Question

You are auditing the accounts of Chavez Ramos Pty Ltd, a small manufacturing firm in the eastern suburbs of Melbourne. During the year one of the owners contributed cash and other private assets from her home office to the business, with the following general journal bringing them to account in the books: Dr/Cr Account Debit Credit DR Cash 5,500 DR Equipment 10,000 DR Computer 1,250 DR Printer 1,000 CR Capital 17,750 (Contribution by owner) Required: Explain in detail one substantive test (including the source document as applicable) for each of the following, in relation to the above journal entry: a. The existence of the cash; b. The valuation and allocation of the equipment; c. The rights and obligations of the computer; d. The classification of the printer; e. The valuation and allocation of the capital.

Answer 1

Journal Entry is as below:-

Cash A/c Dr 5500

Eqiupment A/c Dr 10000

Computer A/c Dr 1250

Printer A/c Dr 1000

Capital A/c Cr 17750

Below is the substantive test details on each of them :-

1. Existance of Cash :- While doing audit for cash, first of all cash balance should be checked and if the same has been deposited in bank then subsequent month bank statement should be checked and reconciled.All the bank account and cash account should be included in general ledger and balance of that should match with statment and reconciliation. Any other deposite or payment out of it should be vouched properly to cross check the difference.

2. The valuation and allocation of the equipment : - For this we need to we need to take care below points:-

a. Reconcile the book value of assets to GL and TB

b. Reconcile book value of assets to fixed assets register or mater file to ensure that the register that uses for the physical count is completed and accurate.

c. Review the depreciation schedule

d. Review the working paper of reconciling fixed asset per listing to actual count to ensure that the result after count reflects fixed assets in the financial statements.

e. Review repair and maintenance costs and the acquisition cost of fixed assets and related capitalization cost whether all necessary costs that should be capitalized or not

3. Classification of Printer:- Printers are classified as impact printers (in which the print medium is physically struck) and non-impact printers. Most impact printers are dot-matrix printers, which have a number of pins on the print head that emerge to form a character.

4. The valuation and allocation of the capital:- In this case, we usually perform the test of details in the audit work by testing various assertions including existence, completeness, and valuation as well as present and disclosure f capital.