Substantive testing

Question 1

Sales

Sales have increased over the prior year by a significant percentage.

Answer 1

Risk: Sales might be overstated. The client may be recording revenue prior to delivering goods to the customer.
Assertion: Occurrence and cut off
Procedure:
-Select a sample of general ledger sales entries, trace them back to the related shipping documents and sales invoices, and examine the dates on these documents to determine whether the sale was recorded in the correct period. (Occurrence )
-Select a sample of shipping documents before and after year end, trace them to the related sales invoices and general ledger entries, and compare the dates to determine if the sale was recorded and in the correct period. (Cut off)

Question 2

Sales

The client has a manual sales system.

Answer 2

Risk:Sales may be overstated or understated due to clerical errors
Assertion: Accuracy
Procedure:
Select a sample of general ledger sales entries, trace them back to the related sales invoices, and determine whether the sales transactions were recorded at the correct amounts by comparing the sales price to the approved price list.

Question 3

COGS

The accounting clerk has been ill and has a large backlog of purchase invoices to process in a hurry.

Answer 3

Risk: There could be errors in the coding and posting of the invoices in the accounting system.
Assertion: Accuracy
Procedure:
Select a sample of COS transactions from the general ledger and determine whether inventory purchases have been recorded at the correct amounts by comparing the recorded amount against the purchase invoice amount.

Question 4

COGS

There are a number of foreign-currency inventory purchases.

Answer 4

Risk: The foreign exchange translation of the COS transactions may contain errors.
Assertion: Accuracy
Procedure:
Select a sample of general ledger COS transactions and determine whether inventory purchases and COS have been appropriately translated into Canadian funds by comparing the rate used in the translation to the rate published on the Bank of Canada website.

Question 5

COGS

The accounting clerk is new at his job and did not handle the cut-off of purchases in an appropriate manner.

Answer 5

Risk: Purchases for the current year may have incorrectly been recorded in the next fiscal year.
Assertion: Cut off and completness
Procedure:
Select a sample of purchase invoices, both before and after the period end, and ensure the transactions were recorded in the appropriate period by comparing the date of the purchase transaction in the general ledger to the purchase invoice.

Question 6

Gross profit

Gross profit percentage, has increased during the year.

Answer 6

Risk: There is a risk that sales are overstated or COS is understated, as the Gross profit percentage, has increased during the year.
Assertion: Occurrence of sales and completeness of COS
Procedure:
Select a sample of shipping documents from before and after year end and trace them to the related sales invoices and general ledger entries. Compare the dates to determine whether the sale and the related cost were recorded, and whether they were recorded in the correct period.

Question 7

Sales

Large volume sales are calculated manually

Answer 7

Risk : There is a possibility that the sales amounts for large-volume customers are not calculated correctly.
Assertion: Accuracy
Procedure:
Select a sample of manual sales transactions from the general ledger and determine whether the transactions have been recorded at the correct amount by recalculating the sales amounts using the sales price per the approved price list.

Question 8

COGS

Purchase made from vendors are made in US dollar

Answer 8

Risk:There is a possibility that the foreign-currency COS items have not been translated using the correct U.S. exchange rate
Assertion: Accuracy
Procedure: Select a sample of U.S.-dollar COS transactions from the general ledger and determine whether purchases and COS have been appropriately translated into Canadian funds by comparing the rate used to the rate published on the Bank of Canada website.

Question 9

COGS
large online sale was made before year end. The shipping department has struggled with the volume of online sales, and the shipment of many of the orders was delayed

Answer 9

Risk :There is a risk that the online sales items were not shipped before year end and the sales should be recorded in the next year.
Assertion: Cut off
Procedure: Select a sample of general ledger entries for online sales, trace them back to the shipping documents and sales invoices, and examine the dates on these documents to determine whether the sale and COS were recorded in the correct period.

Question 10

Advertising expense has decreased.

