Thủ Thuật Hướng dẫn What items do you need to consider in performing substantive audit tests prior to the balance sheet date? 2022
Cao Thị Xuân Dung đang tìm kiếm từ khóa What items do you need to consider in performing substantive audit tests prior to the balance sheet date? được Update vào lúc : 2022-09-25 10:36:40 . Với phương châm chia sẻ Kinh Nghiệm Hướng dẫn trong nội dung bài viết một cách Chi Tiết Mới Nhất. Nếu sau khi Read tài liệu vẫn ko hiểu thì hoàn toàn có thể lại phản hồi ở cuối bài để Mình lý giải và hướng dẫn lại nha.It is also an aspect in respect of which audit regulators in various jurisdictions find common problems when inspecting completed audit engagements. Massimo Laudato, technical adviser ACCA, explains.
Nội dung chính- Audit evidence and the objectives of an auditSufficient appropriate audit evidenceDesigning and performing audit procedures for obtaining audit evidenceWhat information can be
used as audit evidence?Selection of Items to obtain audit evidenceDocumentation of procedures and audit evidenceObtaining Audit Evidence in respect of some specific ItemsInventory ReceivablesPayables Income Under what condition would substantive testing of accounts receivable before the balance sheet date be appropriate?What substantive audit procedures should be performed?What factors should the auditor consider when substantive procedures are to be completed an interim date?When planning substantive audit procedures What should the auditor do?
Audit evidence and the objectives of an audit
The main objective of the work performed by the auditor in an audit engagement is that of obtaining reasonable assurance as to whether the financial statements, as a whole, are không lấy phí from material misstatement, so that the auditor is able to express an opinion on the financial statements and report accordingly in the auditor’s report.
To obtain reasonable assurance about the financial statements, which is a high but not absolute level of assurance, the auditor needs to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
ISA (UK and Ireland) 500, Audit Evidence, explains what are the auditor’s responsibilities in obtaining audit evidence that can underpin the auditor’s opinion and what constitutes sufficient appropriate audit evidence for such purpose.
Sufficient appropriate audit evidence
A large part of the work involved in the performance of an audit consists of obtaining and evaluating audit evidence, which is primarily derived from audit procedures carried out during the course of the engagement, but that can also be gained from other sources. For example sources like previous audits; provided that changes occurred in the meantime have been carefully taken into account; or the firm’s quality control procedures, especially around client acceptance and continuance.
Audit procedures that are used to obtain audit evidence are various and are often applied in combination. They can include inspection, observation, confirmation, recalculation, reperformance and analytical procedures, in addition to inquiry, as the latter does not normally provide sufficient audit evidence on its own.
However, audit evidence obtained will only be useful in reducing to an acceptably low level the risk that the auditor could express an inappropriate opinion when the financial statements are materially misstated and, therefore, allow the auditor to draw reasonable conclusions, when it is sufficient and appropriate to the circumstances.
Sufficiency and appropriateness of audit evidence are two qualities that are interrelated. Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the risks of misstatement assessed by the auditor, whereby the higher the risks the more audit evidence required, and by the quality of the evidence, where the higher the quality the less evidence perhaps required. A large amount of audit evidence may, however, not compensate for its poor quality.
Appropriateness is the measure of the quality of audit evidence. The quality of audit evidence depends on whether it is relevant and reliable in providing support to the conclusions on which the auditor’s opinion is based. Whether evidence is reliable also depends on its source; for instance, whether it is generated by the client, a third party or the auditor; and also from its nature, whereby documentary evidence is normally more reliable than verbal evidence.
Whether the audit evidence obtained in the course of an engagement is sufficient and appropriate to support the auditor’s opinion is a matter of professional judgment that the auditor needs to establish. Professional judgment is not, however, an abstract and subjective category of the auditor’s frame of mind, and should be informed by a structured approach to gathering evidence that is based on the assessed risks of material misstatement of the financial statements.
Designing and performing audit procedures for obtaining audit evidence
A number of ISAs (UK and Ireland), namely ISA 300, ISA 315 and ISA 330, require and explain that audit evidence should be obtained by performing risk assessment procedures and further audit procedures. Further audit procedures include tests of controls and substantive procedures, including tests of details and substantive analytical procedures.
In particular, alongside an overall audit strategy that indicates the scope of the work, the resources of staff allocated to specific areas and the timing of the engagement, a more detailed audit plan should indicate the audit procedures to be performed in respect of specific assertions in the financial statements and their timing.
