Audit test

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    keppel
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    Dear tutor,

    I read from the book that for the trade receivables, where there are direct confirmations received and balances confirmed, and for the trade payables, where suppliers’ statements are available and the balances reconciled, there is no need to trace to the supporting documentations for sales like the GDN and the sales invoices & orders, and for purchases, the GRN and the purchase invoices and orders. Is this really the case?

    I would appreciate it if you would guide me on why the availability of the debtor’s confirmations and suppliers’ statements can save the auditors the troubles from going on to check the underlying documents for the balances?

    Thanks a lot.


    Avatar of gromit
    gromit
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    Some of these documents would definitely be traced, for example to ensure that purchases had been ordered and goods received before the liability was accepted.


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    keppel
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    Dear Gromit,
    Thank you for your kind guidance.

    To ensure that purchases had been ordered and goods received before the liability was accepted, could this be verified only by performing transaction tests and cut-off test on purchases for testing against the occurrence of purchases and the complete recognition of liabilities respectively, whereas the trade payables balances, when checked against the suppliers statements, can satisfy the auditors as to the completeness of the purchases and the payable balance stated?

    Am I correct in the understanding in applying the directional testing so as to achieve audit efficiency?


    Avatar of gromit
    gromit
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    I wouldn’t worry about directional testing in F8.

    Checking statements will test completeness, but might not properly verify existence eg if the invoices should not have been received and processed the liability would not truly exist.


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    keppel
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    Dear Gromit,

    Thank you for your kind guidance. I benefitted a lot from it.

    Regarding the inventories, if the stock level dropped sharply in the current year, despite an increase in turnover. There is then a risk of the inventory being understated. To address the risk, could I adopt the procedures like: (i) I would agree the balances per the inventory records to the inventories list and then to the ledger; (ii) carry out an inventory count; &enquire with the management why there is a fall in inventory; (iii) Check the unit cost of the inventories against the purchase invoice; Check the subsequent sales of the inventories to verify the NRV. (iv) Check against the GRN’s and GDNS near the year end? Am I correct?
    .
    And if a company simply counts the inventory periodically, say every month and then draw up a list of inventory, without keeping a full inventory records showing the inwards and outwards of inventories is this a weakness in the system? Under this system, what other procedure shall we do to check against the inventory?

    May I look forward to receiving your kind guidance again?


    Avatar of gromit
    gromit
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    Para 1 = correct

    Para 2 = I think it is a bit of a weakness, but no worse than companies who keep no stock records at all and who simply count it at year end. I would suggest observing a test close to year end or ideally at year end.

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