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Dear Mr Smith,
In the following question I am not able to understand how the review of financial statments notes will give the assertion of the presentation ,how reading the minutes of of board meeting will be the assertion of completness ,and the Review of the Memorandum and Articles of Association and comparing their requirements with issued share capital will be the assetion of Existence .Theses matches are not of much clearance to me.
Can you please clarify them to me.Thanks
Q
47 You are about to begin work on the share capital section of the South audit file.
Match each of the following audit procedures to the financial statement assertion to which
it is most closely related.
Procedure AssertionRecalculate the closing
balance on the share capital
account
PresentationReview financial statement
notes
CompletenessReview Memorandum and
Articles of Association and
compare their requirements
with issued share capital
Accuracy, valuation
and allocationRead minutes of board
meetings for evidence of share
issues
Existence48 In relation to the capitalised costs of the new till system, you are concerned that South may
have included within the capitalised costs some items which are revenue in nature, leading
to the overstatement of non-current assets.
Which of the following statements is a valid response to this audit risk?
Obtain a copy of the training manual relating to the new till system and discuss with
directors the extent of training staff have received on the new system
Agree the capitalised costs from the trial balance back to invoices to confirm their
value
Inspect invoices capitalised within the cost of the new till system to determine
whether they are directly attributable to the cost of the new till system
Recalculate the depreciation charged on the new till system
49 The audit engagement partner has stated that the new till system may not be reliable.
Which TWO of the following statements represent valid responses to this audit risk?
Perform analytical procedures by comparing daily/weekly sales by store with both
the prior year and with expectations, in order to determine whether any unusual
patterns have occurred following the installation of the new system
Vouch the sales revenue per the system to the till receipts to confirm the accuracy of
the sales
Obtain a copy of the training manual relating to the new till system and discuss with
directors the extent of training staff have received on the new system
Agree sales revenue from till receipts to the cashbook to determine the accuracy of
till receiptsAnswer
47 The correct answer is:
Procedure AssertionReview financial statement
notes
PresentationRead minutes of board meetings
for evidence of share issues
CompletenessRecalculate the closing balance
on the share capital account
Accuracy, valuation
and allocationReview Memorandum and
Articles of Association and
compare their requirements with
issued share capital
ExistenceComparing issued share capital with the Memorandum and Articles of Association relates to
existence because ‘equity’ that is not issued pursuant to those documents does not legally
exist.Please see pages 85 and 86 of the notes to make sure you understand what the assertions mean.
You also need to understand the purpose of doing particular thing – e.g. reviewing the financial statement and all the disclosure notes (with the assistance of an IFRS/companies act checklist or similar) is to make sure that what should be presented has been presented.
You should also find thinking about the “direction” of testing helpful.
“Existence” (of a balance) or “occurrence” (of a transaction) – you start with what is recorded in the financial statements and then find evidence that it existed/occurred.For the “completeness” assertion, you are looking to confirm that there are no omissions from the financial statements – so you can’t start with what is recognised in the financial statements – but rather the “source”.
So to ask “is share capital complete”? you would search from a source that could increase capital during the year – namely if the directors authorised a rights issue (= minutes of board meeting).
South isn’t a past exam question and I don’t think you should get hung up on the “existence” explanation – if last year’s share capital was “100” and it’s still 100, I don’t think auditors refer back to a company’s founding documents.
Thanks Sir,
I understand the knowledge behand the assertioms but sometimes applying it to the particular case it is the most challenging in this respect.
Thanks a lot sir,
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