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Dear tutor,
I am not sure whether my understanding about the directional testing approach is correct or not. Would you kindly give me some help?
After performing substantive tests on the trade receivables, the results are satisfactory. I am then satisfied that the trade receivables have not been overstated. This also gives me comfort that the corresponding side, the income, has not been overstated. So, to increase the audit efficiency, when it comes to the checking for the sales transactions, I focus the tests on the completeness of the sales income without repeating the test of validity of the sales income transactions. .
Would you mind advising whether my understanding of the directional tests is correct or not. Thanks a lot.
That’s correct.
For example, if all asset balances and expenses for the year (i.e. debits) are tested directly for overstatement and all credit balances and income for the year are tested directly for understatement, then misstatement in the opposite directions will be tested indirectly.
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