Understanding the management assertions related to a specificcontrol is an important factor in preparing the tests of controls.Using the assertions provided below, select the managementassertion(s) that relates to the purpose of the controls in thetable. (A management assertion may be selected once, more thanonce, or not at all.)
Management Assertions
(a) Existence or occurrence
(b) Completeness
(c) Rights and obligations
(d) Valuation or allocation
(e) Presentation and disclosure
(f) Authorization
(g) Cutoff
Purpose of Control
Management Assertion
To ensure that credit is approved before a sale is executed andservice is provided or goods are shipped
To ensure that transactions shown as sales are properlyclassified
To ensure that when cash receipts are recorded they show cashthat was actually received by the company and deposited
To ensure that cash receipts transactions are properly posted tothe accounts receivable subsidiary ledger and general ledger
To ensure that all cash received by the company is deposited andrecorded in the cash receipts journal and that amounts and details,including the date, are shown correctly
To ensure that sales transactions are recorded based on thecorrect dates
Understanding the management assertions related to a specificcontrol is an important factor in preparing the tests of controls.Using the assertions provided below, select the managementassertion(s) that relates to the purpose of the controls in thetable. (A management assertion may be selected once, more thanonce, or not at all.)
Management Assertions
(a) Existence or occurrence
(b) Completeness
(c) Rights and obligations
(d) Valuation or allocation
(e) Presentation and disclosure
(f) Authorization
(g) Cutoff
Purpose of Control | Management Assertion |
|---|---|
To ensure that credit is approved before a sale is executed andservice is provided or goods are shipped | |
To ensure that transactions shown as sales are properlyclassified | |
To ensure that when cash receipts are recorded they show cashthat was actually received by the company and deposited | |
To ensure that cash receipts transactions are properly posted tothe accounts receivable subsidiary ledger and general ledger | |
To ensure that all cash received by the company is deposited andrecorded in the cash receipts journal and that amounts and details,including the date, are shown correctly | |
To ensure that sales transactions are recorded based on thecorrect dates |
Related questions
Management assertions for the financial statements referenced inPCAOB Auditing Standards are:
Existence, occurrence
Completeness
Rights, obligations
Valuation, allocation
Presentation and disclosure
The purpose of tests of controls is to permit the auditor toassess whether properly designed controls operate effectivelyenough to prevent or detect material misstatements that would makethese managements assertions wrong.
Required:
For each of the following audit procedures identify whether theprocedure is:
(a) directed at a control or at an amount ordisclosure, 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 forinclusion of a customer order, credit approval, and shippingdocument. Make sure the documents are properly matched andcomplete, with all required signatures and trace amounts to thesales journal, accounts receivable subsidiary ledger, and inventoryfiles. | ||
Payroll | For the Hourly Payroll Expense account, multiply the averagenumber of workers times the average number of hours worked per yeartimes the average hourly rate. Compare to the total posted annualamount. | ||
Cash | Inspect the client-prepared bank reconciliation for each monthof the year, recalculate the amounts, examine the supporting bankstatements, and trace the cash amount to the general ledger. | ||
Fixed assets | Obtain a list of fixed assets and physically look at theassets. | ||
Long-term debt | Read the contract related to each of the companyâs long-termborrowings and agree the terms of the contracts to the financialstatements notes. | ||
Cash, Long-term debt | For each item of long-term debt that existed both at thebeginning and end of the year, inspect the debt contracts and thecompanyâs analysis of the discounted debt amount and its analysisof violation of debt covenants and look for whether the detailsagree. Recalculate the amounts, and examine recorded entries andbank statements for cash disbursements for debt repayments. Usingthat information, determine whether the company has been inviolation of any debt covenants during the year. | ||
Prepaid rent | Using the beginning financial statement amount, cash receiptsand cash disbursements evidence, and the lease agreement, calculateyear-end prepaid rent and agree that amount to what is shown in thegeneral ledger. | ||
Inventory | At the end of the last day in the fiscal year, go to theclientâs shipping area and record the last shipment; trace theshipment into the clientâs |
Management assertions for the financial statements referenced inPCAOB Auditing Standards are:
Existence, occurrence
Completeness
Rights, obligations
Valuation, allocation
Presentation and disclosure
The purpose of tests of controls is to permit the auditor toassess whether properly designed controls operate effectivelyenough to prevent or detect material misstatements that would makethese managements assertions wrong.
