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Transcript of ppt_ch10
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett1
CHAPTER 10:
SUBSTANTIVE TESTSOF TRANSACTIONS
AND BALANCES
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett2
RELATIONSHIP BETWEEN TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS
• Most controls built around transaction flows.
• Tests of controls: transactions selected to test whether related controls are working.
• Substantive test of transactions: transactions selected to determine whether monetary errors have occurred.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett3
DUAL PURPOSE TESTS• These are tests of transactions that address
both control and financial misstatement issues simultaneously.
• Very common in practice since both tests of controls and substantive tests of transactions involve inspection of documents.
• It is efficient to perform tests on transactions selected simultaneously, e.g. select document and check evidence of authorisation (test of control) and recompute amount (substantive test of transaction).
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett4
SUBSTANTIVE TESTS OF TRANSACTIONS AND BALANCES
• Objective is to provide reasonable assurance of validity and propriety of financial report or identify monetary misstatements and thus reduce detection risk of auditor.
• Substantive tests of transactions focus on the individual transactions that make up the balance.
• Substantive tests of balances substantiate the ending balance of an account.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett5
DISTINGUISHING BETWEEN SUBSTANTIVE TESTS OF TRANSACTIONS AND SUBSTANTIVE TESTS OF BALANCES
• The $5000 balance for Able could be verified by confirming this balance with customer (test of balances) or verifying to supporting documentation the three transactions comprising this balance (tests of transactions).
Extract from Accounts Receivable Subsidiary Ledger Customer Year-end Balance Transactions for Able Able 5000 Sales 2000 Receipts (1000) Sales 4000 Baker 500 Chan 1000
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett6
FINANCIAL REPORT ASSERTIONS OF INTEREST
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett7
EXISTENCE/ OCCURRENCE AND COMPLETENESS ASSERTIONS
Note that the direction of testing determines whether existence/occurrence or completeness assertion is tested.
SourceDocuments
existence (of account balance components)/occurrence (of transactions in accounting records)
AccountingRecords
Completeness (of accounts balance components ortransactions in accounting records)
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett8
DETERMINANTS OF AUDIT PROCEDURES USED
Will be determined by:• The assertion/audit objective to be
tested• The nature of the item and available
evidence
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett9
CASH, CASH RECEIPTS AND CASH PAYMENTS — ASSERTIONS OF PRIMARY INTERESTS
Cash Cash receipts/payments
•Existence;•Completeness; and
possibly•Valuation (if foreign
currency balances).
•Occurrence•Completeness; and
possibly•Measurement (if foreign
currency transactions).
These are primarily:
- since these are areas where misstatement is most likely to occur
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett10
APPROACH IN AUDITING CASH BALANCES
• Determined by assessed level of control risk in bank and cash handling procedures.
• Much of this information will come from evaluations and tests of controls in the sales and cash receipts, purchases and cash payments systems.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett11
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR CASH BALANCES
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett12
CASH — KEY PROCEDURES
These are:• Testing of client’s bank
reconciliation
• Obtaining confirmation of bank balances from client’s bankers
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett13
SALES, CASH RECEIPTS, ACCOUNTS RECEIVABLE — ASSERTIONS OF INTEREST
Sales/cash receipts
Accounts receivable
•Occurrence•Measurement
•Existence•Valuation
- as these are areas in which misstatement is most likely to occur
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett14
ACCOUNTS RECEIVABLE — KEYAUDIT PROCEDURES
• Confirmation• Subsequent receipts review• Cut-off• Analytical procedures• Tests of sales transactions• Review of aged trial balance
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett15
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR SALES AND ACCOUNTS RECEIVABLE
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett16
ACCOUNTS RECEIVABLE —CONFIRMATION AND OTHER PROCEDURES
Auditor might plan to obtain direct confirmation from debtors using:
• Positive form — asks client to respond, whether or not they agree with information as to amount owed in request
• Negative form — requests client to respond when they disagree with amount shown
Auditor should also consider other proceduressuch as examining evidence of subsequent
cashreceipts, and examining sales and shippingdocuments.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett17
FORMAT OF POSITIVE ACCOUNTS RECEIVABLE CONFIRMATION REQUESTS
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett18
CONFIRMATION PROCEDURE VERSUS SUBSEQUENT CASH RECEIPTS TESTING
Subsequent cash receipts commonly viewed as superior form of evidence because achieves both key assertions.
Confirmations Subsequent cash receipts testing
•Existence YES
•Valuation NO
•Existence YES
•Valuation YESConfirmations still require tests of likelihood of
payment (doubtful debts provision).
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett19
PURCHASES AND INVENTORY
• Inventory consists of goods to be sold or used in the production of saleable goods.
• Transactions involving inventory: increase to inventory when goods purchased and decrease to inventory when goods sold.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett20
RISK ASSESSMENT OF INVENTORY
Inventory generally considered high risk
because:• Significant to determination of
income• High volume of activity• Accounting complexities• Possibility of manipulation in this
area
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett21
INVENTORY — ASSERTIONS OF INTEREST
Two key assertions of inventory aregenerally:• Existence• Valuation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett22
INVENTORY — KEY PROCEDURES
• Observation of physical inventories• Analytical procedures• Cut-off• Tests of pricing and summarisation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett23
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR PURCHASES AND INVENTORY I
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett24
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR PURCHASES AND INVENTORY II
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett25
INVENTORY — OBSERVATION OF PHYSICAL INVENTORY: STOCKTAKE
• Where inventory is considered material, auditor should attend physical inventory count (stocktake), unless impractical.