Answer 10

Risk:There is a risk that amounts paid for advertising have been recorded as prepaid expenses and have not been properly amortized as services rendered.
Assertion: Completeness and accuracy
Procedure:
There is a risk that amounts paid for advertising have been recorded as prepaid expenses and have not been properly amortized as services rendered.

Question 11

There are foreign-currency-based expense transactions

Answer 11

Risk:There is a possibility that the foreign-currency-based expense transactions have not been translated using the correct US$ exchange rate
Assertion: Accuracy
Procedure: Select a sample of US$ expense transactions and determine whether purchases have been translated into Canadian funds appropriately by comparing the rate used to the rate published on the Bank of Canada website

Question 12

R&M expense has decreased significantly over the prior year.

Answer 12

Risk: There is a risk that repair expenses have been improperly included in PP&E, which would result in the overstatement of PP&E and the understatement of R&M expense.
Assertion: Completeness of RM expense
Procedure: For a sample of PP&E additions from the GL, trace to invoices for the year; inspect the invoices to verify the nature of the cost and determine whether it should have been capitalized as an asset.

Question 13

Amortization expense has decreased significantly from the prior year.

Answer 13

Risk: There is a risk that the additions to PP&E have not been amortized in accordance with company policies.
Assertion: Completeness and accuracy
Procedure: Request the client’s PP&E continuity schedule. Inquire if there have been any changes to the company’s amortization policies. Recalculate the amortization expense and compare it to the amount recorded in the GL.

Question 14

Salaries expense has decreased over the prior year

Answer 14

Risk: Since it was noted that there was no change in the total number of employees or type of employees, salary expense would be expected to remain relatively constant. This increases the risk that salary expense is understated.
Assertion: Completeness of payroll expense
Procedure: Select a sample of employees from the payroll ledger and agree them back to both the time-sheets and the employee contracts to ensure the payroll amounts are recorded at the correct amount.

Question 15

The payroll cut-off date was December 31, but the employees were not paid until January 5 in the next period

Answer 15

Risk:There could be cut-off errors, as the employees were paid after year end for work performed before year end.
Assertion: Completeness and cut-off of payroll expense
Procedure:
Review the GL account at year end to ensure the year-end December 31 payroll has been recorded in the correct period.

Question 16

high turnover in accounting dept, some controls related to authorization and approval have not been strictly adhered to

Answer 16

Risk: There is a risk that the expenses have not been appropriately coded and expenses have been recorded in the wrong accounts.
Assertion: Classification
Procedure:
-Select a sample of expense transactions from the GL. Compare the coding on the invoice to the master GL account code listing to determine if the expense has been coded to the correct account
-Prepare an analytical review of expenses comparing the balances of the current year to those of the prior year. Investigate any material variances

Question 17

Commissions’ expense has decreased significantly

Answer 17

Risk: There is a risk that the commission expense has not been recorded for the sales in the last month of the year.
Assertion: Completeness and accuracy
Procedure:
Select a sample of sales invoices and recalculate the commission. Select a sample of sales invoices and ensure that the terms of the sale have been met to address whether the sale occurred and the related commission has been recorded.

Question 18

Professional fees have increased.

Answer 18

Risk: There is a risk that MLL could be facing a lawsuit and the increase in professional fees are a result of the litigation.
Assertion: Completenss
Procedure:
Inquire of management if there are any current lawsuits. Review the results of the legal confirmation and examine subsequent payments to lawyers to determine if any additional amounts need to be accrued in the financial statements.

Question 19

Property taxes have decreased.

Answer 19

Risk:There is a risk that amounts paid for property taxes have been recorded as prepaid expenses and have not been properly amortized not properly amortized with the passage of time.
Assertion: Completeness and accuracy
Procedure:
Examine the property tax assessment to ensure accurate entry (accuracy), and review the amortization of the prepaid property taxes into the property tax expense account (completeness).

Question 20

Travel and entertainment has increased.