Required:
For each of the following audit procedures identify whether theprocedure is:
(a) directed at a control or at an amount ordisclosure, 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 forinclusion of a customer order, credit approval, and shippingdocument. Make sure the documents are properly matched andcomplete, with all required signatures and trace amounts to thesales journal, accounts receivable subsidiary ledger, and inventoryfiles. | ||
Payroll | For the Hourly Payroll Expense account, multiply the averagenumber of workers times the average number of hours worked per yeartimes the average hourly rate. Compare to the total posted annualamount. | ||
Cash | Inspect the client-prepared bank reconciliation for each monthof the year, recalculate the amounts, examine the supporting bankstatements, and trace the cash amount to the general ledger. | ||
Fixed assets | Obtain a list of fixed assets and physically look at theassets. | ||
Long-term debt | Read the contract related to each of the companyâs long-termborrowings and agree the terms of the contracts to the financialstatements notes. | ||
Cash, Long-term debt | For each item of long-term debt that existed both at thebeginning and end of the year, inspect the debt contracts and thecompanyâs analysis of the discounted debt amount and its analysisof violation of debt covenants and look for whether the detailsagree. Recalculate the amounts, and examine recorded entries andbank statements for cash disbursements for debt repayments. Usingthat information, determine whether the company has been inviolation of any debt covenants during the year. | ||
Prepaid rent | Using the beginning financial statement amount, cash receiptsand cash disbursements evidence, and the lease agreement, calculateyear-end prepaid rent and agree that amount to what is shown in thegeneral ledger. | ||
Inventory | At the end of the last day in the fiscal year, go to theclientâs shipping area and record the last shipment; trace theshipment into the clientâs records. |
Management assertions for the financial statements referenced inPCAOB Auditing Standards are:
Existence, occurrence
Completeness
Rights, obligations
Valuation, allocation
Presentation and disclosure
The purpose of tests of controls is to permit the auditor toassess whether properly designed controls operate effectivelyenough to prevent or detect material misstatements that would makethese managements assertions wrong.
Required:
For each of the following audit procedures identify whether theprocedure is:
(a) directed at a control or at an amount ordisclosure, 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 forinclusion of a customer order, credit approval, and shippingdocument. Make sure the documents are properly matched andcomplete, with all required signatures and trace amounts to thesales journal, accounts receivable subsidiary ledger, and inventoryfiles. | ||
Payroll | For the Hourly Payroll Expense account, multiply the averagenumber of workers times the average number of hours worked per yeartimes the average hourly rate. Compare to the total posted annualamount. | ||
Cash | Inspect the client-prepared bank reconciliation for each monthof the year, recalculate the amounts, examine the supporting bankstatements, and trace the cash amount to the general ledger. | ||
Fixed assets | Obtain a list of fixed assets and physically look at theassets. | ||
Long-term debt | Read the contract related to each of the companyâs long-termborrowings and agree the terms of the contracts to the financialstatements notes. | ||
Cash, Long-term debt | For each item of long-term debt that existed both at thebeginning and end of the year, inspect the debt contracts and thecompanyâs analysis of the discounted debt amount and its analysisof violation of debt covenants and look for whether the detailsagree. Recalculate the amounts, and examine recorded entries andbank statements for cash disbursements for debt repayments. Usingthat information, determine whether the company has been inviolation of any debt covenants during the year. | ||
Prepaid rent | Using the beginning financial statement amount, cash receiptsand cash disbursements evidence, and the lease agreement, calculateyear-end prepaid rent and agree that amount to what is shown in thegeneral ledger. | ||
Inventory | At the end of the last day in the fiscal year, go to theclientâs shipping area and record the last shipment; trace theshipment into the clientâs records. |
