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Hi,
I had a doubt in the Cherry Co question no 101 in BPP.
I dont understand how is the answer 1 valid.
As per BPP, overstatements are occurred for assets, hence overstated. So should we not see the existence of the asset? Hence the answer should 2nd option.
Please explain. Got very confused with directional testing with this question.
Thank you!
Sorry but I don’t have a BPP kit in which there is a quesion 101 for Cherry, but let me try and answer some of the points you raise.
“Direction” of testing (not “directional”) is relevant to substantive tests of details – please see my comments on this post https://opentuition.com/topic/audit-procedures-assertions-2
I don’t know where “overstatements are occurred for assets” comes from … ANY account balance can be overstated or understated.
– It is true that assets have a higher risk of overstatement than liabilities (e.g. think of all the “allowances – depreciation/obsolescence/irrecoverability – against asset amounts, if these are omitted, assets will be overstated) but assets can be understated too – e.g. due to omission.
– Although liabilities have a higher risk of understatement (e.g. due to omission), they can be overstated – e.g. if management makes a provision for some future event that doesn’t meet the definition of a liability.
You have ascertained that Cherry purchases its raw materials from a wide range of approved suppliers. When production supervisors require raw materials, they complete a requisition form and this is submitted to the purchase ordering department. Requisition forms do not require authorisation and no reference is made to the current inventory levels of the materials being requested.
Cherry has an internal audit department which has provided you with details of the internal controls around the non-current assets cycle. One such control is that upon receipt of a new asset, each asset is assigned a unique serial number and this is recorded on the asset and in the non-current assets register.
In relation to the control relating to the receipt of a new asset, which of the following describe the MOST RELIABLE audit procedures which enable the auditor to assess whether this control is operating effectively?
1) Select a sample of capital additions on site, agree that a serial number is recorded on the asset and confirm it is included in the non-current assets register
2) Select a sample of assets recorded on the non-current assets register, confirm that it includes a serial number for each asset and agree the number to the physical asset
3) Inspect the non-current asset register and verify that there are no duplicated serial numbers
4) Observe the receipt of assets to confirm that serial numbers are assigned and recorded
1 and 3
2 and 3
1 and 4
2 and 4
The answer is 1 and 3.
I do not understand how to decide which assertion to look at? If we look at existence, the 2nd option is right and if we look at completeness, 1st is right.Getting confused at this part
This is a test of controls question – nothing to do with assertions or direction of testing in substantive procedures.
The control to be tested is: “upon receipt of a new asset, each asset is assigned a unique serial number and this is recorded on the asset and in the non-current assets register.”
“Receipts” of new assets are additions – so you would start with additions (option 1). Sampling from option 2 would include all assets – not just those purchased in the year – so it isn’t targeted at the test.
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