Substantive testing Flashcards
What are testing when it comes to substantive procedures?
For each balance or transaction we are testing for the assertions.
What are the assertions for balances?
Existence - assets, liabilities and equity exists
rights & obligations - entity controls all the rights and the obligation.
completeness - all assets, liabilities and equity are records at appropriate amounts.
Accuracy, valuation and allocation - assets, liabilities and equity are recorded at appropriate amounts
classification - balances have been recorded in the proper accounts
presentation - appropriately describes with relevant disclosures.
What should an auditor do about non-current assets?
they should design audit procedures appropriate for tangible and intangible non-current assets as well as investments, depending on the asset held by the client.
What are sample substantive procedures for the assertion being tested?
review repairs in the nominal ledger for any capital items - completeness
compare depreciation rates to those of competitors with similar assets - accuracy, valuation and allocation
inspect registration documents of a motor vehicle for ownership - rights and regulations
physically verify assets - existence
Inventory
inventory can be highly material
valuation is subjective (lower of costs and net realisable value
What is the formula for inventory
Inventory = quantity x valuation
evidence about quantity is provided as the auditor performs test counts to check.
evidence about valuation can be gathered by identifying items that appear old, damaged, dusty and may need to be scrapped.
What should auditors do before inventory count?
- review location and counting instructions
- consider if expert help needed
- review systems of control/agreements
- arrange to verify any inventory held at 3rd party premises
What should auditors do during the inventory count?
- observe count for compliance with instructions
- perform 2-way tests
- identify slow moving/old inventory that may require impairment
What should auditors do after the inventory count?
follow up the sample selected for test counting to check the correct quantity has been included in the final inventory listing.
What is a bank confirmation?
Auditors may prepare a request and client signs it then they send it to the bank.
Auditor then receives confirmation to compare balances on bank reconciliation.
may also seek information about loans and overdraft facilities/terms, contingent liabilities and securities belonging to the client that are held in safe custody of the bank.
What are management expectations?
These are expectations or answers given to the audit/assurance provider while engagement is occurring.
can be written or oral, written avoids confusion.
if a particular representation is contradicted by other evidence the auditor should investigate the matter and consider the impact on reliability of all others.
