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On this forum you already have students’ answers – if an existing thread doesn’t answer your question I recommend you use the tutor forum – which I look at every working day. See page 64 and Chapter 16 of the notes – assertions relate to “classes of transactions” (e.g. sales, purchases) and “account balances” (e.g. receivables, inventory). Collectively all classes of transactions, account balances (and their related disclosures) make up the financial statements. Most risks you will see described are at the assertion level e.g. risk of revenue overstatement due to cut-off [assertion] error; risk of understatement of trade payables due to unrecorded purchase invoices [completeness assertion]. Examples of risks that affect financial statements as a whole (i.e. effect is not limited to individual classes of transaction/account balance) include the risk that entity is not a going concern (e.g. if financial statements should be prepared on a basis other than going concern) and significant risks of management fraud (e.g. if management is involved in fraudulent financial reporting). requires the auditor to determine overall responses to address the risks of material misstatement at the assertion level. The auditor should plan procedures that directly address and target the risk assessment, and should consider: •the significance of the risk; •the likelihood that a material misstatement will occur; •the magnitude of the potential misstatement should it occur; •the characteristics of the class of transactions, account balance or disclosure involved; •the nature of the specific controls used by the entity and in particular whether they are manual or automated; and Need help? Get subscribed!To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action. Call an Expert: 0800 231 5199 Cash is usually an inherently risky asset on the balance sheet when we audit cash accounts . This is due to cash may be inappropriately used without proper authorization and wrong account or incorrect timing of record may be made involving in cash transactions. In the audit of cash, the inherent risk of cash is usually assessed as high risk because the nature of cash has several risky elements such as high volume, high liquidity, automation of transactions, debt covenants, high susceptibility of manipulation, etc. In assessing the risk of fraud related to the cash, we need to consider how high the level of client’s business, control and policy related to incentives, opportunities to commit fraud, and rationalization. For example, the staff having access to cash think they are being paid too low (incentive). Cash is physically available to employees (opportunity). And top management takes cash without proper recording of transactions (rationalization). Audit Assertions for CashIn the audit of cash, we usually test the audit assertions included in the table below: Audit assertions for cashExistenceCash balances on the balance sheet really exist at the reporting date.CompletenessCash balances include all cash transactions that have occurred during the accounting period.Rights and obligationsThe company has title to the cash accounts as of the reporting date.Valuation or allocationThe recorded balances reflect the true underlying economic value of the cash and cash equivalents.Presentation and disclosureCash is properly classified on the balance sheet and adequate disclosure has been made in the notes to the financial statements.In the audit of cash, we usually focus more on the existence and completeness assertions as we concern more about whether the cash does actually exist and that cash transactions that should have been recorded have actually been recorded. Test of Controls in Audit of CashThe common controls over cash include segregation of duties, authorization, regular bank reconciliation, regular cash count, and limiting access to cash. Usually, after we assess the inherent and fraud risks of cash that could lead to misstatements in financial statements, we will obtain an understanding of the control system that the client has in place. This is to make sure if the client’s internal control is effective in preventing or detecting the risks of material misstatements. As auditors, we can gain an understanding of the client’s internal control by performing a walkthrough of the process, making an inquiry to the client’s personnel, observing the control procedures performed by the client’s personnel, and inspecting the supporting documents. This understanding provides us with a basis for making a control risk assessment. Analytical Procedures in Audit of CashFinancial statement line item like cash doesn’t have a very predictable relationship with other accounts or non-financial information such as sales with the cost of goods sold or salaries expense with the number of employees. As a result, there won’t be many analytical procedures available to use in the audit of cash. However, we may perform analytical procedures by comparing cash to prior-period and budgeted figures, as they are useful in alerting to the risks. Comparing cash to prior-periodIn the audit of cash, comparing balances to the prior-period is very useful to examine the fluctuation of cash between the two periods. This way, we can evaluate the reasons behind any major fluctuation of cash balances in order to alert to the risks involving cash. Also, it is very useful in the audit of petty cash this way. This is due to petty cash should always be the same as the prior period. For example, in a normal circumstance, the petty cash balance at the end of last period should be the same as the petty cash balance at the end of the current period; it is because of the imprest system. We usually discuss with the client’s management when there is any significant fluctuation in the balances of cash comparing to the prior-period balances. Checking cash against budgeted figuresIn this way of audit cash, we compare the actual cash balances with budgeted figures including cash from anticipated payments on accounts receivable, cash receipts, and proceeds from debt and equity. If there is a big difference between the actual figures and the budgeted figures, we need to enquire management about the reasons behind. Additionally, the sampling size of the test, for example in revenues transactions, may also need to be increased. This is so that we make a better evaluation of whether there are any cash receipts that were not appropriated leading to the misstatement. Audit Procedures for CashBank ConfirmationIn the audit of cash, bank confirmation is the process to ask for verification or confirmation to the third party, which is the bank, on the cash accounts and balances that the company has at the bank. It is done through bank confirmation letter which is usually used for inquiry about outstanding interests, contingent liabilities and guarantees in addition to the cash amount that the company has with the bank. Bank confirmation letter is usually sent out at the early date of the audit fieldwork as the confirmation process may take sometimes. The request for confirmation from the bank may also include loans and other accounts in addition to the client’s cash. The following procedures are usually performed for bank confirmation in audit cash:
Bank ReconciliationThe client usually performs bank reconciliation at the end of the month by comparing the cash balances on its bank statement with the cash balances in the accounting records. In the procedures of audit cash, we usually review the bank reconciliation statement at the year-end to make sure that client has taken into account all adjusting and reconciling items, such as deposits in transit, outstanding check, and bank charges, into the bank reconciliation. In addition, we also need to check and verify that the adjusted items have been corrected recorded in the balance sheet. What is an assertion level risk?The risks of material misstatement at the assertion level consist of two components: inherent risk and control risk. Inherent risk and control risk are the entity's risks; they exist independently of the audit of the financial statements.
What is assertion risk in auditing?Auditors must assess the risk of material misstatement for the financial statements as a whole and on the relevant assertion level. Management assertions are the claims that management makes about the items included or not included in the financial statements.
What does assertion level mean in auditing?So the “assertion level” is the level at which statements are presented as completely true. E.G. Management tells the auditor the financial statements show a true valuation of inventory – management are formally “asserting” this statement as being correct, so we call this at the “assertion level”.
What are the 3 types of audit risk?There are three main types of audit risk: Inherent risk, detection risk, and control risk.
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