Alan KerstetterACCTG 403WProblem 6-30
When auditing a company’s financial statements, there are eight general balance-related audit objectives for the audit of any balance sheet account. These eight are categorized as existence, completeness, accuracy, classification, cutoff, detail tie-in, realizable value, and rights and obligations. The balance-related audit objectives assist auditors with accumulating sufficient appropriate evidence related to account balances. These objectives are also usually applied to the ending balances of accounts on the company’s balance sheet.
The first general balance-related audit objective is existence, which concerns whether the amount included on the balance sheet account should actually exist; therefore, this objective is concerned with overstatements. When applying this objective to a company’s property, plant, and equipment a specific balance related object concerning existence would be making sure all of the fixed assets physically exist and are being used for the purpose intended. Next, the general balance-related audit objective is completeness, which deals with whether all amounts that should have been included are actually included in the financial statements. This objective is concerned with any understatements. A specific balance-related audit objective would consist of verifying that there are no unrecorded fixed assets in use.
The objective of accuracy concerns the amounts being included on the company’s books at the correct arithmetic amounts. This objective is part of the valuation and allocation assertion for account balances. An example of this objective being applied to specific accounts such as property, plant equipment would be verifying that these assets are recorded at their correct amounts. Classification is the objective that concerns whether items included on a client’s listing are included in the correct general ledger accounts. This objective is also another part of the valuation and is closely related to the presentation and disclosure objective since the general ledger account balances are the accounts presented and disclosed in the financial statements. For example, a specific classification balance-related objective would consist of verifying that expense accounts do not contain amounts that should have been capitalized. If no capitalized items are expensed then they will be classified correctly and will effect the financial statements correctly.
The cutoff objective involves testing for the cutoff date of account balances, thus determining whether the transactions are recorded and included in account balances in the proper accounting period. Account balances are most likely misstated by transactions recorded near the end of the accounting period, since the cutoff date is the date of the balance sheet of an annual audit. This objective is also part of valuation. A specific balance-related objective for the cutoff objective would be making sure cash disbursements or accrual transactions for property, plant, and equipment items are recorded in the proper accounting period. The detail tie-in objective, which is another part of valuation, deals with whether or not summary amounts from sub-ledger accounts are accurately prepared, correctly added, and agree with the total in the general ledger. A specific detail tie-in balance related objective for an auditor for example could be tying sub-ledger accounts for property, plant, and equipment to the general ledger and verifying that the figure agree with one another.
Another part of the valuation assertion is the realizable value objective, which concerns whether an account balance has been reduced for declines from historical cost to the net realizable value. This objective only applies to asset accounts. Two specific balance-related objectives for the realizable value objective include confirming that depreciation has been determined in accordance with an acceptable method and is computed correctly or confirming that fixed asset accounts have been properly adjusted for declines in historical cost on the company’s books.
Most assets must be owned before they are considered to be acceptable to be included in a company’s financial statements; therefore, the last balance-related audit objective is the rights and obligation objective. This concerns liabilities as well, since they also must belong to the entity to be included in their financial statements. For example a specific balance-related audit objective would be verifying that a company has a valid title or the contractual rights for the use of equipment owned or leased on their financial statements.
All of the balance-related audit objectives, except valuation, have a one-on-one relationship with management’s assertions; valuation is more complex and is broken down into five separate audit objectives. The balance-related audit objects all directly correspond to the related specific balance-related objectives, thus meaning that once general balance-related objectives are developed the related specific balance-related objectives for each account balance on the financial statements can then be developed.