6-30 (continued)
MANAGEMENT ASSERTION
b.
CATEGORY OF
MANAGEMENT
ASSERTION
c.
NAME OF
ASSERTION
a. Receivables are appropriately
classified as to trade and other
receivables in the financial
statements and are clearly
described.
Presentation and
disclosure
Classification and
understandability
b. Sales transactions have been
recorded in the proper period.
Classes of
transactions
Cutoff
c. Accounts receivable are
recorded at the correct amounts.
Account balances
Valuation and
allocation
d. Sales transactions have been
recorded in the appropriate
accounts.
Classes of
transactions
Classification
e. All required disclosures about
sales and receivables have
been made.
Presentation and
disclosure
Completeness
f. All accounts receivable have
been recorded.
Account balances
Completeness
g. Disclosures related to accounts
receivable are at the correct
amounts.
Presentation and
disclosure
Accuracy and
valuation
h. Sales transactions have been
recorded at the correct amounts.
Classes of
transactions
Accuracy
i. Recorded accounts receivable
exist.
Account balances
Existence
j. Disclosures related to sales and
receivables relate to the entity.
Presentation and
disclosure
Occurrence and rights
and obligations
k. Recorded sales transactions
have occurred.
Classes of
transactions
Occurrence
l. There are no liens or other
restrictions on accounts
receivable.
Account balances
Rights and
obligations
m. All sales transactions have
been recorded.
Classes of
transactions
Completeness
6-31
SPECIFIC BALANCE-
RELATED AUDIT
OBJECTIVE
MANAGEMENT
ASSERTION
COMMENTS
a. There are no
unrecorded
receivables.
2. Completeness
Unrecorded transactions or
amounts deal with the
completeness objective.
b. Uncollectible
accounts have been
provided for.
3. Valuation or
allocation
Providing for uncollectible accounts
concerns whether the allowance
for uncollectible accounts is
adequate. It is part of the
realizable value objective and the
valuation or allocation assertion.
c. Receivables that
have become
uncollectible have
been written off.
3. Valuation or
allocation
This is part of the realizable value
objective and the valuation or
allocation assertion. There may
also be some argument that this is
part of the existence objective and
assertion. Accounts that are
uncollectible are no longer valid
assets.
d. All accounts on the
list are expected to
be collected within
one year.
3. Valuation or
allocation
Accounts that are not expected to
be collected within a year should
be classified as long-term
receivables. It is therefore
included as part of the
classification objective and
consequently under the valuation
or allocation assertion.
e. The total of the
amounts on the
accounts receivable
listing agrees with
the general ledger
balance for accounts
receivable.
3. Valuation or
allocation
This is part of the detail tie-in
objective and is part of the
valuation or allocation assertion.
f. All accounts on the
list arose from the
normal course of
business and are not
due from related
parties.
3. Valuation or
allocation
Concerns the classification of
accounts receivable and is
therefore a part of the
classification objective and the
valuation or allocation assertion.
6-16
6-31 (continued)
SPECIFIC BALANCE-
RELATED AUDIT
OBJECTIVE
MANAGEMENT
ASSERTION
COMMENTS
g. Sales cutoff at year-
end is proper.
3. Valuation or
allocation
Cutoff is a part of the cutoff
objective and therefore part of the
valuation or allocation assertion.
h. Receivables have
not been sold or
discounted.
4. Rights and
obligations
Receivables not being sold or
discounted concerns the rights
and obligations objective and
assertion.
transaction cycle and account. General transaction-related audit
objectives are essentially the same as management assertions, but
they are expanded somewhat to help the auditor decide which audit
evidence is necessary to satisfy the management assertions.
Accuracy and posting and summarization are a subset of the
accuracy assertion. Specific transaction-related audit objectives are
b. and c.
The easiest way to do this problem is to first identify the general
and transaction-related audit objectives for each specific
6-17
6-32 (continued)
SPECIFIC TRANSACTION-
RELATED AUDIT OBJECTIVE
b.
MANAGEMENT
ASSERTION
c.
GENERAL
TRANSACTION-
RELATED AUDIT
OBJECTIVE
a. Existing cash disbursement
transactions are recorded.
