Chapter 13 - Substantive procedures – key financial statement figures Flashcards
What are the major risks of the tangible non-current asset balances in the financial statements being
misstated due to?
the company not actually owning the assets (rights and obligations assertion)
the assets not actually existing or having been sold by the company (existence assertion)
omission of assets owned by the company (completeness assertion)
the assets being overvalued, either by inflating cost or valuation, or by undercharging depreciation (valuation assertion)
the assets being undervalued, by not including an appropriate revaluation in a policy of revaluation or by overcharging depreciation
the assets being incorrectly presented in the financial statements (presentation and disclosure assertion)
What are eight sources of information about tangible non-current assets that can be used?
The non-current asset register
Purchase invoices for assets purchased within the year
Sales invoices for assets sold within the year
Registration documents or other documents of title such as title deeds for property
Valuations carried out by employees or third party valuers
Leases or hire purchase documentation in respect of assets
Physical inspection of the assets themselves by the auditor
Depreciation records or calculations
What are the major risks of the intangible non-current asset balances in the financial statements being
misstated due to?
expenses being capitalised as non-current assets inappropriately (existence assertion)
intangible assets being carried at the wrong cost or valuation due to inflating the cost or valuation (valuation assertion)
intangible assets being carried at the wrong cost or valuation due to charging inappropriate amortisation, wrongly amortising or not amortising (valuation assertion)
intangible assets being carried at the wrong cost or valuation due to impairment reviews not being carried out appropriately (valuation assertion)
What are eight sources of information about intangible non-current assets that can be used?
Accounting standards/auditor’s knowledge of accounting standards for what constitutes an intangible asset
Purchase invoices or documentation (particularly for, say, purchased intangibles)
Client calculations and schedules
Specialist valuations
Auditor understanding of the entity for signs of impairment factors
What are the major risks of the inventory balances in the financial statements being
misstated due to?
inventory that does not exist being included in the financial statements (existence)
not all inventory that exists being included in the financial statements (completeness)
inventory being included in the financial statements at full value when it is obsolete or damaged (valuation)
inventory being included in the financial statements at the wrong value, whether due to miscalculation of cost or the fact that cost has been used although net realisable value is lower than cost (valuation)
inventory that actually belongs to third parties being included in the financial statements (rights and obligations)
inventory which has actually been sold is included in the financial statements (cut-off)
What are eight sources of information about inventory that can be used?
The company’s controls over inventory counting
The auditors’ attendance at the annual inventory count
Confirmations with third parties holding inventory or having inventory stored for them by the company
Purchase invoices for inventory
Work-in-progress records for inventory
Post-year-end sales invoices for inventory
Post-year-end price lists for inventory
Post-year-end sales orders
What are three controls that the assurance provider will be looking for, in terms of inventory counts?
Organisation of count - supervision, tidying and marking, restriction and control, identification of damaged, obsolete, slow-moving, third party and returnable inventory
Counting - Systematic counting, Teams of two counters/ independent counts
Recording - Serial numbering, control and return of inventory sheets, signed in ink, count records, quantity, conditions and stage of production of work in progress, goods inwards/outwards, reconciliation with inventory records and investigation and correction of any differences
If perpetual inventory counting is used, what should assurance providers check that management are doing?
Ensures that all inventory lines are counted at least once a year.
Maintains adequate inventory records that are kept up-to-date.
Has satisfactory procedures for inventory counts and test-counting.
Investigates and corrects all material differences
Define cost of inventory
The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Define Net realisable value of inventory
It is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
What are major risks of misstatements of the receivables balance?
debts being uncollectable (valuation)
debts being contested by customers (existence, rights and obligations)
What sources of information can be used in respect of receivables?
Receivables ledger information
Confirmations from customers
Cash payments received after the year end
What is the positive method of requesting information from the customer?
Under the positive method the customer is requested to give the balance or to confirm the accuracy of the balance shown or state in what respect he is in disagreement.
What is the negative method of requesting information from the customer?
Under the negative method the customer is requested to reply only if the amount stated is disputed. This method generally provides less reliable audit evidence than the positive method as a lack of response could mean that the customer does not dispute the balance, or it could mean that the customer did not receive the confirmation request, or ignored it.
When should the negative method be used?
The negative method should only be used when:
- assessed risk of material misstatement is low.
- the relevant controls are operating effectively.
- a large number of small balances is involved.
- a substantial number of errors is not expected.
- the auditor has no reason to believe that customers will disregard the request.
