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Hello!
Client has poor internal controls and it has been decided that substantive testing will be carried out.
Now, Which Audit Methodology to choose from Directional and Transaction Cycle Testing and why?
Thank you.
Given the start point that the client has poor (unreliable) internal controls and that you are therefore reconcild to a substantive based audit approach, I would have thought it more sensible to follow a directional methodology looking for under- and over-statements
Essentially adopt a “balance sheet approach” where, by “confirming” the figures on the statement of financial position, you can reach a reasonable opinion about the overall company position (if the figures are all “confirm able” to within materially acceptable amounts, then retained earnings must also be materially correct. Sacrifice the detail accuracy of the statement of profit or loss – the overall total for retained earnings is acceptable)
Is that ok?
Thx for the explanation.
I want to know the distinguish merits and demerits between both approaches;
Directional Testing Vs Transaction Cycle.As both are used in same circumstances, as i know of, why choose one over the other?
What benefits are realised by taking one approach over the other?
Thank you.
It seems to me that directional testing concentrates on assets and liabilities whereas transaction cycle testing will look at the procurement cycle from purchase requisition through ordering, delivery of goods, receipt of invoice and settlement of debt
This is more orientated to separate identifiable applications within the day to day running of a business whereas directional testing seems more balance sheet orientated
Why choose one over the other? Without a potentially reliable system of internal controls, there’s no point in looking at transaction cycles!
Hello sir, I would say that the choice depends on the size of the entity to be audited and effectiveness of internal controls.
If big and poor controls, Transaction Cycle approach. Balance Sheet approach would be so tiring or require a lot of resources.
If small and poor controls, Balance Sheet approach.
What about this sir?
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