The results of the initial risk assessment procedures, like the entity’s business risk assessment or the assessment of internal controls, are the basis on which to design the nature, timing and extent of further audit procedures to be performed in respect of the risks identified.
Further audit procedures should respond to the assessed risks of material misstatement the assertion level, so that sufficient appropriate evidence can be obtained in respect of those risks.
The detailed audit plan records the risk assessment procedures and the further audit procedures the assertion level in response to the assessed risks. The audit plan describes the nature, extent and timing of the audit procedures to be performed by team members in respect of specific classes of transactions, account balances and disclosures. In the case of an audit of a small entity, the audit plan would normally be included in standard audit programmes and schedules used for the various transactions and account balances. In any case, the standard programmes need to be tailored so that the approach to an item, in terms of the use of substantive procedures, tests of controls or both, is proportional to the risk assessed for that item and is directed obtaining audit evidence capable of verifying the underlying assertions.
The audit evidence generated by the planned audit procedures should be sufficient and appropriate to support and corroborate, or to contradict, the management’s assertions in respect of specific classes of transactions, account balances or disclosures in the financial statements.
Audit procedures in respect of specific items in the financial statements should be designed with the objective of providing evidence capable of verifying the assertions embodied in an item, so that the auditor can draw a reasonable conclusion about that item. Audit evidence and the auditor’s conclusions in respect of the various assertions tested contribute to the overall audit evidence on which the auditor’s opinion is based.
The audit objectives in respect of the various assertions embodied in the financial statements, which need to be met by sufficient appropriate evidence provided by audit procedures, can be summarised as follows:
When designing and performing audit procedures to verify specific financial statements assertions, the auditor needs to consider whether the procedures are suitable to meet the audit objective and should select those that either in isolation or combination can provide sufficient appropriate evidence.
In fact, out of the various procedures that can be performed by auditors, some are more suited to verify certain assertions in respect of specific classes of transactions, account balances and disclosures, while they may not produce relevant results in respect of the other assertions relating to the same financial statements items. In many cases a single type of procedure may not verify an assertion relating to an item and a combination of procedures will be needed to that affect.
- Inspection is an audit procedure based on the examination of records or documents, whether internal or external, that could be held in various forms, ie paper, electronic or similar, or on the
physical assessment of an asset. The inspection of records and documents provides audit evidence whose reliability depends on their nature and source. Inspecting certain documents may provide direct audit evidence of the existence of an asset, for instance a financial instrument like a share or a bond where the document itself constitutes the asset. At the same time the inspection of the document may not provide evidence in respect of the assertions of ownership and valuation of the asset.
Similarly the inspection of tangible assets may provide reliable audit evidence about their existence but not about the entity’s rights and obligations or the valuation of the assets. Another example may be the inspection of an executed contract that may provide evidence in respect of the entity’s application of accounting policies like revenue recognition.Observation is instead an audit procedure that consists of looking a process or procedure being performed by
others so that evidence about the actual performance is obtained. However observation provides evidence that is limited to the point in time when it takes place and by the fact that being observed may influence how the process or procedure is performed on such occasion. Examples of observation are the auditor’s attendance the inventory counting by the entity’s staff and observing the performance of control activities.External confirmation procedures may be an
important source of relevant and reliable audit evidence. External confirmation is audit evidence that is obtained as a direct written response to the auditor from a third party (the confirming party) in paper form, electronic medium or other medium. External confirmations are normally used when confirming assertions relating to account balances, like payables and receivables, but should not be restricted to such items only. The auditor may ask confirmation of the terms of agreements and
transactions with third parties, whether any changes to existing agreements has occurred or whether no additional conditions are attached to an agreement, perhaps in a separate document. Recalculation is a procedure that consists of checking the mathematical accuracy of documents or records and that can be used to verify the accuracy of the recording of transactions or of the application of accounting policies, for example by recalculating depreciation of tangible
assets. Recalculation however does not provide evidence of the accuracy of the estimated rate of depreciation charged in relation to each class of assets.Reperformance instead involves the independent execution by the auditor of procedures or controls that were originally performed as part of the entity’s internal control.Analytical procedures can or should be used various stages of an audit engagement: the risk-assessment stage, as
substantive audit procedures to verify financial statements assertions and towards the end of the audit to corroborate whether the financial statements are consistent with the auditor’s understanding of the entity. Analytical procedures involve evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. They also include investigation of fluctuations and relationships that are inconsistent with other relevant information or that
