Unit 10

Question 1

What do substantive procedures for balance sheet accounts include?

Answer 1

• use of confirmations
• vouching GL balances back to third party supporting evidence
• tracing of supporting evidence back to balances recorded in the GL.

Question 2

What are the most important assertions for the substantive testing of revenue?

Answer 2

• Occurrence: the auditor must be confident that revenue recorded in the GL are in fact revenue transactions that have “occurred”.
• Accuracy: the auditor must be confident that revenue has been recorded at the correct amount (has not been overstated or understated).
• Cut off: the auditor must be confident that revenue has been recorded in the correct reporting period.
• Completeness is generally not a significant assertion for revenue, as the risk is generally overstatement, not understatement. Recall, completeness testing focuses on ensuring that all revenues that have occurred have been recorded.

Question 3

What are the most important assertions for the substantive testing of expenses?

Answer 3

• Completeness: the auditor must be confident that all COGS and expenses that should have been recorded in the GL have, in fact, been recorded.
• Accuracy: the auditor must be confident that COGS and expenses have been recorded at the correct amount (have not been overstated or understated).
• Cut off: the auditor must be confident that COGS and expenses have been recorded in the correct reporting period.
• Occurrence is typically not a significant assertion, as the primary objective in testing for occurrence is to ensure that costs are expenses are not overstated. It is unlikely for most entities that there is any incentive to overstate costs and expenses.

Question 4

How are accuracy and cut-off tested for expenses?

Answer 4

• Accuracy is generally verified by vouching recorded amounts to supporting (third party) documentation or by reference to the significant Balance Sheet account that has determined the expense.
• Cut-off and completeness are generally tested by tracing supporting documentation for transactions that have occurred both before (and after) reporting period end, back to transactions recorded in the GL

Question 5

How is payroll tested?

Answer 5

test the controls over the payroll cycle and then perform substantive analytical procedures over the related expense accounts.

Question 6

If payroll is outsourced how can you rely on the balances provided?

Answer 6

many service organizations will issue an audit report on their operations which the auditor can rely on, thereby eliminating the need for the auditor to test the controls at the service organization directly.

Question 7

What are substantive procedures for testing payroll?

Answer 7

• Compare the payroll at the beginning and end of the period to identify changes in employees and in pay rates (Occurrence, Completeness, Accuracy)
• Recalculate the payroll amounts paid to the supporting timecards, multiplying the hours worked with the hourly pay rate (Accuracy)
• Trace the payroll payments to the payroll clearing account (Occurrence, Accuracy)

Question 8

How is the balance sheet tested?

Answer 8

With detailed substantive testing

Question 9

How is the income statement tested?

Answer 9

With substantive analytical procedures