Audit procedures & Evidences

Although it may be useful to think about assertions the learning outcome in the syllabus refers to being able to “design” procedures. Especially at AAA you cannot really learn procedures in advance as what is appropriate in the circumstances will depend on the scenario – but here are some pointers.

Revenue recognition should always be considered a “significant risk” (in all but the simplest of situations) – that could be overstatement (e.g. to inflate profit to achieve some expectation) or understatement (e.g. to reduce tax liabilities). It goes without saying that you should know the revenue recognition criteria of IFRS 15 – in particular, whether the performance obligation is satisfied at a point in time (typically for goods) or over time (typically for services).

So just think about a scenario in which there are pressures to overstate revenue, where sales are for goods and the y/e is 31-Dec 2020 – how could revenue be recognised in December say that should not have been recognised until 2021? (If at all?) In no particular order (and not a comprehensive list):

1. Recognise January sales as having been made in December – i.e. cut-off assertion – so need cut-off procedures.
2. Inflate pricing on December invoices – i.e. accuracy assertion – this would need to be corrected with credit notes in 2021 – so need procedures on credit notes.
3. Raise fictitious invoices before the y/e – i.e. occurrence assertion – so again credit notes to “reverse” or if not reversed there will be outstanding receivables.

So it’s important to think that you are not just auditing the “Cr Revenue” but the other side of the entry “Dr Trade receivables” which would also be overstated. You should appreciate the importance of external confirmation of receivables as a test for the overstatement of revenue.

Completeness would of course be a relevant assertion if the risk is understatement.

For deferred tax you have to think HOW/WHAT gives rise to the liability/asset. If, for example, there is a deferred tax asset arising from trading losses, you would need to perform procedures to confirm the expectation of future profits to utilise those losses. And don’t forget the obvious things too – like recalculation to confirm the accuracy of computations and agreeing tax bases (e.g. tax written down values of non-current assets) to tax working papers.