Question

Suppose you are an auditor who is using audit sampling to perform substantive tests of client revenue for the year-ended 20X1. You have obtained the 20X1 sales journal and the population of all approved shipping documents used by the client during 20X1. Clearly explain how you could perform a test for each of the following management assertions about revenue transactions: A.) Completeness and B.) Occurrence. Be specific as to how you would perform the two tests.

Answer 1

Ans.(A)

Completeness: Completeness evaluates the management assertion opposite to occurrence. This means all the fixed and intangible assets your client owns show up on the balance sheet; none are missing. In fixed-asset management, this assertion directly ties back to the purchasing process. To test this assertion, select a sample of purchase requisitions and trace them back to detailed records of property, plant, and equipment.

Audit procedures can test to see if any transactions are missing from the accounting records. For example, the client's bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded.

Ans.(B)

• Occurrence: Occurrence tests whether the fixed-asset transactions actually took place. To test the occurrence of fixed-asset additions, you should take a sample of fixed-asset additions and vouch them to supporting documents such as vendor invoices, purchase agreements, and titles. Vouching means you take a recorded amount and trace it back to the supporting document.

  To test the occurrence of fixed-asset disposals, you select and vouch a sample to supporting documentation. If your audit client sells any fixed assets during the year under audit, ask to see the bill of sale. Use this document to verify that the client has both reduced the asset accounts to zero and correctly reflected the results of the sale on the income statement. Verifying occurrence of purchases and disposals confirms the existence of any assets your client reflects on their balance sheet.