12. Assertions & Procedures

Question 1

What is an assertion?

Answer 1

A claim made by management about the financial statements

Assertions are fundamental in the auditing process.

Question 2

Why do auditors use assertions?

Answer 2

To assess RMM and design procedures

RMM stands for Risk of Material Misstatement.

Question 3

Name the two categories of assertions.

Answer 3

• Income Statement (I/S)
• Balance Sheet (B/S)

Mnemonic: CCOCA + Presentation.

Question 4

What does completeness refer to in assertions?

Answer 4

Have all revenues and expenses been recorded?

Completeness ensures that no transactions are omitted.

Question 5

What does classification assess?

Answer 5

Are revenues and expenses recorded in proper accounts?

Proper classification is crucial for accurate financial reporting.

Question 6

What does occurrence verify?

Answer 6

Did the revenues and expenses actually happen?

Occurrence ensures that recorded transactions are valid.

Question 7

What does cutoff check?

Answer 7

Were revenues and expenses recorded in the correct period?

Cutoff is important for accurate period reporting.

Question 8

What does accuracy ensure?

Answer 8

Are revenues and expenses recorded at correct amounts?

Accuracy is vital for the integrity of financial statements.

Question 9

What does presentation evaluate?

Answer 9

Are they properly disclosed?

Presentation ensures compliance with accounting standards.

Question 10

What does completeness refer to in Balance Sheet assertions?

Answer 10

Have all A/L/E been recorded?

A/L/E stands for Assets, Liabilities, and Equity.

Question 11

What does classification assess in Balance Sheet assertions?

Answer 11

Recorded in proper accounts?

Proper classification is essential for accurate financial representation.

Question 12

What does existence verify?

Answer 12

Do the assets and liabilities actually exist?

Existence ensures that reported assets and liabilities are real.

Question 13

What do rights & obligations check?

Answer 13

• Does entity own the assets?
• Are liabilities truly obligations?

This assertion confirms ownership and responsibility.

Question 14

What does AVA stand for?

Answer 14

Accuracy, Valuation, Allocation

AVA ensures that balances are recorded appropriately.

Question 15

What does presentation ensure in Balance Sheet assertions?

Answer 15

Properly disclosed?

Presentation is critical for transparency in financial reporting.

Question 16

When testing completeness, what is the direction?

Answer 16

From outside → into GL

This involves tracing source documents to the general ledger.

Question 17

When testing occurrence/existence, what is the direction?

Answer 17

From GL → source documents

This direction rule alone saves marks in assessments.

Question 18

What are the two types of procedures in auditing?

Answer 18

• Substantive
• Tests of Controls (ToC)

Both types are essential for a comprehensive audit approach.

Question 19

What are substantive procedures designed to do?

Answer 19

Detect material misstatements

Substantive procedures include tests of details and substantive analytical procedures.

Question 20

What are tests of controls?

Answer 20

Evaluate effectiveness of internal controls

Used in a combined approach to auditing.

Question 21

What is the risk and procedure of I/S – Completeness (Expenses)?

Answer 21

• Risk: Expenses Understated
• Procedure: Trace POs –> Vendor Invoices –> GL

Question 22

What is the risk and procedure for I/S - Occurence (Revenue)?

Answer 22

• Risk: Fake Revenue
• Procedure: Trace POs –> Vendor Invoices –> GL

Question 23

What is the Risk and Procedure for I/S - Cutoff (Revenue)?

Answer 23

• Risk: Revenue Recorded Early
• Procedure: Compare invoice date to shipping ate around year-end

Question 24

What is the risk and procedure for B/S - Existence (PPE)?

Answer 24

• Risk: Ghost Assets
• Procedure: Physically inspect assets

Question 25

What is the risk and procedure for B/S - Rights and Obligations (Inventory)?

Answer 25

- ***Risk:*** Consignment Goods Recorded - ***Procedure:*** Inspect Supplier Contracts

Question 26

What is the Risk and Procedure for B/S - AVA (A/R)?

Answer 26

- ***Risk:*** A/R Overstated - ***Procedure:*** Review aged listing + assess AFDA reasonableness.

Question 27

What are 2 methods that can be used for procedure writing framework?

Answer 27

1. RAP (Risk --> Assertion --> Procedure) 2. VOOP (Verb + Object + Evidence + Purpose)

Question 28

Look at the back of the Card for all the information about RAP

Answer 28

Question 29

Look at the back for all the information about VOOP

Answer 29

Question 30

What are the 3 questions to ask yourself about Nature, Timing, and Extent?

Answer 30

Answer on the image.

Question 31

What is extent influenced by? (3 things)

Answer 31

1. Materiality 2. Risk 3. Assurance Level

Question 32

If **revenue risk** is overstatement, which assertion is affected?

Answer 32

Occurrence (not completeness) ## Footnote This relates to ensuring that revenues recorded actually occurred and are not overstated.

Question 33

If **expense risk** is understatement, which assertion is affected?

Answer 33

Completeness ## Footnote This pertains to ensuring that all expenses that should be recorded are included.

Question 34

If **asset risk** is overstated, which assertion is affected?

Answer 34

Existence or AVA ## Footnote This involves verifying that the assets reported actually exist and are valued appropriately.

Question 35

If **liability risk** is understated, which assertion is affected?

Answer 35

Completeness ## Footnote This ensures that all liabilities that should be recorded are included in the financial statements.

Question 36

If **related party transactions** are missing, which assertion is affected?

Answer 36

Presentation ## Footnote This relates to the proper disclosure of transactions with related parties in financial statements.