Question

When checking the sales and account receivable accounts, the auditor would like to confirm the objectives below:

ITEMS	AUDIT OBJECTIVES
I	Sales transactions that are recorded actually occurred
II	The balance presented on account receivables aged trial balance (ATB) for each customer exists on the balance sheet date

Required:

For each of the objectives listed above:

(a) state the name of management assertion from which the audit objective is derived.

(b) advise the auditor of one (1) substantive test they should perform.

Answer 1

(a) Definition :-Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of financial statements (management) is making to its users

Types of Assertions are :-

1.Transactions and events-Income statement items

• Occurrence
• Completeness
• Accuracy
• Cutoff
• Classification

2.Accounts balances - Balance sheet items

• Existence
• Rights and Obligations
• Completeness
• Valuation and Allocation

3.Presentation and disclosure

• Occurrence
• Rights and Obligations
• Completeness
• Classification
• Accuracy and Valuation

Identification of management assertions

1.Sales - sales is an income statement item.The audit objective to ensure sales transactions that are recorded actually occurred is derived from "occurrence" assertion. The assertion is that recorded business transactions actually took place.

2.Accounts receivable - It is a Balance sheet item.The audit objective to verify balance presented on account receivables aged trial balance (ATB) for each customer exists on the balance sheet date is derived from "existence " assertion. The assertion is that all account balances exist for assets, liabilities, and equity.

(b) A substantive procedure is a process, step, or test that creates conclusive evidence regarding the completeness, existence, disclosure, rights, or valuation of assets and/or accounts on the financial statements.

1.To verify whether the sales transactions actually occurred, the auditor can cross verify the sales ledger with sales tax /GST returns, E- way bills/lorry receipts/freight bills, etc.... and also check movement of inventory in stock register.

2.To ensure that balance in accounts receivable actually exist on balance sheet date, the auditor can obtain Debtors confirmation. Here, the auditor can send letters to a sample of the client's customers asking them to verify / confirm the amount that is owed to the company being audited.