differ from expected values by a significant amount. At the assertion level, analytical procedures may be used as substantive procedures either on their own or in conjunction with tests of details. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time and for which there is an expectation that the relationships among data exist and will continue in the absence of indications to the contrary. Sometimes a simple model
may work out as effective analytical procedures. For instance if an entity has a stable number of employees fixed rates of pay during a period, then the auditor may estimate the total payroll costs for the period with a high level of accuracy, therefore obtaining audit evidence for a significant item in the accounts and reducing the need to perform tests of details on the payroll. In other cases analytical procedures may provide less persuasive evidence, for instance when gross margin
percentages are calculated and compared in order to confirm a revenue amount, that may in any case be relevant if used with other procedures. An example of effective combination of substantive analytical procedures and tests of details could be in respect of the valuation assertion for accounts receivable, where the auditor may perform analytical procedures on an aged list of debtors in addition to tests of detail on subsequent cash receipts to verify collectability of the receivables.Inquiry
is a type of audit procedure that is used extensively during the performance of an audit in addition to other procedures. It consists of seeking both financial and non-financial information of knowledgeable persons within or outside the entity. Inquiries are important as they may provide new information to the auditor or corroborative audit evidence or, on the contrary, information that differs significantly from other information obtained by the auditor.
What information can be used as audit evidence?
When designing and performing audit procedures to verify assertions in the financial statements, the auditor should consider whether the outcome of the procedures would constitute relevant and reliable audit evidence.
Audit evidence would be relevant if it is capable of meeting the purpose of the audit procedure, which is normally that of verifying an assertion in respect of a financial statements item. The relevance of evidence produced in respect of a specific audit objective may also depend on the direction of testing. For instance when an audit objective of a procedure is that of testing for existence or valuation of accounts payable, testing the recorded accounts payable may produce relevant audit evidence. However when the audit objective is that of testing completeness (ie understatement) of accounts payable, testing the accounts payable already recorded would not be relevant, as it could be, for instance, testing information like subsequent disbursements, unpaid invoices and suppliers’ statements. Audit procedures may provide evidence that is relevant to certain assertions but not others. For example the inspection of documents in respect of the collection of receivables after the year end may provide relevant evidence about existence and valuation but not cut-off. However audit evidence from different sources or of a different nature may be relevant to the same assertion.
As already mentioned, the reliability of information to be used as audit evidence depends on its source and nature and the circumstances under which it is obtained. However in respect of audit evidence reliability, ISA 500 outlines a number of generalisations, some of which are:
- The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliable than
audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control). Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence obtained orally.Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles, or documents that have been filmed, digitised or otherwise transformed into electronic form.
The generalisations above are however subject to relevant exceptions. For instance information obtained from an independent source outside the entity may not be reliable if the source is not knowledgeable. Similarly a management’s expert may lack objectivity.
Selection of Items to obtain audit evidence
When designing tests of controls and tests of details in respect of specific assertions the auditor needs to use methods for selecting the items to be tested that are effective in meeting the purpose of the audit procedures.
A test is effective if it provides audit evidence that is relevant and reliable and that, taken together with other audit evidence obtained, will be sufficient for the auditor’s purposes.
The methods available to the auditor for selecting items for testing are:
Selecting all items (100% examination)Selecting specific items; and Audit sampling.The application of one or a combination of the above methods may be effective depending on the specific circumstances, like the risks of material misstatement in respect of the assertion tested and the efficiency of the different methods.
Sometimes it may be appropriate to test all the items that make up a class of transactions or an account balance, or a sub-class within a class. 100% examination is more common for tests of details and less suitable for tests of controls and may be appropriate when for instance:
- The
population is made up of a small number of large value items;There is significant risk of misstatement and other methods do not provide sufficient appropriate evidence; orCalculation or other process performed automatically by an information system make 100% examination cost effective.
Alternatively an auditor may make a judgemental selection of specific items from a population that make up a class of transactions or account balance. Being a judgemental selection it will be based on the auditor’s understanding of the entity, the assessed risks of material misstatement and the characteristics of the population being tested. Specific items that may be selected include:
- High value or key items. The auditor may select items because of their value within a population or because they reveal some specific feature, ie items that could be suspicious, unusual, more subject to risk or that have a history of error.All items over a certain amount.
