Module 20: Substantive Testing Pt 2

Question 1

Why is it inefficient for an auditor to gain sufficient, appropriate and audit evidence through tests and details for profit and loss statements, and what should be used instead?

Answer 1

Too many transactions. Test of control should be used

Question 2

What substantive procedures are likely to be used on significant P&L accounts?

Answer 2

Sales
Cost of Sales
Depreciation expense
Payroll expense

Question 3

What does substantive analytical procedures generally provide evidence for?

Answer 3

Completeness, occurrence, accuracy, cut-off and classification

Question 4

What are the possible errors identified by analytical procedures?

Answer 4

Account appears too high because of duplicate or false transactions being recorded or credit notes being omitted (occurrence)

Account appears too low because transactions have been omitted or credit notes have been duplicated (completeness)

Account appears either high or low because figures have been miscalculated or recorded at wrong amount (accuracy)

Account appears too high or low because transactions have been included in error due to being classified incorrectly (classification)

Account appears too high or low because sales have been recorded in the incorrect period (cut-off)

Question 5

Why is completeness a higher ROMM transaction assertion in expenses?

Answer 5

Because you don’t want expenses to be understated. Cut-off and accuracy are also high risk as well.

Question 6

What are the key substantive procedures performed on all expense accounts?

Answer 6

Substantive analytical procedures

Cut-off testing

Question 7

What are the key substantive procedures for payroll expense?

Answer 7

Substantive analytical procedures
Payroll reconciliation
Joiners and leavers testing

Question 8

Payroll reconciliation testing

Answer 8

Payroll reconciliaiton is performed between the payroll listing (sub-ledger) and the payroll expense account in the nominal ledger to check the figures in nl are accurate.
The auditor should obtain year end payroll reconciliation and complete the following tests of detail:

Cast the reconciliation to check the mathematical accuracy

Agree the payroll listing total per the reconciliation to the actual detailed payroll listings for the year

Agree the payroll nominal ledger expense per the reconciliation to the nominal ledger

Obtain supporting evidence for a sample

Question 9

What is a disclosure checklist?

Answer 9

For every account in the financial statements the auditor has to check that all matters have been presented and disclosed in accordance with the companies act 2006 and applicable accounting standards.
This will be achieved with a disclosure checklist that details all the disclosure requirements for a UK company.
Specifically tailored to the set of financial statements being audited.