chap 11

Question 1

the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll

Answer 1

1. acc pay is the largest current liability
2. risk of understatement as mgrs will try to present favourable FS
3. adtr gather evidence relating to completeness assertion

Question 2

acc pay DR assertions

Answer 2

1. affected by purchase and payment
2. DR assertions based on the inherent and control risk of purchase and payment

Question 3

Determining An Acceptable Level of Detection Risk

Answer 3

1. IR and CR high indicating that environ. has high likelihood of completeness errors and that controls not effective
2. control risk has 2 components:

-CR for purchases
-CR for pmts

Question 4

control risk has 2 components

Answer 4

if CR for purchases is high then, CR for pmts is moderate

any issue with them leads to completeness with payables acc in the end:

1. if completeness prob with purchases, this means that purchases not recorded in suppliers acc thus completeness issue with payables acc

2.if occurrence prob with cash pmt, payables acc lowered but pmt does not exist. again completeness prob

Question 5

DR risk and its assertion

Answer 5

1. After assessing the IR and CR, detection risk is set to achieve the required audit risk
2. assertions for which audit risk should be low:

-AVA and completeness

3. requires more persuasive evidence for AVA and completeness

Question 6

DR and type of approach

Answer 6

If detection risk is set at low, then extensive substantive testing will take place

If detection risk is set at high, then a combined approach will be used

Question 7

substantive procedures steps

Answer 7

1.Initial Procedures
2. Analytical Procedures
3.Tests of Details of Transactions
4.Tests of Details of Balances
5. disclosure

Question 8

1.Initial Procedures

Answer 8

1. Trace opening balance to previous balance from working papers
2. Review activity in the general ledger acc and investigate for any unusual trsn
3. Obtain suppliers listing and perform summation to see if it corresponds to the amt found from subsidiary ledger and general ledger control acc for accuracy

Question 9

2. Analytical Procedures

Answer 9

UCU

first stage, review understanding of entity

second stage, compare amts of CY and PY to identify changes in absolute amt. Done when preparing lead schedule for payables

Third, use ratios:

-GP (if greater than expected, could arise from understatement of purchases or deliberate cut off)

-Ratio of each expense to sales in CY and PY. usual low expense could indicate unrecorded liability thru cut off error

-for payroll, average wage per employee important

Question 10

3.Tests of Details of Transactions

Answer 10

1. performed during interim audit// dual purpose test
2. No substantive tests of details of payroll transactions because the tests of controls are the main sources of substantive evidence for payroll transactions
3. Vouching recorded payables to supporting documentation
4. Performing purchases cut-off tests

5.Performing payments cut-off tests

Question 11

Tests of Trsn//Vouching recorded payables to supporting documentation

Answer 11

1. to verify occurrence, vouch the purchases trsn to supporting doc likes suppliers invoices

2.test numerical continuity of purchase orders and receiving reports and trace them to supplier’s invoice and acc payables to verify for completeness

Question 12

Tests of Trsn//Performing purchases cut-off tests

Answer 12

1. making sure that purs trsn ocurring near end of reporting year are recorded in proper accounting period

2.adtr will review receiving reports and purchases trsn and match them with suppliers invoices. those unmatched but relate to current accounting period are recorded through journal entry. this ensures completeness of records

3.this becomes challenging for adtr as unlike for receivables, suppliers take time to send their invoices relating to trsn occurring before reporting date

4. cut off very sig. but many entities do have strong control to make distinction of trsn happening before end of reporting year and after reporting year. Thus, adtr will set DR low and perform extensive testing
5. vouching and tracing used for testing completeness can be used here to test for cut-off.
6. receiving reports after year end are traced to suppliers invoices to check if correctly recorded to the next period

7.recorded purchases before end of reporting year are vouched to receiving report dated before end of reporting date to ensure that no trsn happening after year end are recorded before year end. occurrence is also tested

8. these tests take 5-10 days before reporting date

9,. adtr needs to ensure that proper cutoff is achieved fro physical inventory as well as recording the purchases trsn

10. when inv coined other than end of reporting period, adtr needs to check cut off for purs inventory at count date and end of reportinng date
11. In summary, because invoices from suppliers can be delayed, auditors perform detailed checks around the cut-off date to ensure all transactions are recorded in the correct period, focusing on completeness to maintain accurate financial records.

