Topic 6 - Substantive testing

Question 1

What are the key assertions for assets and liabilities (account balances)

Answer 1

CRAVE
Completeness, Rights and Obligations, Accuracy, Valuation, Existence

Classification and Presentation

Question 2

What are the key assertions fore P/L (transactions and events)

Answer 2

COCAO
Completeness, Occurance, Classification, Accuracy, Cut Off

Presentation

Question 3

What are the most likely assertions we would need to test for assets and liabilities?

Answer 3

• Assets are likely to be overstated therefore existence, rights + obligations and valuation are most important
• Liabilities are likely to be understated so completeness is most important

Question 4

Why might NRV be lower than cost?

Answer 4

• changing tastes and fashions
• technologically obselete goods
• fall in market price of goos
• costs have risen which cannot be passed to customers

Question 5

Tests for NRV

Answer 5

• post y/e sales orders
• post y/e sales invoices

Question 6

Tests for receivables

Answer 6

• direct confirmation
• agree total to nominal ledger
• obtain list of TR as at the confirmation date
• review on cash received from cutomers post y/e (highestet quality)

Question 7

Examples where positive replies would be required

Liabilties

Answer 7

• suppliers’ statements are unavailable or incomplete
• there are weaknesses in internal controls around payables
• deliberate understatement is suspected
• unusual transactions

Question 8

What ratios are reasons why analytical procedures can give strong evidence in relation to accuracy of purchases

Answer 8

• purchase and payables
• purchase and invoices
• gross operating margin