2. Completeness
7. Completeness
b. Recorded cash disbursement
transactions are for the amount of
goods or services received and
are correctly recorded.
3. Accuracy
8. Accuracy
c. Cash disbursement transactions
are properly included in the
accounts payable master file and
are correctly summarized.
3. Accuracy
9. Posting and
summarization
d. Recorded cash disbursements
are for goods and services
actually received.
1. Occurrence
6. Occurrence
e. Cash disbursement transactions
are properly classified.
4. Classification
10. Classification
f. Cash disbursement transactions
are recorded on the correct dates.
5. Cutoff
11. Timing
6-33
AUDIT PROCEDURE
BALANCE-
RELATED
AUDIT
OBJECTIVE
TRANSACTION
RELATED
AUDIT
OBJECTIVE
PRESENTATION
AND
DISCLOSURE
AUDIT
OBJECTIVE
a. Examine a sample of duplicate sales invoices to determine
whether each one has a shipping document attached.
(9) Occurrence
balance and agree the amount to the general ledger.
(6) Detail Tie-In
c. For a sample of sales transactions selected from the sales
journal, verify that the amount of the transaction has been
recorded in the correct customer account in the accounts
receivable subledger.
(14) Posting and
summarization
d. Inquire of the client whether any accounts receivable
balances have been pledged as collateral on long-term
debt and determine whether all required information is
included in the footnote description for long-term debt.
(15) Occurrence
and rights
e. For a sample of shipping documents selected from shipping
records, trace each shipping document to a transaction
recorded in the sales journal.
(10) Completeness
f. Discuss with credit department personnel the likelihood of
collection of all accounts as of December 31, 2016, with a
balance greater than $100,000 and greater than 90 days
old as of year-end.
(7) Realizable
value
g. Examine sales invoices for the last five sales transactions
recorded in the sales journal in 2016 and examine shipping
documents to determine they are recorded in the correct
period.
(5) Cutoff
6-18
Copyright © 2017 Pearson Education, Inc.
6-33 (continued)
AUDIT PROCEDURE
BALANCE-
RELATED
AUDIT
OBJECTIVE
TRANSACTION
RELATED
AUDIT
OBJECTIVE
PRESENTATION
AND
DISCLOSURE
AUDIT
OBJECTIVE
h. For a sample of customer accounts receivable balances for
December 31, 2016, examine subsequent cash receipts in
January 2017 to determine whether the customer paid the
balance due.
(1) Existence
(7) Realizable
value
i. Determine whether all risks related to accounts receivable
are adequately disclosed.
(16) Completeness
j. Foot the sales journal for the month of July and trace
postings to the general ledger.
(14) Posting and
summarization
k. Send letters to a sample of accounts receivable customers
to verify whether they have an outstanding balance at
December 31, 2016.
(1) Existence
l. Determine whether long-term receivables and related party
receivables are reported separately in the financial
statements.
(18) Classification
and
understandability
6-19
Copyright © 2017 Pearson Education, Inc.
6-20
6-34
AUDIT ACTIVITIES
AUDIT PHASE
a. Examine invoices supporting fixed asset
additions.
3. Perform substantive analytical
procedures and tests of details of
balances (Phase III)
b. Review industry databases to assess
the risk of material misstatements in the
financial statements.
1. Plan and design an audit
approach based on risk
assessment procedures (Phase I)
c. Summarize misstatements identified
during testing to assess whether the
overall financial statements are fairly
stated.
4. Complete the audit and issue an
audit report (Phase IV)
d. Test computerized controls over credit
approval for sales transactions.
2. Perform tests of controls
and substantive tests of
transactions (Phase II)
e. Send letters to customers confirming
outstanding accounts receivable balances.
3. Perform substantive analytical
procedures and tests of details of
balances (Phase III)
f. Perform analytical procedures comparing
the client with similar companies in the
industry to gain an understanding of the
client’s business and strategies.
1. Plan and design an audit
approach based on risk
assessment procedures (Phase I)
g. Compare information on purchase
invoices recorded in the acquisitions
journal with information on receiving
reports.
2. Perform tests of controls and
substantive tests of transactions
(Phase II)
