Wk 9 Ch 10: substantive testing and balance sheet accounts

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Substantive testing- cash
Most important assertions and how they are tested
- EXISTENCE
- Usually addressed by bank confirmation
- COMPLETENESS
- Test bank reconciliation and cut-off of cash transactions
- Verify reconciling items to next period bank statement
Other assertions may also be important in the audit of cash:

RIGHTS AND OBLIGATIONS assertion also significant where clients may pledge assets

Pledging restricts client’s rights over cash

–

VALUATION AND ALLOCATION usually only an issue when client has significant foreign currency bank accounts
Cash- assertion descriptions
Cash receipt process
Substantive tests cash
Substantive testing- receivables
- TWO MOST IMPORTANT ASSERTIONS:
- EXISTENCE
- Usually addressed by debtors’ confirmation
- Positive confirmation: auditor requests reply in all circumstances
- Negative confirmation: auditor requests reply only if debtor disagrees with balance shown
- Confirmations do not provide assurance about valuation because they do not address recoverability
VALUATION & ALLOCATION

–Use subsequent receipts test ?

–Analytical procedures based on ageing
Substantive testing inventory
- TWO MOST IMPORTANT ASSERTIONS:
- EXISTENCE
- Usually addressed by testing client’s annual or cyclical stock take
- Auditor tests client’s verification of physical inventory with records, and auditor must sight inventory
- Lower CR, less likely stocktake is performed only annually
VALUATION & ALLOCATION

Lower of cost and NRV -

Sighting inventory at stock take allows auditor to assess slow-moving, damaged, obsolete, impaired, excess stock which should be written down
- Typical techniques:
- Vouching to invoices to verify initial cost
- Vouching to sales details to verify cost of sales
- Test provision for impairment calculations
types of transactions that impact on the inventory balance

1.Purchasing,

2.cash payments, and

3.inventory processes

Usually, auditor relies on control testing of these transactions to confirm low CR

If CR not low, substantive tests required for the transactions

Testing inventory account balances required by ASA 501; ISA 501, para 4

If inventory is material to the financial report, auditor must attend the physical inventory counting, unless impracticable, to:

a)Evaluate managements’ instructions and procedures

b)Observe performance of count

c)Inspect inventory

d)(re-) Perform test counts (Sampling)

Auditor is required to test entity’s final inventory records to determine if they accurately reflect actual inventory count.

Author

kirstenp

343363

Card Set

Wk 9 Ch 10: substantive testing and balance sheet accounts

Description

Wk 9 Ch 10: substantive testing and balance sheet accounts Discuss the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures Design and discuss how to execute substantive procedures to address audit risk related to cash Design and discuss how to execute substantive procedures to address audit risk related to trade receivables Design and discuss how to execute substantive procedures to address audit risk related to inventory Design and discuss how to execute substantive procedures to address audit risk related to property, plant and equipment Design and discuss how to execute substantive procedures to address audit risk related to payables Discuss how substantive testing is used for other balance sheet accounts Discuss how to assess the results of substantive procedures to determine whether additional substantive tests are necessary.

Updated

2018-11-04T14:48:41Z