Chapter 13 - Substantive procedures Flashcards
What is valuation assertion?
Assets may be overvalued by inflating cost/valuation or by under charging depreciation
What is rights and obligations assertion?
Company might not own assets
What is existence assertion?
Assets may not exist or may have been sold
What is completeness assertion?
Omission of company assets
What is presentation and disclosure assertion?
Assets may be incorrectly presented in financial statements
What is existence inventory?
Non-existent inventory may be included in financial statements
What is inventory completeness?
Some existing inventory may not be included in financial statements
what is inventory valuation?
- Damaged/obsolete inventory included in financial statements at full value
- Included at wrong value
What is inventory cut off?
Sold inventory included in financial statements
What types of controls are there relating to inventory counts?
- Supervision
- Tidying and marking
- Damage identification
- Restriction and control
What is perpetual inventory counting?
Assurance providers ensure management is undertaking inventory counts annually
Mainly concerned with cut off
What are the sources of info on receivables?
- Receivables ledger
- Customer confirmations
- Cash payments received after year end
What is direct confirmation of receivables covered by?
ISA 505
Are external confirmations compulsory for an audit?
No, provides evidence in relation to existence and rights and obligations
When should confirmation take place?
Immediately after year end
what is confirmation?
Act of the client which authorises 3rd parties to divulge info to the auditor
What are the 2 alternative methods used when a client refuses an auditor to send a confirmation request?
Positive method
Negative method
What occurs under the positive method?
Customer requested to give the balance or to confirm accuracy of balance shown
What occurs under the negative method?
Customer is requested to reply only if the amount stated is disputed
Method considered less reliable
What are the alternative procedures if it’s impossible to get confirmations from individual customers?
- Verify valid POs
- Examine account
- Obtain explanations for unpaid invoices
- Vouch receipt of cash
- Check balance mvmt
- Test company’s controls
What are the sources of info relating to bank?
- Cash at bank
- Nominal ledger
- Bank confirmation
- Bank statements
- Reconcilliations
What does the testing of bank balances need to cover?
- Completeness
- Existence
- Rights and obligations
- Valuation
How can all elements be tested cirectly?
Through gaining 3rd party confirmations from client’s banks
What is the most commonly requested info?
- Balances due
- Deposits
- Loans
- Nil balances
- Closed accounts
What may window dressing involve?
Keeping cash at bank nominal ledger accounts open to take credits for remittances actually received after year end
Enhances balance at bank and reduces receivables
What can window dressing also entail?
Delaying the recording cheques until after year end
Decreases balance at bank and reduces payables
What should assurance providers examine?
Paying in slips to ensure the amounts were paid before year end
How should all cash balances be counted?
At the same time as far as possible
What do assurance providers have to determine when counting cash?
Locations where cash is held and which of these warrant a count
What are the sources of info relating to payables?
- Payables ledger records
- Supplier confirmation
What is the most important test when considering trade payables?
Comparison of supplier statements with payables ledger balances
What should assurance providers be careful of when taking supplier statements?
Not to just select supplier with large year end balances
What are assurance providers primarily interested in when reviewing payables?
Errors of understatement
What should assurance providers have within their sample?
Payables with nil or negative payables ledger balances
What should assurance providers be wary of?
Major suppliers with low balances
What should the sample be selected from?
Client’s list of suppliers
Where may positive supplier statement confirmations be required?
- Statements unavailable/incomplete
- Weakness in internal control
- Nature of business
what does to audit of accruals primarily focus on?
Cut-off and completeness
What does cut-off mean?
Amount accrued relates to reporting period
What are sources of info relating to long term liabilities?
- Schedule of loan
- Statutory books
- Cash at bank nominal ledger account
- Loan agreements
What matters need reporting to more senior staff?
- Conclusions
- Exceptional items discovered
- Unusual accounting entries
- Money laundering
What is the most appropriate procedure to confirm value of trade receivables?
Review of cash paid after date
Which financial statement assertion will be supported by a sample check on the numerical sequence of dispatch records and invoices?
Completeness
What procedure confirms cash at bank exists?
Obtaining direct confirmation of the bank balance from the client’s bank