• When attending stocktake, auditor uses a combination of observation and inquiry and making test counts.
• If inventory outside auditor’s area of expertise, should consider utilising services of expert.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett26
INVENTORY — TESTS OF PRICING AND SUMMARISATION OF COUNT PROCEDURES
A combination of vouching, tracing andrecomputation. In performing theseprocedures auditor’s main concerns are:• Identifying obsolete, excess and slow-moving
items• That inventory is counted correctly and results
of inventory count are updated correctly• That prices for goods are applied appropriately• That inventory is valued at the lower of cost
and net realisable value
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett27
ACCOUNTS PAYABLE AND PAYMENTS• Primary assertion of concern is
completeness, as most likely form of misstatement is understatement.
• Common audit procedures to address this assertion are confirmation, a search for unrecorded liabilities and analytical procedures performed on related expense account balances.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett28
ASSERTIONS, OBJECTIVES AND PROCEDURES OF ACCOUNTS PAYABLE
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett29
NON-CURRENT ASSETS• The balances of non-current asset
accounts are usually affected by a few relatively large transactions each year.
• For this reason, it is usually efficient for auditor to verify account balances by performing tests on individual transactions.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett30
PROPERTY, PLANT ANDEQUIPMENT
Assertions of interest are generally:
• Existence• Rights and obligations• Valuation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett31
PROPERTY, PLANT AND EQUIPMENT — KEY PROCEDURES
• Substantiating additions and identifying retirements
• Considering any revaluations
• Analytically testing or recomputing related expense accounts such as depreciation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett32
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR PROPERTY, PLANT AND EQUIPMENT
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett33
INVESTMENTS AND INTANGIBLE ASSETS
Assertions generally of interest are:• Rights and obligations• Existence• Valuation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett34
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR INVESTMENTS
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett35
INTANGIBLES — USE OF EXPERT
• Assertions in relation to valuation and existence for intangible assets are particularly subjective given nature of intangible assets.
• Auditor may consider use of experts where issues are outside auditor’s own expertise.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett36
INVESTMENTS AND INTANGIBLES — KEY PROCEDURES
• Physical examination• Confirmation• Inspection of legal documents • Recomputation, vouching, tracing• Specialised valuation procedures
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett37
NON-CURRENT LIABILITIES AND OWNERS’ EQUITY
Key assertions completeness:
Key procedures:• Confirmations• Reading minutes of meetings• Examination of contracts and
agreements• Inspection of share registers
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett38
ASSERTIONS, OBJECTIVES AND PROCEDURES FOR NON-CURRENT LIABILITIES
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett39
STATEMENT OF FINANCIAL PERFORMANCE ACCOUNTS: ASSERTIONS OF INTEREST
• Occurrence• Completeness• Rights and obligations• Measurement• Disclosure
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett40
AUDIT PROCEDURES FOR STATEMENT OF FINANCIAL PERFORMANCE ACCOUNTS I
• Substantiation indirectly by simultaneous tests of statement of financial performance accounts, e.g. sales accounts receivable; cost of goods sold inventory
• Substantiation directly in conjunction with statement of financial position accounts, e.g. property, plant & equipment depreciation
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett41
AUDIT PROCEDURES FOR STATEMENT OF FINANCIAL PERFORMANCE ACCOUNTS II
• Substantiation directly by analytical procedures, e.g. relationships between amounts that are expected to follow a predictable pattern such as sales sales commission
• Substantiation directly by separate direct tests of individually significant transactions or events or account balances of intrusive interest, e.g. discontinued operations
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett42
AUDITING BY COMPUTER: TESTING CLIENTS’ FILES
The major way the auditor uses the computer for substantive tests involves using audit software to read clients’ master files and/or transactions files.
Major advantages:• Directs auditor’s attention to items of risk
and/or materiality• Undertakes routine audit tasks efficiently
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett43
AUDITING BY COMPUTER: FOUR MAJOR TECHNIQUES
• Generalised audit software — audit interrogation software used with many clients
• Specialised audit software — audit interrogation software especially written for client, task or industry
• Utility programs — routines written by manufacturer for hardware, e.g. sort, merge
• Systems management programs — enhanced productivity tools (e.g. data retrieval software) typically part of sophisticated operating systems environments
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett44
FUNCTIONS OF AUDIT SOFTWARE
This software can interrogate clients’ files in order to:
• Select sample items• Identify records meeting specified criteria
(exception reporting)• Test and make calculations• Compare data in separate fields or on
separate files• Summarise data• Write reports
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett
Slides prepared by Roger Simnett45
EFFECT OF STRATEGIC BUSINESS RISK ON SUBSTANTIVE TESTS
• Increased emphasis on tests of controls for routine transactions implies decreased emphasis for substantive tests for such transactions.
• Increased emphasis on non-routine transactions implies increased emphasis on substantive tests, as would not expect sophisticated control systems around non-routine transactions.