Answer 20

Risk: There is a risk that personal travel and entertainment has been expansed in company.
Assertion: occurrences
Procedure:
Select a sample of travel and entertainment expenditures from the GL. Compare the expense details from the expense report to the company’s travel policy to ensure the amounts recorded are legitimate expenses.

Question 21

The AP balance per the general ledger has decreased from the prior year.

Answer 21

Risk: The AP may have been recorded in the following period.
Assertion: completeness
Procedure:
-Perform a search for unrecorded liabilities at year end:
-Request a listing of cheques written since year end (known as a cheque run). Select a sample of cheques from the cheque run, vouch the cheques to the related invoices and inspect when the related goods/services were provided. Trace the payments to the general ledger to determine whether or not they were appropriately included on the AP listing at year end.
-Select a sample of vendors with low or nil balances and send positive confirmations (ones that require a response). Compare the confirmed balances to the balances in the AP sub-ledger.
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Question 22

The AP clerk was away over year end and appears to have processed a significant number of payments in the new fiscal year.

Answer 22

Risk:These payments may be related to prior-year expenses, increasing the risk that not all payables were recorded at year end.
Assertion: Completenss
Procedure:
Periodically throughout the audit, request to view the unpaid invoices. Select a sample of these invoices, inspect them to determine what period the goods/services relate to, and trace them to the general ledger to determine whether or not they were appropriately included on the AP listing at year end.

Question 23

The company has a number of suppliers that are paid in foreign currency.

Answer 23

Risk:
-Per GAAP, foreign-currency AP balances have to be translated to the Canadian dollar at the end of the year using the spot rate.
-The AP balance per the general ledger could be misstated if the incorrect foreign exchange rate was used.
Assertion: Valuation
Procedure:
-Identify foreign-currency AP balances and recalculate the translated amounts using the spot rate on the year-end date (per the Bank of Canada website).

Question 24

A comparison of the AP listing to the prior year shows that there are key suppliers in the current year with low or nil balances.

Answer 24

Risk: There could be unrecorded AP balances in the current year
Assertion: Completeness
Procedure:
Select key vendors with low or nil balances and send a positive confirmation to each vendor. Compare the confirmed balances to the balances per the AP listing. Investigate any differences.

Question 25

AP significantly smaller than prior year.

Answer 25

Risk: The AP current is significantly smaller than prior year. There is a risk that the AP balance per MLL’s general ledger is understated at year end.
Assertion: Completeness
Procedure:
-Request a listing of cheques written since year end (known as a cheque run). Select a sample of cheques from the cheque run, vouch the cheques to the related invoices and inspect when the related goods/services were provided. Trace the payments to the general ledger to determine whether or not they were appropriately included on the AP listing at year end.
-Select a sample of vendors with low or nil balances and send a positive confirmation to each.
-Based on a review of the AP listing, confirm the following vendor balances, as they are low compared to the prior year:
Canadian Cotton Ltd.
Canuck Foam and Pillows
Shaw
Burnaby Boxes Ltd
Compare the confirmed balances to the balances in the AP sub-ledger.

Question 26

In an effort to get caught up after taking time off over the year end

Answer 26

Risk: In an effort to get caught up after taking time off over the year end, the AP clerk may have inadvertently recorded payables in the next fiscal year when the balances should have been recorded in the current fiscal year.
Assertion: Completness
Procedure:
-Periodically throughout the audit, request to view the unpaid invoices. Select a sample of these invoices, inspect them to determine what period the goods/services relate to, and trace them to the general ledger to determine whether or not they were appropriately included in the AP listing at year end.

Question 27

The foreign exchange for the U.S.-dollar payables may not be translated at the correct rate at year end.

Answer 27

Risk: The foreign exchange for the U.S.-dollar payables may not be translated at the correct rate at year end.
Assertion: Valuation
Procedure:
-For the foreign-currency vendors, recalculate the translated amounts using the spot rate on the year-end date from the Bank of Canada. Compare the recalculated balances to the amounts recorded on the AP listing.
Based on a review of the AP listing, there are three foreign-currency vendors:
Minnesota Thread Suppliers
California Quits
Seattle Fabric Finishing

Question 28

There is a $12,000 balance owing to RB&D Lawyers LLP and there was no amount owing in the prior year.