Question 13

Tests of Trsn//Performing pmt cut-off tests

Answer 13

1. important for correct presentation of cash and acc pay at end of reporting year
2. verify pmt cutoff is to check the dates when unpresented cheques are actually presented for payment. This helps ensure that payments are recorded in the correct period. verifies the dates when performing bank recon for next period.

Question 14

Tests of Details of Balances for

Answer 14

1. for payables
2. for payroll

Question 15

Tests of Details of Balances//payables

Answer 15

1.reconciling payables to monthly statements received by the entity from suppliers

2.confirming accounts payable

3.searching for unrecorded liabilities

Question 16

1.reconciling payables to monthly statements received by the entity from suppliers

Answer 16

1.externally generated evidence held by entity. thus need to be cautious that the doc is not altered. avoid using photocopies or scanned versions.

2.when in doubt request a copy or amt directly from suppliers

3. Selection of Accounts for Testing should be on the volume of business conducted during the year rather than the balance shown in the accounts payable listing. This is because the main concern is that the recorded balance might be understated, meaning some liabilities might not be recorded.
4. Discrepancies are often due to:
   - Goods in transit (items shipped but not yet received)
   - Cash in transit (payments made but not yet recorded)
   - Disputed amounts (disagreements over invoices or payments)
5. Assertions:
   -Existence
   • Completeness
   • AVA

In summary, focusing on the volume of business for account selection and investigating discrepancies helps ensure that the accounts payable are accurately and completely recorded, supporting the overall reliability of the financial statements.

Question 17

2.confirming accounts payable

Answer 17

PAYABLE confirmation less frequently performed as :

1. provides limited assurance abt unrecorded liabilities
2. invoices and suppliers monthly statement evidence for the balances test
3. recommended when:

• DR is high
• for suppliers having a significant presence but do not send monthly statements
  -suppliers not having statements available at end of reporting year

4.The auditor uses a positive form, meaning the supplier is asked to confirm the balance owed.

5.The confirmation does not specify the amount due; instead, the supplier indicates the amount, which is then reconciled with the entity’s records.

6.

Question 18

3.searching for unrecorded liabilities

Answer 18

1. identifying unrecorded liabilities involves examining next period’s purchase and pmt transaction and reviewing unpaid invoices from cuts off test

2.using analytical procedures to spot unexpected discrepancies,

3.reviewing contractual commitments for existing liabilities not yet provided for :

-Progress Payments: In long-term contracts, there might be progress payments due as certain milestones are reached. If these payments are not yet recorded, they represent unrecorded liabilities.

-Accrued Amounts: There might be amounts that have been accrued (incurred but not yet paid or invoiced) under a contract, such as royalties or franchise fees, which need to be recorded as liabilities.

-Lease Commitments: Future lease payments under operating leases might need to be disclosed or recorded as liabilities.

4.performing subsequent-events testing.for undisclosed contingent liabilities

Question 19

Tests of Details of Balances//payroll

Answer 19

1. recalculating payroll liabilities

2.verifying directors’ and executive officers’ remuneration

Question 20

1. recalculating payroll liabilities

Answer 20

1. main adtr concern for payroll is overstatement but at year end the concern becomes understatement of accruals and the consistency in measuring the accruals thru’out different period
2. adtr review mgt calculations and make independent calculations to ensure mgt calculations are reasonable

3.The auditor examines payments made after the reporting period but before the completion of the audit fieldwork

4. MAIN assertion AVA

Question 21

2.verifying directors’ and executive officers’ remuneration

Answer 21

1. their remuneration audit sensitive as they can override control to gain from compensation more than authorized

2.remuneration will be reviewed by reference to employment contracts and board minutes to ensure their remuneration is not overstated

Question 22

DISCLOSURE

Answer 22

1.disclosure for each class of liability by charge and by nature should be made