Question

In: Accounting

b. Jenny and Sam are the auditors for the AAA audit firm. They discuss an audit...

b. Jenny and Sam are the auditors for the AAA audit firm. They discuss an audit
program for the sales account. Jenny and Sam disagree about whether they
should use procedure (1) or (2) below to test the Occurrence assertion for the
sales account:
Procedure (1): Select a sample of sales invoices, delivery dockets and customer
orders and agree the details to the details recorded in the sales journal.
Procedure (2): Select a sample of sales from the sales journal and agree the
details in the journal to the sales invoices, delivery dockets and customer orders.
Required:
Advise the senior auditor of AAA audit firm:
1. Which procedure provides evidence about the Occurrence assertion? Explain
your answer.
2. Which assertion does the other procedure provide evidence about? Explain your
answer.

Solutions

Expert Solution

1) Occurence- Assertion that a transaction or event took place which pertains to the entity during the relevant period.

This assertion is tested for an overstatement. In simple words, if management has recorded a transaction related to profit or loss statement, you need to check its occurrence which will ensure two major things:

  • That transaction recorded by management actually occurred, and
  • That transaction actually relates to the entity (it means management is not showing someone else’s transaction in their profit or loss statement.

Procedure 2 shall provide evidence about occurence assertions. First select some sample of entries from the sales ledger of the entity. After this, you need to match these entries with supporting documents like sales invoices, goods dispatch notes, and customer orders, etc. The reason being- here we need to test that the entries which have been entered in sales journal have actually occured or not. That is why we will check the sample entries from the journal and then match it with sales invoices and dispatch notes and customer orders.

2) Procedure 1 shall provide for Completeness Assertion.
Completeness assertion-
The assertion that all the transactions that should have been recorded are recorded is called completeness.

This assertion is tested for any understatement. To put it in simple words, if accounting standards require that a transaction should be recorded, it should be recorded and a profit or loss statement will be considered as complete if all such transactions are recorded.

Reason- we first need to select a sample of customer orders and match it with sales invoices and goods dispatch notes. You should also check its posting into the general ledger. This can provide the evidence that all the invoices have been entered in the Sales Journal of the entity and no sales invoice is missed.


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