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Flashcards in Week 12 Deck (19):
1

Verifications of Asset Balances
Verification of Acquisitions

Continuity schedule prepared by client
Examination of supporting documentation
Important objectives: E, V & A (classification)

2

Verifications of Asset Balances
Verification of Disposals

Important objective is C & V
Search for unrecorded disposals – count, enquiry

3

Verifications of Asset Balances
Verification of Asset Balance

Extensive testing usually not required
Presentation & disclosure should be tested

4

Verifications of Asset Balances
Verification of Depreciation

Important assertion is V&C
Policy consistent & recalculate expense

5

Verifications of Asset Balances
Verification of Accum. Depr.

Residual of Depreciation

6

Audit Emphasis
Assets

Concern is overstatement
Right to collect
Valuation

Leads to an overstatement of owners equity

7

Audit Emphasis
Liability

Concern is understatement
Obligation to pay
Completeness

Leads to an overstatement of owners equity

8

Purchasing
Test of Controls

If possible, reliance on controls can reduce effort dramatically
Vary widely from business to business

9

Purchasing
Analytical Procedures

Highly predictable if stable; thus very useful
Can minimize test of details

10

Purchasing
Test of Details

Common for balances to be material
Can be extensive if IC are ineffective

11

Substantive testing – Other Balances

Most other accounts are typically audited substantively because they do not rely on high volume processes and specific application controls

For example:
Pre-paids
Financing Activities: LT Debt, Bonds, Shares, Leases
Inter-company balances
Provisions
Taxation

12

Difference b/w Auditing B/S vs. I/S
Balance Sheet

Represent recent/permanent transactions.
Gather evidence for related I/S accounts.
Required procedures.
Test using test of details.

13

Difference b/w Auditing B/S vs. I/S
Income Statement

Represent entire year of transactions.
Less evidence required as gathered while testing B/S.
Few required procedures.
Test using analytical procedures.

14

Substantive testing - Revenue

Sales is usually very significant account:
Pressure to achieve sales targets creates risk of overstatement
- High overall inherent risk, e.g. manipulation, fraud

Also significant because:
- Material size
- High volume of transactions

Auditors usually either use only substantive testing techniques, or use controls testing supplemented with high-level analytical procedures

15

Substantive testing – When ?

Processes impacting on costs and expenses
Substantive testing of purchases and payroll usually undertaken only if controls are not effective, or if more efficient to test substantively
For example: Contractual (rent, insurance) or Residual of B/S (depreciation, bad debt, warranty expense)


Testing of balances – some procedures ordinarily always performed, others if risk assessment warrants
For example: legal fees, maintenance

16

Illustration of Audit Process - Payroll
Test of Controls

Most important means of verifying payroll
RMM is usually considered low, so less assurance is required

17

Illustration of Audit Process - Payroll
Analytical Procedures

Highly predictable; thus very useful
Can minimize test of details

18

Illustration of Audit Process - Payroll
Test of Details

If TOC is satisfactory, significantly reduces TOB

19

Extend Procedures when…

Significantly impacts the valuation of inventory

When internal controls are weak increasing the risk of fraudulent payroll transactions
Non-existent employees
Non-existent hours