Substantive testing Flashcards
(34 cards)
Sales
Sales have increased over the prior year by a significant percentage.
Risk: Sales might be overstated. The client may be recording revenue prior to delivering goods to the customer.
Assertion: Occurrence and cut off
Procedure:
-Select a sample of general ledger sales entries, trace them back to the related shipping documents and sales invoices, and examine the dates on these documents to determine whether the sale was recorded in the correct period. (Occurrence )
-Select a sample of shipping documents before and after year end, trace them to the related sales invoices and general ledger entries, and compare the dates to determine if the sale was recorded and in the correct period. (Cut off)
Sales
The client has a manual sales system.
Risk:Sales may be overstated or understated due to clerical errors
Assertion: Accuracy
Procedure:
Select a sample of general ledger sales entries, trace them back to the related sales invoices, and determine whether the sales transactions were recorded at the correct amounts by comparing the sales price to the approved price list.
COGS
The accounting clerk has been ill and has a large backlog of purchase invoices to process in a hurry.
Risk: There could be errors in the coding and posting of the invoices in the accounting system.
Assertion: Accuracy
Procedure:
Select a sample of COS transactions from the general ledger and determine whether inventory purchases have been recorded at the correct amounts by comparing the recorded amount against the purchase invoice amount.
COGS
There are a number of foreign-currency inventory purchases.
Risk: The foreign exchange translation of the COS transactions may contain errors.
Assertion: Accuracy
Procedure:
Select a sample of general ledger COS transactions and determine whether inventory purchases and COS have been appropriately translated into Canadian funds by comparing the rate used in the translation to the rate published on the Bank of Canada website.
COGS
The accounting clerk is new at his job and did not handle the cut-off of purchases in an appropriate manner.
Risk: Purchases for the current year may have incorrectly been recorded in the next fiscal year.
Assertion: Cut off and completness
Procedure:
Select a sample of purchase invoices, both before and after the period end, and ensure the transactions were recorded in the appropriate period by comparing the date of the purchase transaction in the general ledger to the purchase invoice.
Gross profit
Gross profit percentage, has increased during the year.
Risk: There is a risk that sales are overstated or COS is understated, as the Gross profit percentage, has increased during the year.
Assertion: Occurrence of sales and completeness of COS
Procedure:
Select a sample of shipping documents from before and after year end and trace them to the related sales invoices and general ledger entries. Compare the dates to determine whether the sale and the related cost were recorded, and whether they were recorded in the correct period.
Sales
Large volume sales are calculated manually
Risk : There is a possibility that the sales amounts for large-volume customers are not calculated correctly.
Assertion: Accuracy
Procedure:
Select a sample of manual sales transactions from the general ledger and determine whether the transactions have been recorded at the correct amount by recalculating the sales amounts using the sales price per the approved price list.
COGS
Purchase made from vendors are made in US dollar
Risk:There is a possibility that the foreign-currency COS items have not been translated using the correct U.S. exchange rate
Assertion: Accuracy
Procedure: Select a sample of U.S.-dollar COS transactions from the general ledger and determine whether purchases and COS have been appropriately translated into Canadian funds by comparing the rate used to the rate published on the Bank of Canada website.
COGS
large online sale was made before year end. The shipping department has struggled with the volume of online sales, and the shipment of many of the orders was delayed
Risk :There is a risk that the online sales items were not shipped before year end and the sales should be recorded in the next year.
Assertion: Cut off
Procedure: Select a sample of general ledger entries for online sales, trace them back to the shipping documents and sales invoices, and examine the dates on these documents to determine whether the sale and COS were recorded in the correct period.
Advertising expense has decreased.
Risk:There is a risk that amounts paid for advertising have been recorded as prepaid expenses and have not been properly amortized as services rendered.
Assertion: Completeness and accuracy
Procedure:
There is a risk that amounts paid for advertising have been recorded as prepaid expenses and have not been properly amortized as services rendered.
There are foreign-currency-based expense transactions
Risk:There is a possibility that the foreign-currency-based expense transactions have not been translated using the correct US$ exchange rate
Assertion: Accuracy
Procedure: Select a sample of US$ expense transactions and determine whether purchases have been translated into Canadian funds appropriately by comparing the rate used to the rate published on the Bank of Canada website
R&M expense has decreased significantly over the prior year.
Risk: There is a risk that repair expenses have been improperly included in PP&E, which would result in the overstatement of PP&E and the understatement of R&M expense.
Assertion: Completeness of RM expense
Procedure: For a sample of PP&E additions from the GL, trace to invoices for the year; inspect the invoices to verify the nature of the cost and determine whether it should have been capitalized as an asset.
Amortization expense has decreased significantly from the prior year.
