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When designing substantive procedures, is it a good idea to think about documentation, and then try to think what the document reveals, and how it proves or disproves something?
E.g. for a receivable to exist, a sale was made, so there must be a corresponding sales order, a GDN, a sales invoice generated, a credit note if part (or whole or defective part) of the order was returned, so to ascertain existence, we can conveniently agree GDN with sales invoice and sales order; or, agree post year end credit notes to list of individual supplier balances…
To establish completeness, we can cast and agree list of receivables balances to the RLCA. This also tests for accuracy.
To establish completeness, we can compare the total of the list of balances to the trial balance and draft financial statements. This also tests for presentation.
The accountant maintains an aged receivables analysis – another document to test for old balances, credit balances, balances that have been misrecorded or misclassified, so test the agreed receivables listing, compare it with the list of individual customer balances, discuss its contents with the credit controller, inspect board mins to grasp what the directors plan on doing with old receivables, the allowance created… Aw
* A couple of procedures about allowances and testing for valuation*
The accountant also calculates the receivables period so recalculate that and compare it to study how it has increased /decreased against prior years.
The auditor performs a circularisation so a procedure about this…
My main question is: If I go totally blank in the exam setting then is it a good idea to think like this:
1. Think about the documents, and calculations relevant to normal accounting treatment of the situation laid out in the question scenario.
2. Next up, think: What does this document reveal?
3. Can I use it individually or in a combination with another document / calculation/ another procedure to test any of the assertions I want to test?
4. Form a sentence about what I am using (source document), what I am testing (which assertion?) and why I am testing this (relate with the scenario, give purpose).
I know this is too long, but I had to share this with you, so that you can comment if this method is foolproof and can help me secure a pass.
Much thanks!!!
It’s really whatever works for your through Q practice and what is revealed to you when you compare your answers with the published answers.
The most imporant thing with a substantive procedures Q is to address only the relevant assertion(s) when explicitly stated (e.g. “VALUATION”).
Then you have to have the right “direction” of testing: so for existence – always start with what is recorded in the FS (i.e. asserted to exist) and trace “backwards”. For completeness, we covered here https://opentuition.com/topic/pacific-co
Anything that is agreeing monetary amounts is accuracy and cut-off is matching recording of transactions in the correct accounting periods.
I personally would not jump straight to documentation for a balance – I would think first what is the balance made up of – so a receivable is the net amount of sales and cash receipts – your post makes no mention of cash.
When a customer replies that they disagree with the y/e balance on the statement they were asked to confirm because they sent a payment before the y/e, this should be a timing difference rather than an error – but the auditor has to confirm it. So this “cash in transit” would need to be agreed to post-y/e cash book/bank ledger a/c and bank statement.
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