The auditor may decide to test items with carrying values above a level established to verify a large proportion of the total amount of a class of transactions or account balance.Items to obtain information. The auditor may select certain items to obtain information about general matters like the nature of the entity or the nature of transactions.
Albeit the selection of specific items is often an efficient method of obtaining audit evidence, it does not constitute audit sampling, ie the results of procedures applied to the selected items do not provide evidence in respect of the rest of the population.
Audit sampling is a method of selecting a sample of items to be tested, which covers less than the total of the population, but that provides the chance for all items to be selected, so that the auditor may have a reasonable basis to draw a conclusion about the whole population. In order to have statistical relevance, a sampling approach should be determined either using a random selection method or probability theory to evaluate a sample result. Audit programmes often include schedules for determining sample sizes that reduce the risk of erroneous conclusions to an acceptably low level.
Documentation of procedures and audit evidence
Audit procedures designed and performed by the auditor should clearly document the audit objective that they intend to achieve (in terms of assertions relating to a specific class of transactions, account balance or disclosure), the actual work performed, the results obtained, their evaluation and a conclusion as to whether the audit evidence obtained is sufficient and appropriate to verify or not the assertion and is capable of supporting the auditor’s opinion.
The documentation of the design and performance of audit procedures may take place by using không lấy phí form working papers, especially when documenting uncommon procedures or procedures in respect of specialist items, like defined benefit pension plans, or by using structured working papers like those included in audit programmes, which also suggest audit objectives and standard procedures in respect of the most common financial statements items. As ever when using audit programmes, the auditor should only select relevant procedures and documentation according to the risk assessment in that area of the financial statements, the materiality assessment, and the extent to which the auditor wishes to rely on directional testing. Additionally standard audit tests may need to be varied or substituted by more efficient non-standard tests that are better suited to the nature of the client and the systems employed.
Obtaining Audit Evidence in respect of some specific Items
Audit regulators in various jurisdictions find a number of common problems when conducting external inspections of completed audit engagements.
A general problem encountered is that audit files fail to meet the ISAs requirements as they fail to record sufficient appropriate audit evidence to support the auditor’s conclusions and opinion. It may happen that the audit working papers do not record adequate details of the audit procedures performed and of the conclusions drawn from the audit work carried out. In such a case it would not be possible to determine from the documentation what audit objective was to be achieved by the work done, what procedures were performed and what results were actually obtained.
The problem in respect of audit evidence normally stems from the fact that either the work set out in the audit plan has not been completed or that the auditor has not recorded the work undertaken in an effective manner. Therefore, in the first case the auditor would have failed to meet the requirements of ISA 500 in respect of obtaining sufficient appropriate audit evidence on which to base the auditor’s opinion, while in the second case the requirements of ISA (UK and Ireland) 230, Audit Documentation, would not be met as the documentation does not record all the matters which are significant in supporting the auditor’s opinion.
It goes without saying that if the auditor has not performed the work planned, there would be no grounds to express an opinion on the financial statements. If on the other hand the auditor has been unable to produce effective documentation of procedures and audit evidence, the recommendations above as to the form and content of effective documentation should be followed.
Apart from the general problem relating to recording sufficient appropriate audit evidence, which could imply a systematic failure across the whole audit engagement in obtaining and recording audit evidence, the audit regulators commonly come across issues relating to the inappropriate approach to the audit of specific items in the financial statements, which may be unsuitable to generate sufficient appropriate audit evidence and for which guidance may be derived from the ISAs and established audit practice.
Inventory
The main assertions in the financial statements relating to inventory are existence, ownership, completeness and valuation and audit procedures should be designed and performed with the objectives of verifying such assertions.
ISA (UK and Ireland) 501, Audit Evidence – Specific Considerations for Selected Items, đơn hàng with inventory and specifically requires that, if inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by, in addition to other procedures, attendance physical inventory counting unless impracticable.
ISA 501 therefore focuses on the existence assertion, ie testing for overstatement of inventory, and on the condition of inventory, which is relevant to its valuation by identifying obsolete, damaged and slow moving items, both of which should invariably be verified by attending and performing audit procedures the inventory counting (stocktake).
Attendance the inventory counting is in any case also relevant in providing evidence in respect of the completeness and valuation of inventory and in respect of the cut-off for recording inventory inwards and outwards movements, and the connected impact on revenues and costs.
