Question

The purpose of substantive testing is to verify the assertions made by management in the financial statements. Consider the following unrelated audit tests, which a CPA performed for the audit of the financial statements of a client with a fiscal year-end of December 31, 2017.​

		Required For each of the six audit procedures listed below, identify the primary management assertion being tested and the account balance being verified, name the specific audit procedure being used, and state the quality of the audit evidence obtained (high, moderate, or low), explaining why the evidence is the quality level you specify. Organize your answer with these headings: Situation Identify the primary management assertion and the account balance being verified (1 mark each) Name the specific audit procedures being used (½ mark each) State the quality of the audit evidence obtained (high, moderate, or low), explaining why the evidence is the quality level you specify (½mark for the quality and 1 mark for the explanation) Sent positive confirmation requests to a sample of customers with unpaid balances at December 31, 2017. Performed test counts of goods on hand during the company’s normal physical inventory taking on December 31, 2017, and traced them to the client’s inventory listing. Requested statements as of November 30, 2017, from a large sample of vendors with whom the client did business during 2017. Examined shipping reports dated prior to year-end that have not been matched against customers’ invoices. Recalculated amortization of copyrights, patents, and other intangibles as at December 31, 2017 Examined and counted Canadian government bond certificates held as investments as of December 31, 2017.

Answer 1

1) Account balance to check Verify customer ledger

Audit procedure Obtain balance confirmation from third party(customer) & written representation of management.

Quality level Moderate because confirmation from third party does not provide reliable audit evidence.

2)Account balance to check Closing inventory of goods

Audit procedure Physical verification of inventory ,Conduct test count by management at reasonable interval.

Quality level high because perform test count & traced with client's inventory list provide high level of assurance.

3)Account balance to check Supplier's ledger

Audit procedure Confirmation from supplier regarding their balance,Verify statement of supplier(vendor)

Quality level moderate because confirmation from third person does not provide sufficient & appropriate audit evidence.

4)Account balance to check customer ledger & shipping expense ledger.

Audit procedure Verify shipping report,Representation from management

Quality level moderate because representation from management does not provide reasonable assurance.

5)Account balance to check Examine intangible account balance

Audit procedure Examine agreement copy of intangible asset like trademark,copyright

Ascertain useful life of asset,Examine that assets are properly amortised.

Quality level high CPA can obtain sufficient & appropriate reasonable assurance after checking balance of intangible assets.

6)Account balance to check Investment ledger

Audit procedure Verify investment register,Ensure that all entries are properly made like date of investment,rate of interest,acquisition of price.

Quality level high Reasonable assurance can be obtain by checking balance of investment