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Dear Mr Gromit
Page 57 of the bpp revision kit (sep15 to Aug 16) has a MCQ q2 where it has a true or false question, “an audit procedure which tests for the understatement of a class of expenditure will simultaneously test for the overstatement of the related liability”. I would have thought false. If the Dr is too low, the corresponding Cr the liability will also be too low and would also be understated, ie Dr light and heat $500 cr creditors $500.. When in fact the bill was $5000
However the answer on page 253 is true and its only explanation is that” testing a debit item (such as expenditure) for understatement will allow the auditor to test simultaneously for the overstatement of the related credit item (such as a liability) ”
This statement doesnt make sense to me, is the book correct?
Cheers
Hugh
I think you are correct, as explained by your example.
The important thing about testing for understatement of expenses(ie testing for completeness) is to start with the transaction (eg an invoice from the supplier) and ensure that has made it’s way accurately into the accounts. Leaving out theinvoice entirely or, as you suggest, posting 1/10 of the correct amount will pick up that error. The knock on effect is also to understate liabilities.
Of course, starting with the posting in the expense accounts and tracing back to initiating documentation will not detect understatement, it will help to verify occurrence.
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