Solutions for C hapter 7 A udit E vidence: A F r amewor k
Review Questions: 7-1. Audit evidence is all the information used by auditors in arriving at the conclusions on which the audit opinion is based. The basic sources of evidence are knowledge of the business and industry, analytical procedures, tests of controls, and direct tests of account balances and transactions. The auditor must decide how much evidence is needed (extent), what kind of evidence is needed (nature), and when to gather the evidence (timing). The assertions form the framework for gathering sufficient, competent audit evidence as required by the professional standards. The assertions tie into generally accepted accounting principles in that those assertions are also embodied in GAAP. The five main assertions are defined as: Existence/occurrence. The assets, liabilities, and equity interests exist and all transactions reflected in the financial statements actually occurred. Completeness. All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded, i.e., nothing is left out of the financial statements. Rights/obligations. The entity holds or controls the legal ownership to assets, and liabilities are legally owed by the entity. Valuation/allocation. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Presentation/disclosure. Assets, liabilities, and equity interests are appropriately classified on the financial statements, and are adequately described in the footnotes to the financial statements. 7-4. Valuation is usually one of the most important assertions to address in most audits. The intent of this question is to have the students think about the detail required by GAAP in forming specific assertions to be