Week 12

Question 1

Verifications of Asset Balances

Verification of Acquisitions

Answer 1

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

Question 2

Verifications of Asset Balances

Verification of Disposals

Answer 2

Important objective is C & V

Search for unrecorded disposals – count, enquiry

Question 3

Verifications of Asset Balances

Verification of Asset Balance

Answer 3

Extensive testing usually not required

Presentation & disclosure should be tested

Question 4

Verifications of Asset Balances

Verification of Depreciation

Answer 4

Important assertion is V&C

Policy consistent & recalculate expense

Question 5

Verifications of Asset Balances

Verification of Accum. Depr.

Answer 5

Residual of Depreciation

Question 6

Audit Emphasis

Assets

Answer 6

Concern is overstatement
Right to collect
Valuation

Leads to an overstatement of owners equity

Question 7

Audit Emphasis

Liability

Answer 7

Concern is understatement
Obligation to pay
Completeness

Leads to an overstatement of owners equity

Question 8

Purchasing

Test of Controls

Answer 8

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

Question 9

Purchasing

Analytical Procedures

Answer 9

Highly predictable if stable; thus very useful

Can minimize test of details

Question 10

Purchasing

Test of Details

Answer 10

Common for balances to be material

Can be extensive if IC are ineffective

Question 11

Substantive testing – Other Balances

Answer 11

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

Question 12

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

Balance Sheet

Answer 12

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

Question 13

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

Income Statement

Answer 13

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

Question 14

Substantive testing - Revenue

Answer 14

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

Question 15

Substantive testing – When ?

Answer 15

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

Question 16

Illustration of Audit Process - Payroll

Test of Controls

Answer 16

Most important means of verifying payroll

RMM is usually considered low, so less assurance is required

Question 17

Illustration of Audit Process - Payroll

Analytical Procedures

Answer 17

Highly predictable; thus very useful

Can minimize test of details

Question 18

Illustration of Audit Process - Payroll

Test of Details

Answer 18

If TOC is satisfactory, significantly reduces TOB

Question 19

Extend Procedures when…

Answer 19

Significantly impacts the valuation of inventory

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