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Hi tutor,
I am a bit confused about the specificity requirement of substantive procedures. At the end of each procedure, are we supposed to write the objective for each procedure, for example, “….to confirm completeness and accuracy”?
Example 2:
If I am needed to come up with substantive procedures over the cash and bank balance, would writing just “obtain a bank confirmation letter from all of the client’s bankers for all of its accounts” be enough for me to gain a mark? Or would I need to include “….to confirm the existence and rights and obligations”Example 3:
Which of the following procedures written would be sufficient to gain a mark?
1. Reperform arithmetic of bank reconciliation
2. Reperform arithmetic of bank reconciliation to confirm no errors had been made during the reconciliationSome procedures given in the exam answers do not include their objectives while others do. The same goes for the procedures given in the BPP study text. And some of the procedures given in the BPP study text are so short as well. It is so confusing.
Hope you could help me on this, thank you!
The examiner has repeatedly said that each substantive procedure should be justified by the assertion(s) it supports. However, not all model,answers do that, which is a pity.
So what youmsuggest in (2) is correct. You could also add accuracy.
In (3) your first answer would not score well as,you have,provided no explanation as to why it is being performed. Your second answer is fine.
Thanks for the prompt reply. That sure is a pity. But it might be a method to prevent students from memorising the model answers. And it’s working on me!
What about the analytical procedures?
For example:
Testing the completeness of inventory:
Would writing “compare the gross profit percentage in the current year to the previous year. Investigate any significant differences.” score me a full mark?
If it is not sufficient to earn a mark, how should I go on about elaborating the above analytical procedure? I find it so hard to relate an analytical procedure to an assertion because the reasons behind a change in a financial ratio can be so diverse. If I had to elaborate the procedure I probably would have written a huge paragraph of explanations..
That is not bad, but could be improved by adding something like “…which could, for example, indicate incorrect closing inventory. How much you write is to some extent, determined by the time available.
Hi tutor, sorry, I have another question pertaining to the specificity requirement again.
Question 1:
For audit risks, do I have to relate the risk to the financial statement assertions?Example 1: “There is an increased risk of material misstatement related to the existence and valuation of inventory….leading to possible risk of over-/under-valuation of inventory in the financial statements”
Example 2: “<explanations>….there is thus a risk of inventory being overstated or understated in the financial statements”
Would both of these answers be accepted?
Question 2:
For auditor responses to audit risks, do they need to be elaborated? I know for one that auditor’s responses are not as detailed as audit procedures, but some responses given in the model answers are so brief that I don’t know if I can rely fully on them or not.For example: responses to possible risk of receivables being overstated
“Consider the adequacy of the allowance for receivables”
Would writing the above gain me a full mark?Question 3:
On a side note, can I assume that the clients in the exam questions adopt the IASs/IFRSs? So, for capitalisation of development costs for example, I would apply IAS 38 when writing audit procedures.Hoping you could help me on this again, thank you!
It is best to give the fullest explanation you can even if you feel you are stating the obvious. So your answers relating to audit risk are better when linked to an assertion – as you have. Either version is fine.
The receivables being overstated answer would be improved by saying how you would assess the risk.
If financial statements show a T&F then the accounting standards must have been properly applied, so you would need to check, for IAS 38, that the expenditure met the criteria for capitalisation etc.
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