Chapter 6: Audit Responsibilities and Objectives

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 Answers
6-28 a.

INCOME STATEMENT
CYCLE BALANCE SHEET ACCOUNTS ACCOUNTS
SALES AND Accounts receivable Bad debt expense
COLLECTION Allowance for doubtful accounts Sales
Cash
Notes receivable—trade

ACQUISITION Accounts payable Advertising expense

AND PAYMENT Accumulated depreciation— Depreciation expense—
furniture and equipment furniture and equipment
Cash Income tax expense
Furniture and equipment Insurance expense
Income tax payable Property tax expense
Inventory Purchases
Prepaid insurance Rent expense
Property tax payable Telecommunications expense

PAYROLL AND Cash Salaries, office and general

PERSONNEL Accrued sales salaries Sales salaries expense

INVENTORY AND Inventory Purchases

WAREHOUSING

CAPITAL Accrued interest expense Interest expense

ACQUISITION Cash
AND Common stock
REPAYMENT Loans payable
Notes payable
Retained earnings

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b. c.
CATEGORY OF
MANAGEMENT NAME OF
MANAGEMENT ASSERTION ASSERTION ASSERTION
a. Receivables are appropriately Presentation and Classification and
classified as to trade and other disclosure understandability
receivables in the financial
statements and are clearly
described.
b. Sales transactions have been Classes of Cutoff
recorded in the proper period. transactions
c. Accounts receivable are Account balances Valuation and
recorded at the correct amounts. allocation

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d. Sales transactions have been Classes of Classification
recorded in the appropriate transactions
accounts.
e. All required disclosures about Presentation and Completeness
sales and receivables have disclosure
been made.
f. All accounts receivable have Account balances Completeness
been recorded.
g. Disclosures related to accounts Presentation and Accuracy and
receivable are at the correct disclosure valuation
amounts.
h. Sales transactions have been Classes of Accuracy
recorded at the correct amounts. transactions
i. Recorded accounts receivable Account balances Existence
exist.
j. Disclosures related to sales and Presentation and Occurrence and rights
receivables relate to the entity. disclosure and obligations
k. Recorded sales transactions Classes of Occurrence
have occurred. transactions
l. There are no liens or other Account balances Rights and
restrictions on accounts receivable. obligations
m. All sales transactions have Classes of Completeness
been recorded. transactions

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SPECIFIC BALANCE-
RELATED AUDIT MANAGEMENT
OBJECTIVE ASSERTION COMMENTS

a. There are no 2. Completeness Unrecorded transactions or

unrecorded receivables. amounts deal with the
completeness objective.

b. Uncollectible 3. Valuation or Providing for uncollectible accounts

accounts have been allocation concerns whether the allowance for
provided for. uncollectible accounts is adequate.
It is part of the realizable value
objective and the valuation or
allocation assertion.

c. Receivables that 3. Valuation or This is part of the realizable value

have become allocation objective and the valuation or
uncollectible have been allocation assertion. There may also
written off. be some argument that this is part
of the existence objective and
assertion. Accounts that are
uncollectible are no longer valid
assets.

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 d. All accounts on the 3. Valuation or Accounts that are not expected to
list are expected to be allocation be collected within a year should be
collected within classified as long-term receivables.
one year. It is therefore included as part of the
classification objective and
consequently under the valuation or
allocation assertion.

e. The total of the 3. Valuation or This is part of the detail tie-in

amounts on the accounts allocation objective and is part of the valuation
receivable listing agrees or allocation assertion.
with the general ledger
balance for accounts
receivable.

f. All accounts on the 3. Valuation or Concerns the classification of

list arose from the normal allocation accounts receivable and is therefore
course of business and a part of the classification objective
are not due from related and the valuation or allocation
parties. assertion.

g. Sales cutoff at year- 3. Valuation or Cutoff is a part of the cutoff

end is proper. allocation objective and therefore part of the
valuation or allocation assertion.

h. Receivables have 4. Rights and Receivables not being sold or

not been sold or obligations discounted concerns the rights and
discounted. obligations objective and assertion.

