🎯Assertions: 41 MCQs

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Paul Ruchal 18 October 2024

Which of the following audit objectives is part of the accuracy assertion for classes of transactions?
Posting and summarization
can you explain this answer and explain why this is not classification

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1. Maroun, CPA 19 October 2024
  
  Hello Paul,
  
  Posting and summarization is associated with the accuracy assertion because it ensures that transactions are correctly recorded at the right amounts and accurately transferred from journals to ledgers. The accuracy assertion focuses on making sure the amounts are correct and properly posted throughout the accounting system.
  
  The classification assertion ensures that transactions are recorded in the correct accounts (e.g., recording a repair expense as a maintenance expense rather than capitalizing it as an asset). While classification is about assigning transactions to the appropriate categories, posting and summarization deals with ensuring that the amounts are transferred correctly within the system—an issue of accuracy, not of the category or nature of the transaction.
  
  Thus, posting and summarization is about getting the numbers right rather than assigning them to the right accounts, which makes it part of the accuracy assertion.
  
  Let me know if this helps clarify!
  
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Paul Ruchal 18 October 2024

Which of the following audit objectives emphasize opposite audit concerns, with the first objective dealing with potential overstatement and the second objective dealing with potential understatement?

can you explain this concept and illustrate an example

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1. Maroun, CPA 19 October 2024
  
  Hello Paul,
  
  This concept addresses how auditors focus on different types of risks depending on the nature of the financial statement element. Some audit objectives aim to detect overstatement, while others focus on identifying potential understatement.
  
  For example, the concern with the existence assertion is to ensure that recorded assets or revenue are real and valid. If a company records fake receivables to inflate its financial position, this would be an overstatement. To address this, auditors perform procedures like confirming accounts receivable.
  
  On the other hand, the concern with the completeness assertion is that all liabilities and expenses that should be recorded are included in the financial statements. Management might omit or understate payables to present a stronger financial position. In this case, the auditor would perform a search for unrecorded liabilities..
  
  These two assertions reflect opposing concerns. For assets and revenue, the focus is on preventing overstatement, while for liabilities and expenses, the concern shifts to avoiding understatement. This is because the incentives and risks are different depending on the type of account being audited.
  
  Let me know if this explanation helps.
  
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Paul Ruchal 18 October 2024

could you explain further and illustrate by example the following
Which of the following audit tests would provide evidence regarding the existence and occurrence assertion?

I. Testing whether the revenue is overstated

II. Testing whether the inventory is understated

III. Testing whether the payables are overstated

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1. Maroun, CPA 19 October 2024
  
  Hello Paul,
  
  The existence and occurrence assertion is that recorded assets and liabilities balances really exist and that recorded transactions have really occurred. Here’s how each test relates to that assertion:
  
  I. Testing whether revenue is overstated focuses on the occurrence assertion. The goal is to verify that recorded sales transactions actually took place.
  
  Example: The auditor might vouch entries from the sales journal to underlying documents like sales invoices and shipping documents to confirm the sales were real and not fictitious.
  
  – Testing whether inventory is understated does not relate to the existence or occurrence assertion. Instead, it focuses on completeness (ensuring that all inventory owned by the company is recorded). This test aims to detect missing items, not confirm what’s already recorded.
  
  – Testing whether payables are overstated relates to the existence assertion. The auditor needs to ensure that recorded liabilities reflect real obligations.
  
  Example: The auditor might vouch selected amounts from the accounts
  payable listing to the voucher packages or request vendor confirmations to verify that the liabilities exist and are not overstated.
  
  I hope this helps!
  
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🎯Assertions: 41 MCQs

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