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Link the type of account with the purpose of the primary test in directional testing.
Formula 1:
Assets, expense( Debit)= overstatement
Liabilities, income( Credit)= understatementFormula 2:
Asset = overstatement
income= overstatementLiabilities= understatement
Expense= understatementWhich formula is correct? let me answer if possible, thanks.
I don’t understand your formulas. Directional testing does not seem to be talked about as much now as once. Just try to think about it logically, concentrating on the double entry.
If you test expenses for overstatement (too many Drs) you are going some way to also testing liabilities for overstatement (too many Crs).
Of course it could be Dr Expenses, Cr Cash, so if you test that expenses have not been overstated (too many Drs) you are also getting some assurance that cash has not been understated (to many Crs).
To perform this test you would have to trace from the expense account to the original documents (invoices, say).
If you test expenses for understatement (too few Drs) you are going some way to also testing liabilities for understatement (too few Crs).
To perform this test you have to trace from orders/grns/invoices to the expense account.
Question 2 page 57 of the revision kit :
“An audit procedure which tests for the understatement of a class of transactions will simultaneously test for the overstatement of the related liability ”The answer is:A True
Shouldn’t it be false because shouldn’t the statement rather read :
“An audit procedure which tests for the understatement of a class of transactions will simultaneously test for the understatement of the related liability ”
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