The directors of a company, ie those charged with its governance, have the responsibility of preparing financial statements that are không lấy phí from material misstatement and of ensuring that the amount which inventory is recorded in the financial statements represents inventory physically in existence and includes all inventories of the entity. To achieve this, entities may maintain detailed records of inventory and check these by regular test counts, a perpetual inventory system. In some entities where the accounting records are less detailed, the amount of inventory may be determined by way of a full physical count a date close to the entity’s financial year end.
Where an entity maintains a perpetual inventory system, checked by regular test counts, the auditor should perform procedures to confirm whether adequate records of inventory are maintained and kept up to date, procedures for inventory recording and test-counting are satisfactory and all material differences between the book records of inventory and the physical counts are investigated and corrected. The auditor attending a physical inventory counting for such an entity will need to consider whether the checking of stocks as a whole is effective in confirming that accurate records of inventory are maintained.
For entities that do not maintain detailed records of inventory and rely on a full physical count around the financial year end, the auditor’s attendance the inventory counting is more important for the purpose of obtaining audit evidence in respect of inventories.
When the auditor attends an inventory count in compliance with ISA 501, the auditor is required to:
Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting; Observe the performance of management’s count procedures;Inspect the inventory; andPerform test counts.The auditor should examine the way the inventory count is organised and evaluate the adequacy of management’s instructions; for example as to whether they address the accurate identification of slow-moving, obsolete or damaged items or control over the shipping and receipt of inventory before and after the cut-off date. Such instructions should be preferably in writing and should cover all phases of the inventory counting procedures.
During the inventory counting the auditor should observe whether the entity’s staff are carrying out management’s instructions and count procedures properly, and if that is not the case, any issues identified should be brought to the attention of the management supervising the counting, including a request to re-perform partly or completely the count.
The inspection of the inventory and the performance of test counts assists the auditor in ascertaining the existence of inventory and in identifying obsolete, damaged or ageing items. Test counts should also be designed to provide audit evidence in respect of completeness of inventory and intrinsically provide evidence about the accuracy of the inventory count records.
Common problems encountered by audit regulators in respect of the audit of inventory include the fact that the inventory count is not attended or that the evidence of the work done during attendance the inventory count is poor. Frequently attendance notes do not provide sufficient detail of what happened on the day.
To rectify the latter issue, there should be adequate notes that provide a reasonable outline of the procedures performed. In particular it is important to record clearly which lines of inventory have been counted during the test counts and to indicate the direction of the test.
In respect of the direction of the testing, when carrying out test counts the auditor should select items from the count records and trace them back to the physical inventory. Such procedure, coupled with inspection of the selected items, has the objective of verifying the existence of inventory and its physical condition. When using a judgmental approach to the selection of items, the auditor should give particular consideration to those inventories which the auditor believes to have a high value, either individually or as a category, and to those that are susceptible to misappropriation.
Conversely the auditor should select items from the physical inventory and count them back to the inventory count records. In this case the direction of the testing will have the objective of verifying completeness of inventory, ie that inventory is not understated.
Apart from relying on inspection of selected items during test counts, the auditor may verify the condition of inventory also by observing whether the management’s procedures for identifying damaged, obsolete and slow-moving items operate properly.
The work performed to corroborate that inventory is correctly valued will normally involve verification of the cost of inventory and of its net realisable value. When testing cost it will normally be necessary to look suppliers’ invoices and similar documentation. In particular a sample of items from the count records may be selected and agreed to purchase invoices from suppliers to verify the cost. If standard costs have been used then the standard costing calculations will need to be reviewed and tested. Net realisable value testing will involve looking the after date sales invoices and, if necessary, testing the number of units sold such price. The test that may be performed in this case would involve selecting items from the count records and agreeing them to the sales invoices.
During attendance the inventory count the auditor may obtain cut-off information, such as details of the movement of inventory, to assist the auditor in performing audit procedures over the accounting for such movements a later date. Where possible, cut-off testing for inventory can be combined with the same testing for sales and purchases.
When the physical inventory counting takes place a date which is not the financial statements date, the auditor will also need to perform procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. In such a case the auditor evaluates the effectiveness of controls over changes in inventory to determine whether the conduct of inventory counting a different date is appropriate for audit purposes. The observation of entity’s cut-off procedures and cut-off testing performed by the auditor will be relevant in these circumstances.
If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.
If attendance physical inventory counting is impracticable, ISA 501 requires the auditor to perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with ISA (UK and Ireland) 705.
