Audit and Assurance Chapter 5 Flashcards
What are the relevant assertions for assets and liabilities?
- Existence
- Completeness
- Rights and obligations (or ownership)
- Valuation
- Disclosure
An important test when reviewing non-current assets is to ensure that only capital expenditure is included on the statement of financial position.
What is a lease?
is a contract, or part of a contract, that conveys the right to use an asset for a period of time, in exchange for consideration.
What are audit risks for leases?
- Recognition of an asset as a right-of-use asset when it does not qualify
- non-recognition of a leased asset which should be classified as a right-of-use asset
- material misstatement in the accounting treatment of a right-of-use asset (such as incorrect charge calculated)
- incorrect classification between current and non-current lease liaibilities
What is the audit approach for inventory?
- Quantity
- Valuation
- Disclosure
What are the three main methods for an entity to physically count ints inventory?
- Year-end count
- Interim count with follow-through to year-end, but the count occurs during the year-end and all items both inwards and outwards are reconciled to arrive at a calculated amount
- continuous inventory records and perpetual inventory- an automated system records all items inwards and outwards, and maintains an ongoing balance of inventory at any one time- this is tested periodically as part of the entity’s normal controls assessment.
How to perform cut-off tests for revenue?
1) Obtain the last GDN number at year-end
2) Select a sample of GDNs raised before and after the year-end, and ensure the revenue is accounted for in the correct period. Select a sample of sales invoices posted before and after the year-end and ensure that GDNs are raised in the same period.
How to perform cut-off tests for purchases?
1) Obtain the last GRN number at year-end
2) Select a sample of GRNs raised before and after the year-end, and ensure the purchases are accounted for in the correct period. Select a sample of purchase invoices posted before and after the year-end and ensure that GRNs are raised in the same period.
How to use circularisation as a means of testing trade receivables?
by writing directly to the customers owing money to the audited entity and asking them to confirm what they believe they owe. This can then be used to compare against the records held by the entity of sums owed by that customer and any discrepancies reconciled.
Circulairastion is only a good test of existence and obligations and rights. It does not test valuations, as most customers will not confirm if the balance is understated, and agreeing that a debt is owed does. to provide evidence that the debt will be settled.
What is the key audit test for cash and bank?
Bank reconciliation, is a process designed to understand the timing differences between the entity’s cash book and the bank’s understanding of the entity’s bank balance.
What assertions are related to NCL, specifically borrowings?
Completeness.
- check the names of the lenders for relevant information.
- review minutes and cash book to ensure that all loans have been recorded
- compare balances to the general ledger.
Valuation.
- confirm repayments are in accordance with the loan agreement
- obtain direct confirmation from lenders about the amount loaned and the terms thereof.
Disclosure.
- review the disclosures made in the financial statements and ensure they meet legal requirements.
What is an accoiunting estimate?
is an approximation of the amount of an item in the absence of a precise means of measurement. E.g.:
- accrued revenue
- provision for a loss from a lawsuit
- depreciation charges
When should a provision be recognized?
I) A company has a present obligation
ii) a probable outflow of resources embodying economic benefits will be necessary to settle it
iii) that benefit can be reliably estimated
What are some procedures that could be used to test accounting estimates?
Review and testing the process
- test calculations involved in the estimate
- compare estimates made for prior periods with actual results of those periods
Use of an independent estimate
- such an estimate (made or obtained by the auditors) may be compared with the accounting estimate
Review of subsequent events
- auditors should review transactions or events after the period end which may reduce or even remove the need for accounting estimates.
What assertions are relevant to Revenue?
Completeness
- review the level of revenue year over the year, comparing it on a month-by-month basis with previous years
- consider any price rises
- consider the level of goods returned etc.
Accuracy
- checking calculations on invoices
- ensuring VAT has been dealt with properly
- check discounts have been applied correctly
- check the casting of the sales ledger accounts and control account
What are some assertions that are related to Payroll?
Occurrence
- confirm the existence of employees by meeting them
- check benefits to supporting documentation
Accuracy
- recalculate benefits
- check whether deductions of tax and NI have been made correctly
- check the validity of other deductions, e.g. pension contributions to conditions of the pension scheme
Completeness
- check a sample of employees from records to the payroll
- check whether joiners have been paid in the correct month
- confirm payments of pay to bank transfer records
