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Hi
I am having a tough time on the audit procedure questions, purely because I’m not understanding what assertions they could be testing. I seem to be giving procedures that are not testing the correct assertion.For example, if we are designing audit procedures for the audit of goodwill – are we testing the assertion for valuation to ensure its been valued correctly?
If so, would it be things such as – reconcile the payment of the subsidiary to the cash book and bank statement to agree the amount paid, recalculate managements calculation of goodwill and agree for reasonableness. etc. what else could you include?
Thanks
AAA isn’t like AA – you’re not expected to identify an assertion with every procedure,
If you look at a past AAA Q1 “design” requirement you will see that sometimes the assertion is specified – sometimes not – in S/D19 you have an example of each:
(c) Design the principal audit procedures to be performed in respect of:
(i) The classification of the $48 million investment in Peppers Co, and
(ii) The government grant of $20 million received in January 20X5.And for 8 marks you’re only looking for 4 points for each of (i) and (ii).
in each case you should be thinking about the risks you’ve identified in an earlier requirement. So if, for example, there is a risk of misclassification – you have to be thinking about the evidence that you need to decide what the correct classification should be. If for the grant, for example, the issue is to what extent it should be recognised in SoPL, you need to be thinking about the evidence to support whether conditions of the grant have been met, etc.
Re your suggestion for goodwill – do not say “reconcile” when you mean agree. For cash consideration, you agree the $ amount to the cash book/bank statement. Reconciliation is only relevant, for example, when you have some external evidence – say a bank statement or supplier’s statement – that needs to be reconciled to the client’s ledger account balance due to timing differences (or exchange differences – but something that is a function of how things are accounted for). For goodwill you could consider all the components that make up the calculation – FV of considerations – FV of NCI (or proportionate share of net assets) – FV of net assets acquired. Then within that it depends what you have in the scenario – so if NCI is based on a quoted share price you would agree that to published data on the date of acquisition. If there was a suggestion of intangible assets of contingent liabilities in the subsidiary you would be looking for evidence of the amounts included in the FV of net assets.
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