It has to be noted that ISA 501 contemplates only limited circumstances when the auditor’s attendance inventory counting may be considered impracticable, mainly relating to the fact that the nature and location of the inventory may pose threats to the safety of the auditor. If attendance is just generally inconvenient for the auditor that would not make it impracticable. Therefore, as explained in ISA (UK and Ireland) 200, question of difficulty, time or cost involved would not in itself be a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive, as it might be the case if the inventory counting is not attended.
In the limited cases where attendance inventory counting is impracticable, alternative audit procedures, like inspection of documentation of the subsequent sale of specific inventory items, acquired or purchased prior to the inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory. However, when performing alternative procedures would not be suitable in providing sufficient appropriate audit evidence in respect of inventory, the auditor should, in accordance with ISA 705, modify the opinion in the auditor’s report as a result of the scope limitation.
In the circumstances in which the entity does not undertake any physical inventory counting and does not maintains a perpetual inventory system, ie when it does not have any meaningful internal control on inventory that is necessary for the preparation of financial statements that are không lấy phí from material misstatement, the preconditions for an audit indicated in ISA (UK and Ireland) 210, Agreeing the terms of audit engagements, may not be present. In such a case the auditor should consider whether it is appropriate to accept or continue the audit engagement for such an entity.
Receivables
The main audit objectives that should be addressed when auditing assertions in respect of receivables are:
- Verifying that the receivables exist the financial statements date;Verifying that receivables are accurately recorded the correct value and provisions are made for bad and doubtful debts;Verifying completeness of receivables and cut-off.
It will normally be necessary to test a sample of sales ledger balances to verify their existence and this could be done by using a variety of procedures. A common and effective procedure is that of tracing and agreeing the balances selected to after date cash received. When a judgemental method of selection is used older and larger balances should be covered.
When the auditor knows that the amount of after date cash received will be limited due to the level of receivable days, which may stretch beyond the audit engagement completion date, other procedures should be considered, like circularisation of balances on an earlier period with roll forward of the amounts, substantive analytical procedures or obtaining evidence that goods sold were received by or dispatched to the customer before the year end.
It is also important to appreciate that a debt that has been confirmed to exist will not necessarily be recovered, and therefore the valuation objective is not met simply by a debtor confirming to the auditor that the debt existed the year end. Testing selected items against after date cash receipts is a procedure that is also relevant in verifying recoverability of receivables; however the objective is normally achieved by using a combination of procedures. In particular the use of analytical procedures can provide evidence to compound the results of the tests on after date cash receipts. For example, comparing the bad debt expense as a percentage of sales and the provisions for unrecoverable accounts as a percentage of receivables to the data of the previous year may corroborate the receivables’ valuation. Similar evidence may be derived by comparing receivables’ turnover and receivables’ days to the previous year or by examining large customer accounts individually and comparing them to the previous year’s balances. Another procedure to verify valuation of receivables is the examination of credit notes issued after the year end for provisions that should be made against current year balances.
Completeness and cut-off of receivables is normally tested in conjunction with sales and inventory. The objective is to verify that sales and receivables are completely and accurately recorded and are accounted for in the correct period, and that the inventory treatment is consistent with the timing of the sale. A procedure for verifying completeness is that of tracing a sample of dispatch documentation to sales invoices and into the sales and receivables ledgers. Cut-off testing may be performed by selecting a sample of sales invoices around the year end (before and after), inspecting the dates and comparing them with the dates of dispatch of goods in the relevant documentation and with the dates recorded in the ledger for application of correct cut-off. Another cut-off procedure is that of reviewing material after-date invoices and credit notes and ensuring that they are recorded in the correct period. It has to be noted that cut-off testing should not be performed by reference to invoices only, as sales should be recognised in accordance with the applicable revenue recognition policies that would often refer to the date when goods are dispatched; there could be in fact a discrepancy between the date of the invoice and the date the sale should be recognised. Analytical procedures, for instance comparing the gross profit percentage by product line to the previous year, may also provide evidence of completeness and cut-off for sales and receivables.
Payables
The audit objectives that should be addressed when auditing assertions in respect of payables are verifying the completeness, accuracy and valuation of liabilities as often there is a specific risk that payables are not completely recorded in the accounts, particularly where there is doubt about the entity’s ability to continue trading or when there are pressures on the entity to meet certain profit targets.
Addressing the completeness objective for payables is not easy and should be approached from two angles: assessing whether the list of creditor balances includes all payables existing the year end, and assessing whether each creditor balance recorded is complete in respect of all transactions up to the year end.
