Relationship Between Transaction Cycles,

Journals, Ledgers, Trial Balance, and

Financial Statements
Relationship Between Classes of Transactions and
Accounts Receivable Balances
Trust, but verify

• a rhyming Russian proverb

 Audit objectives
must be linked to
management assertions.

Management assertions

Audit objectives
 Management Assertion What Can Go Wrong? Audit Objective
Existence (E) The inventory recorded might not physically To verify that inventory reported in the accounts
exist. at the end of the reporting period physically exists.
Rights and Obligations (R&Ob) The company may not own or have the right to To confirm that the company has legal rights to
the inventory; it may be pledged as collateral the inventory, it is not pledged as loan collateral,
or owned by others. and goods sold on consignment are not incorrectly
recorded as inventory.
Completeness (Co) Some inventory may exist but not be recorded To ensure all existing inventory is counted and
in the financial statements; required included in the inventory report and that all
disclosures might be omitted. required disclosures are included in the financial
statements.
Accuracy, Valuation and Allocation Inventory might not be valued correctly; To ensure inventory is properly valued at the
(Ac/V/Al) valuation methods may be incorrect or not lower of cost or net realizable value using the
disclosed. weighted-average method, and that related
disclosures accurately describe the valuation
method.
Classification (Cl) Inventory may be recorded in the wrong To confirm that inventory items are classified
accounts or categories. correctly, including goods sold under consignment
and reductions to net realizable value.
Presentation (P) Inventory presentation and disclosure may be To verify that inventory is appropriately presented
unclear or non-compliant with standards. in the financial statements with clear disclosures
according to financial reporting standards,
including policies, valuation methods, totals,
breakdown by category, use as collateral, and
other relevant details.
Management Assertion What Can Go Wrong? Audit Objective
Occurrence (O) Did the sales transactions Sales transactions recorded as revenue from the sale of housing-
actually occur? related products actually occurred and the goods were delivered
to real customers.
Completeness (Co) Were all actual sales All sales transactions with actual delivery to real customers during
transactions recorded the audited accounting period were completely recorded.
completely?
Accuracy (Ac) Are the sales transactions Amounts and related information were recorded appropriately.
accurately valued? Sales are recognized at the value received or expected to be
received for delivered goods after deducting discounts, excluding
VAT. Related disclosures are adequately described in the notes.
Cutoff (Cu) Were the sales transactions Sales transactions are recorded and recognized as revenue in the
recorded in the correct correct period based on the transfer of control of the goods to the
accounting period? customer.
Classification (Cl) Were the sales transactions Sales were recorded in the correct accounts and classified as
recorded in the correct revenue from the sale of housing-related goods, not as service or
accounts? rental income.
Presentation (P) Were the sales transactions Sales are appropriately presented as revenue from the sale of
appropriately presented and housing-related products and as part of revenue from customer
disclosed? contracts. Disclosures comply with financial reporting standards
and are clearly explained.
 AUDIT PROCEDURE/AUDIT TEST/
AUDIT TECHNIQUE
1 Risk Assessment Procedure
• Understanding of a
client's business
• Understanding of a
client's internal control
• Assessment of Risk of
Material Misstatement
2 Further Audit Procedures
2
 AUDIT EVIDENCE
is defined as any information
used by the auditor to
determine whether the
information being audited is
stated in accordance with the
established criteria

• Accounting Records
Underlying the Financial
Statements
• Other information
 Inspection
1. Inspection of
record/document
2. Physical examination

Inquiry
Written or oral
form.
 Relationship between Audit Procedures
and Types of Audit Evidence

Further Audit Inspection Observation External Recalculation Reperformance Analytical Inquiry

Procedures Inspection Physical Confirmation Procedures
of Examination
Documents

Test of Controls ✓ ✓ ✓ ✓ ✓

Substantive Test ✓ ✓ ✓ ✓
of Transactions
Substantive ✓ ✓
Analytical
Procedures
Test of Details of ✓ ✓ ✓ ✓ ✓ ✓
Balances
 Relationship Between Audit Objectives
and Types of Audit Evidence

Audit Document Physical Observation External Recalculation Reperformance Analytical Inquiry

Objective Inspection Examination Confirmation Procedure

E / Oc ✓ ✓ ✓ ✓ ✓
R & Ob ✓ ✓
Co ✓ ✓ ✓ ✓ ✓
Ac/V/Al ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Cu ✓ ✓ ✓
Cl ✓ ✓ ✓ ✓
P ✓ ✓ ✓ ✓
AUDIT EVIDENCE DECISION
Type and Amount of Evidence

• Audit Procedure
• Sample Size Audit
• Sampling Program
• Timing
SUFFICIENT APPROPRIATE
AUDIT EVIDENCE
Appropriateness

• Quality of evidence
• Relevance and Reliability
o Source of audit evidence
o Nature of audit evidence
o Circumstance under which
evidence is obtained
SUFFICIENT APPROPRIATE
AUDIT EVIDENCE
Sufficiency
• Quantity or sample size
• Sufficiency of audit evidence
o large dollar value of
transactions or balances
o items with a high likelihood
o items that are representative
of the population
 Audit Documentation
Known as working papers
• Audit documentation is the record
of audit procedures performed,
relevant audit evidence obtained,
and conclusions the auditor
reached.
o document prepared by the
auditor
o document prepared by client or
their photo copies
o Other document
OWNERSHIP OF AUDIT FILES AND
RETENTION
 AUDIT FILES
Filing
• Permanent file
• Current file
o Audit program
o Draft of financial statements
o T/B
o Lead schedule
o Supporting schedule
o Adjusting journal entries and
reclassification entries
 Example of the lead schedule for
the statement of financial position
Example of how working papers and documents are
organized in the file.
Inherent Limitation of an Audit
The auditor is neither
required nor able to eliminate
audit risk entirely.

Therefore, the auditor cannot

provide the highest level of
assurance, or absolute
assurance, that the financial
statements are free from
material misstatement, whether
due to fraud or error.
END