The easiest way to do this problem is to first identify the general

and transaction-related audit objectives for each specific transaction. It is then easy to
determine the management assertion using Table 6-4 (p. 186 in text) as a guide.

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b. c.
GENERAL
TRANSACTION-
SPECIFIC TRANSACTION- MANAGEMENT RELATED AUDIT
RELATED AUDIT OBJECTIVE ASSERTION OBJECTIVE

a. Existing cash disbursement 2. Completeness 7. Completeness

transactions are recorded.
b. Recorded cash disbursement 3. Accuracy 8. Accuracy
transactions are for the amount of
goods or services received and are
correctly recorded.

c. Cash disbursement transactions 3. Accuracy 9. Posting and

are properly included in the accounts summarization
payable master file and are correctly
summarized.

d. Recorded cash disbursements 1. Occurrence 6. Occurrence

are for goods and services actually
received.
e. Cash disbursement transactions 4. Classification 10. Classification
are properly classified.
f. Cash disbursement transactions 5. Cutoff 11. Timing
are recorded on the correct dates.

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PRESENTATION
BALANCE- TRANSACTION AND
RELATED RELATED DISCLOSURE
AUDIT AUDIT AUDIT
AUDIT PROCEDURE OBJECTIVE OBJECTIVE OBJECTIVE
a. Examine a sample of duplicate sales invoices to determine (9) Occurrence
whether each one has a shipping document attached.
b. Add all customer balances in the accounts receivable trial (6) Detail Tie-In
balance and agree the amount to the general ledger.
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c. For a sample of sales transactions selected from the sales

journal, verify that the amount of the transaction has been recorded (14) Classification
in the correct customer account in the accounts receivable sub-
ledger.
d. Inquire of the client whether any accounts receivable balances
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have been pledged as collateral on long-term debt and determine (15) Occurrence
whether all required information is included in the footnote and rights
description for long-term debt.
e. For a sample of shipping documents selected from shipping
records, trace each shipping document to a transaction recorded in (10) Completeness
the sales journal.
f. Discuss with credit department personnel the likelihood of (7) Realizable
collection of all accounts as of December 31, 2016, with a balance value
greater than $100,000 and greater than 90 days old as of year-end.
g. Examine sales invoices for the last five sales transactions
recorded in the sales journal in 2016 and examine shipping (5) Cutoff
documents to determine they are recorded in the correct period.
h. For a sample of customer accounts receivable balances for (1) Existence
December 31, 2016, examine subsequent cash receipts in January (7) Realizable value
2017 to determine whether the customer paid the balance due.

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PRESENTATION
BALANCE- TRANSACTION AND
RELATED RELATED DISCLOSURE
AUDIT AUDIT AUDIT
AUDIT PROCEDURE OBJECTIVE OBJECTIVE OBJECTIVE
i. Determine whether all risks related to accounts receivable are (16) Completeness
adequately disclosed.
j. Foot the sales journal for the month of July and trace postings (14) Posting and
to the general ledger. summarization
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k.Send letters to a sample of accounts receivable customers to (1) Existence

verify whether they have an outstanding balance at December
31, 2016.
l. Determine whether long-term receivables and related party (18) Classification
receivables are reported separately in the financial statements. and understandability
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6-33a. Perform analytical procedures and tests of details of balances (Phase III)

b. Plan and design an audit approach based on risk assessment procedures (Phase I)

c. Complete the audit and issue an audit report (Phase IV)

d. Perform tests of controls and substantive tests of transactions (Phase II)

e. Perform analytical procedures and tests of details of balances (Phase III)

f. Plan and design an audit approach based on risk assessment procedures (Phase I)

g. Perform tests of controls and substantives tests of transactions (Phase II)

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