Risk: There is a risk that the additions to PP&E have not been amortized in accordance with company policies.
Assertion: Completeness and accuracy
Procedure: Request the client’s PP&E continuity schedule. Inquire if there have been any changes to the company’s amortization policies. Recalculate the amortization expense and compare it to the amount recorded in the GL.
Salaries expense has decreased over the prior year
Risk: Since it was noted that there was no change in the total number of employees or type of employees, salary expense would be expected to remain relatively constant. This increases the risk that salary expense is understated.
Assertion: Completeness of payroll expense
Procedure: Select a sample of employees from the payroll ledger and agree them back to both the time-sheets and the employee contracts to ensure the payroll amounts are recorded at the correct amount.
The payroll cut-off date was December 31, but the employees were not paid until January 5 in the next period
Risk:There could be cut-off errors, as the employees were paid after year end for work performed before year end.
Assertion: Completeness and cut-off of payroll expense
Procedure:
Review the GL account at year end to ensure the year-end December 31 payroll has been recorded in the correct period.
high turnover in accounting dept, some controls related to authorization and approval have not been strictly adhered to
Risk: There is a risk that the expenses have not been appropriately coded and expenses have been recorded in the wrong accounts.
Assertion: Classification
Procedure:
-Select a sample of expense transactions from the GL. Compare the coding on the invoice to the master GL account code listing to determine if the expense has been coded to the correct account
-Prepare an analytical review of expenses comparing the balances of the current year to those of the prior year. Investigate any material variances
Commissions’ expense has decreased significantly
Risk: There is a risk that the commission expense has not been recorded for the sales in the last month of the year.
Assertion: Completeness and accuracy
Procedure:
Select a sample of sales invoices and recalculate the commission. Select a sample of sales invoices and ensure that the terms of the sale have been met to address whether the sale occurred and the related commission has been recorded.
Professional fees have increased.
Risk: There is a risk that MLL could be facing a lawsuit and the increase in professional fees are a result of the litigation.
Assertion: Completenss
Procedure:
Inquire of management if there are any current lawsuits. Review the results of the legal confirmation and examine subsequent payments to lawyers to determine if any additional amounts need to be accrued in the financial statements.
Property taxes have decreased.
Risk:There is a risk that amounts paid for property taxes have been recorded as prepaid expenses and have not been properly amortized not properly amortized with the passage of time.
Assertion: Completeness and accuracy
Procedure:
Examine the property tax assessment to ensure accurate entry (accuracy), and review the amortization of the prepaid property taxes into the property tax expense account (completeness).
Travel and entertainment has increased.
Risk: There is a risk that personal travel and entertainment has been expansed in company.
Assertion: occurrences
Procedure:
Select a sample of travel and entertainment expenditures from the GL. Compare the expense details from the expense report to the company’s travel policy to ensure the amounts recorded are legitimate expenses.
The AP balance per the general ledger has decreased from the prior year.
Risk: The AP may have been recorded in the following period.
Assertion: completeness
Procedure:
-Perform a search for unrecorded liabilities at year end:
-Request a listing of cheques written since year end (known as a cheque run). Select a sample of cheques from the cheque run, vouch the cheques to the related invoices and inspect when the related goods/services were provided. Trace the payments to the general ledger to determine whether or not they were appropriately included on the AP listing at year end.
-Select a sample of vendors with low or nil balances and send positive confirmations (ones that require a response). Compare the confirmed balances to the balances in the AP sub-ledger.
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The AP clerk was away over year end and appears to have processed a significant number of payments in the new fiscal year.
Risk:These payments may be related to prior-year expenses, increasing the risk that not all payables were recorded at year end.
Assertion: Completenss
Procedure:
Periodically throughout the audit, request to view the unpaid invoices. Select a sample of these invoices, inspect them to determine what period the goods/services relate to, and trace them to the general ledger to determine whether or not they were appropriately included on the AP listing at year end.
The company has a number of suppliers that are paid in foreign currency.
Risk:
-Per GAAP, foreign-currency AP balances have to be translated to the Canadian dollar at the end of the year using the spot rate.
-The AP balance per the general ledger could be misstated if the incorrect foreign exchange rate was used.
Assertion: Valuation
Procedure:
-Identify foreign-currency AP balances and recalculate the translated amounts using the spot rate on the year-end date (per the Bank of Canada website).
A comparison of the AP listing to the prior year shows that there are key suppliers in the current year with low or nil balances.
Risk: There could be unrecorded AP balances in the current year
Assertion: Completeness
Procedure:
Select key vendors with low or nil balances and send a positive confirmation to each vendor. Compare the confirmed balances to the balances per the AP listing. Investigate any differences.