Answer 28

Risk: There is a $12,000 balance owing to RB&D Lawyers LLP and there was no amount owing in the prior year. This is an indication that there could be litigation in the current year.
Assertion: Complentess
Procedure:
-Send a legal confirmation to RB&D Lawyers LLP requesting details of any pending lawsuits. Review legal invoices for details of the legal expenses.

Question 29

There are issues with the controls that ensure the safeguarding of cash.
Fraud has occurred during the year.

Answer 29

Risk: If cash if stolen, its no longer exists but may not have been removed from the general ledger
Assertion: Existence
Procedure:
-send a bank confirmation to the company’s bank. agree cash the company cash balance listed on the bank reconcilidation
-count cash on hand and compare the company’s ledger

Question 30

Inexperienced accounting staff are responsible for valuing the foreign currency accounts at the reporting date.
The entity opened a foreign currency bank account during the year.

Answer 30

Risk: Foreign currency not have been valued using inappropriate foreign exchange rate or not translated at all
Assertion: valuation
Procedure: Re-calculate foreign currency bank account using the appropriate year end foreign exchange rate and compare to the amount recorded in appropriate.

Question 31

It is suspected that the bank reconciliation contains errors.

Answer 31

Risk: the cash balance confirmed by the bank may not reconcile to the cash balance per the GL
Assertion: existence, valuation and completeness
Procedure:
-Examine the bank reconciliation
-Re-calculate the reconciliation to ensure math are correct
-agree balance per the bank to year end bank statement and or bank reconciliation
-trace cash balance per sub-ledger to GL
-determine whether outstanding cheques have cleared and deposit in transit have been cleared and deposit in transit have been recorded by the bank by tracing these outstanding items to the subsequent bank statement.

Question 32

The company obtained financing, and pledged the cash as security for the loan.

Answer 32

Risk: If the company has breached its loan covenant or missed payment, the lender may have exercised its right to take collateral and the cash may acutally belong to the lender.
Assertion: right and obligation
Procedure: review bank confirmation , BOD meeting minutes and loan agreement for evident of restrictions on cash , pledges or liens
obtain debt management and recalcuate covenant to determine whether the bank has right to any collateral that was pledged.

Question 33

An intercompany transfer of cash from one account to another does not appear to be recorded in the other account.

Answer 33

Risk: cash that should have been recorded on the balance sheet may have been omitted.
Assertion: completeness and existence.
Procedure:
-Obtain a schedule of inter-company cash transfer between accounts for a set period of time, such as five days, both before and after year end. Agree amount transferred in or out of one account to the bank statement and/or bank reconciliation for the corresponding account, and verify that they are correctly recorded as deposits/withdrawals or outstanding deposits/cheques for that account (that is, if a transfer appears as an outstanding cheque in one account, it would be an outstanding deposit in the other account).
-Review the cash accounts in the general ledger for unusual items, such as new and significant accounts, accounts with negative balances, or more than one account with identical balances. Agree these items to supporting documentation (such as the bank statements or bank confirmations) to determine whether the amounts exist.

Question 34

There are issues with controls related to recording accounting transactions. Fraud or error may have occurred during the year.
There is a significant decrease in the cash balance over the prior year.

Answer 34

Risk: There could be unrecorded cash balances; fraudulent financial reporting may have occurred.
Assertion: completeness
Procedure:
-Inquire of personnel who are familiar with or who handle cash transactions whether they are aware of any cash balances, bank accounts or cash transactions that are not recorded in the accounting records (such as cash in unrecorded loans, cash in transit or cash held in a safe) to determine whether there are unrecorded cash amounts.
-Review correspondence or other evidence available (such as a closing bank account statement) to determine whether accounts used in previous periods have indeed been closed.
Count the material cash funds at year end to ensure all cash on hand has been recorded.