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Chapter 5 26 auditing programs and assertions

Assertions relate to financial statement tests, and include presentation and disclosure, existence or occurrence, rights and obligations, completeness and valuation or allocation. Audit procedures indicate steps in testing internal controls and financial account balances.

Presentation and Disclosure Presentation ensures that a business entity's financial statements are reported in accordance with generally accepted accounting principles and industry standards.

Accurate presentation means that accounts are reported in specific ways in financial statements--for example, short- and long-term. Disclosures provide supplemental information to a reader of financial reports. Existence or Occurrence Existence tests check whether an asset or a liability can be verified physically. For example, an auditor might verify the existence of stock inventories at warehouses. Occurrence tests could inform an auditor about the date and place a business transaction happened.

Video of the Day Brought to you by Techwalla Brought to you by Techwalla Rights and Obligations An auditor tests whether a business entity has rights to its assets -- what it owns --or has legal obligations for its liabilities -- what it owes. For example, an auditor might verify a bond agreement to confirm Company ABC's debt.

Completeness Completeness in financial reporting means that a business entity's financial statements include four reports: Valuation or Allocation Valuation tests check whether a corporation appraises its assets or liabilities properly. For instance, an auditor might ask how Company XYZ values its real-estate assets. Allocation techniques could relate to how a business entity allocates costs to products, segments or time periods.

Operating Environment Knowledge An auditor understands an organization's operating environment chapter 5 26 auditing programs and assertions reading corporate policies and guidelines, departmental procedures and segment-level standards.

An auditor also could acquire such knowledge by reading industry publications, inquiring from external auditors and reading prior years' reports.

Audit Assertions & Procedures

Control Knowledge An auditor acquires knowledge about controls existing in a chapter 5 26 auditing programs and assertions, or in an area under review, by discussing with a variety of experts--such as accountants, risk managers, tax specialists and traders. For example, an auditor might ask a risk manager to explain the process for calculating a bond option's price. Control Testing An audit specialist applies generally accepted auditing standards to ensure that internal controls, processes and procedures are "adequate" and "effective.

Effective controls remedy deficiencies properly. Tests of Account Balances An auditor test account balances when a business entity's control environment is not adequate or effective.

For example, an audit specialist reviewing Insurance and Co. Tests of Account Details An auditor conducts detailed tests of accounts and account groups to ensure that individual account balances agree with financial statement balances.

For example, an auditor might review individual policyholders' accounts to verify that the sum of these accounts agree with amounts reported on an insurance company's balance sheet.