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Directional testing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Directional testing

  • This topic has 2 replies, 2 voices, and was last updated 7 years ago by drice99.
Viewing 3 posts - 1 through 3 (of 3 total)
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    Posts
  • November 21, 2015 at 8:41 pm #284400
    drice99
    Member
    • Topics: 52
    • Replies: 78
    • ☆☆

    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

    November 22, 2015 at 9:27 am #284469
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10197
    • ☆☆☆☆☆

    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.

    November 22, 2015 at 12:47 pm #284534
    drice99
    Member
    • Topics: 52
    • Replies: 78
    • ☆☆

    Phew thanks!

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