An effective procedure to verify completeness and valuation is that of reconciling a sample of accounts payables with suppliers’ statements. Many suppliers provide monthly statements to their customers and these may therefore be available for examination. Such statements are documentary evidence originating from outside the entity and therefore are an independent and reliable source of evidence. In any case the auditor should be aware that such statements may have been tampered with by the entity and, in case of doubt, the auditor should request a copy directly from the supplier.
The use of direct confirmation using a payables circularisation is also an option to confirm completeness and valuation, although it is less commonly utilised in practice given that it yields levels of returns, and therefore evidence, that is lower than that obtainable from suppliers’ statements.
The use of analytical procedures can also be very relevant for the objective of verifying completeness and valuation, for example the auditor’s background knowledge of the client may indicate the major suppliers that would be expected to be present in the list of payables the year end. The auditor may therefore compare the list of balances with those outstanding the previous year end and also consider the main suppliers during the year (by reviewing an activity report), and ensure that there is a realistic balance outstanding the year end for each of them.
Income
The main objectives when auditing income are those of verifying completeness, ie that income is not understated, accuracy and cut-off, ie that all items are recorded in the correct period.
As mentioned above, income should be recorded in accordance with the applicable and appropriate revenue recognition policy of the entity, which would often result in recognition of sales when goods are dispatched or services supplied to customers.
Effective auditing of income requires a satisfactory understanding of the entity’s systems, ie what systems are in place and what documentation is produced to control the dispatch of goods or the provision of services. When the entity has in place a sales system that includes controls to ensure that all sales have been recorded, the auditor could perform tests of controls to obtain evidence about its effectiveness in detecting and correcting material misstatement. The sales system should be documented by the auditor and, if judged effective following tests of controls, it may enable a reduction in the performance of substantive procedures.
Tests of controls are never sufficient on their own to provide sufficient appropriate evidence in respect of material balances or classes of transactions and therefore substantive procedures are necessary when auditing income.
Analytical procedures are important in testing completeness of income and may be used in place or in combination with tests of details. For such purpose the auditor may compare the level of sales over the year, on a month-by-month basis, with the previous year or reconcile the total quantities of goods bought and sold. The auditor may also analyse the effect on sales value of changes in quantities sold, or of changes in products or prices. The auditor should also record reasons for changes in gross profit margin, ideally broken down by product area and month or quarter, as that would provide relevant evidence of completeness of income.
In addition to analytical procedures, the auditor may carry out a directional test on completeness of recording of individual sales in the accounting records. For such purpose the test should start with a sample taken from the evidence that the supply has taken place, rather than a sample taken from sales invoices. The documents that first record that a supply has taken place, like goods dispatched notes or till rolls, should be traced back, also via intermediate documents, to the sales ledger. The completeness of the documents that first record a supply should also be verified by, for instance, checking the sequence of goods dispatched notes.
The direction of the test, ie verifying completeness of recording in the sales ledger, dictates that selecting a sample from the ledger or from the sales invoices would not be relevant to the objective as the sample would not include what has not been recorded. It follows that verifying income by reconciling nominal ledger balances to VAT returns does not yield evidence in respect of completeness.
Under what condition would substantive testing of accounts receivable before the balance sheet date be appropriate?
It is acceptable to confirm accounts receivable prior to the balance sheet date if the internal controls are adequate and can provide reasonable assurance that sales, cash receipts, and other credits are properly recorded between the date of the confirmation and the end of the accounting period.What substantive audit procedures should be performed?
7 examples of substantive procedures in auditing. Counting inventory. ... . Monitoring purchases. ... . Distributing invoices. ... . Verifying payments. ... . Corroborating customer orders. ... . Collecting debt. ... . Confirming account balances..What factors should the auditor consider when substantive procedures are to be completed an interim date?
In determining whether it is appropriate to perform substantive procedures an interim date, the auditor should take into account the following:. The assessed risk of material misstatement, including: ... . The nature of the substantive procedures;. The nature of the account or disclosure and relevant assertion; and..When planning substantive audit procedures What should the auditor do?
. 20 In planning the analytical procedures as a substantive test, the auditor should consider the amount of difference from the expectation that can be accepted without further investigation. Tải thêm tài liệu liên quan đến nội dung bài viết What items do you need to consider in performing substantive audit tests prior to the balance sheet date?