- This topic has 10 replies, 2 voices, and was last updated 2 weeks ago by
.
- Posts
Hello Dear Sir,
I hope you are doing well.
I have a doubt in the following question.1. Which TWO of the following audit procedures would test for OVERSTATEMENT of Lancaster Co’s non-current assets?
A.Agree disposals recorded in the non-current asset register to cash book and sales invoice
B.Physically inspect a sample of assets selected from the non-current asset register
C.Inspect a sample of assets found at a location and agree to the non-current asset register
D.Inspect the condition of assets held to determine the need for any impairment
The correct answers are B and D.Tutorial note: The “direction” of testing for overstatement is from what is recognised in the financial statements to source documents or assets. (From source documents or assets to the financial statements tests for understatement). Inspecting assets selected from the register confirms their existence– the carrying amount of assets in the statement of financial position would be overstated if assets included in the register do not, in fact, exist. If an asset is impaired but the impairment loss has not been recognised, the carrying amount will be overstated.
My doubt: Why is option A incorrect? Also, doesn’t overstatement relate to existence of PPE?
Also, I did not copy/paste the scenario since it didn’t seem necessary.
Short answer: Because the “direction” is wrong.
Yes PPE would be overstated if assets did not exist. But the starting point in A is a recording of NON-existence i.e. it has been disposed of. Suppose the SoFP shows PPE $23m – do the assets behind that amount all exist? $23m is a total that should be agreed “backwards” to its source … first stop the sum of the balances on non-current asset a/cs in the general ledger … these should agree to the details in the non-current asset register. For these to agree, a disposal recorded in the register must also be recorded in the ledger a/c – suppose the carrying amount of a disposal was $0.5m – that is an amount that is NOT included in the $23 – so A doesn’t test for what IS included in the $23m. B is the test for overstatement that would detect if assets do not exist.
I got your explanation regarding Point A being concerned with items that do not exist (disposal). Thank you for your detailed explanation.
But I still have four doubts. I have divided it into two parts depending on the option it concerns.
Doubts related to Point A
1. I do not understand how is the direction wrong? It is backwards right? from the financial statements to the source.2. Also, when we say that the direction is wrong, does it mean completeness is being tested?
3. Which assertion is being tested in Point A?
Doubt in Point D
1. Doesn’t impairment concern valuation? How does it link to overstatement (existence) then?“Direction” of testing is considered when designing a test and depends on the assertion (what is being tested?)
Before looking at my responses to each of your doubts – please see my last post on these two threads
https://opentuition.com/topic/audit-procedures-assertions-2
https://opentuition.com/topic/audit-test-on-completeness-test-of-non-current-assetsNow to your doubts related to Point A
1. The starting point is identifying disposals in the asset register and then looking for the disposal proceeds being recorded in the cash book and sales invoice – these would then be traced to the general ledger and financial statements.
2. Yes indeed – the the direction is towards the financial statement because it is a test for completeness of disposal proceeds
3. Completeness
Doubt in Point D
1. Doesn’t impairment concern valuation? YES!
How does it link to overstatement (existence) then? It doesn’t “non-existence” is not the only reason for overstatement. ANY asset will be overstated if it is carried in the financial statements at an amount that exceeds its recoverable amount.Hi sir,
I read your answers as well as the threads that you had asked me to read. I have three more questions.1. In one of the threads, it is mentioned “For “purchases” one of the procedure to confirm completeness is “for a sample of amounts on the ledger, agree to the computerised payment list to verify the amount and supplier. The purpose is to provide assurance that the payment list is complete and accurate.” (BPP, 150 Westra Co question)”. Again, how does directional testing apply here since it is going backwards but is still testing completeness?
2. If I apply the knowledge i learned from “The starting point is identifying disposals in the asset register and then looking for the disposal proceeds being recorded in the cash book and sales invoice – these would then be traced to the general ledger and financial statements” to the following audit procedure which is “Agree a sample of additions recorded in the non-current asset register to the cash book and purchase invoice ensuring that the purchase date is accurate and it is recorded at the correct amount”, then it almost seems like completeness is being tested; though existence and accuracy is being tested.
3. I think I am making a mistake by just looking at the direction not the account balances or transaction. What do you advise? For instance, in the case of trade payables then completeness is a bigger issue as compared to existence. I maybe going wrong here. What do you suggest so that I find this topic easier.
If I refer you to a post it is my comments that I am referring you to rather than the original post.
1. It looks wrong to me but I don’t have BPP materials from 2021 to confirm the student’s extract/interpretation.
2. Agreeing monetary amounts is always going to be relevant to the assertion of accuract – regardless of “direction”. It cannot be an existence test unless your direction is from a record to the physical inspection the asset. (Or other proof of existence – so in the case of receivables that would be a customer’s confirmation.)
I suggest your starting point is to quickly revise the assertions – see Ch16 in our notes https://opentuition.com/acca/aa/acca-audit-assurance-aa-notes
Pay attention to the “Learn the assertions” on page 88.Then look at the accounting system “flow” diagrams in Ch13 – understand that a balance at a point in time is the net effect of all the transactions that make up that balance e.g.
Closing receivable (balance) = Opening receivable (balance) + sales (transaction) – cash received (transaction)It is mentioned in the subsequent question of Lancaster itself that Agree a sample of additions recorded in the non-current asset register to the cash book and purchase invoice ensuring that the purchase date is accurate and it is recorded at the correct amount tests existence and accuracy. Hence, I had the query.
These are the excerpts
The audit programme includes the following tests to be carried out in relation to additions made during the year:1. Agree a sample of additions recorded in the non-current asset register to the cash book and purchase invoice ensuring that the purchase date is accurate and it is recorded at the correct amount
2. Compare total budgeted additions to actual additions in the year and investigate and corroborate any significant differencesThe correct answer is C.
Tutorial note: Test (1) confirms existence and accuracy and valuation (i.e. at cost). Test (2) is an analytical procedure provides evidence relevant to all the assertions listed except classification. As the comparison is based on totals, this test would not provide evidence relating to classification.
- The topic ‘Lancaster – ACCA study hub question’ is closed to new replies.