Question

You are the field manager on the audit of Hotshot Ltd for the year ended 30 September 2015. You have asked Michelle Psi, a new audit analyst to assist you and you are busy ensuring that she has a proper understanding of the work to be done before she starts. Consider the following procedures, which are included in the audit programmes:

1. Vouch a sample of sales transactions recorded in the sales journal to ensure that they have been appropriately authorised in terms of credit terms and policies.

2. Inspect minutes and contracts for evidence of any assignment, pledges, factoring or other liens over debtors.

3. Enquire of client personnel whether sales invoices are independently checked to ensure that Price x Quantity calculations are correct.

4. Select a sample of sales invoices and trace these to the sales journal.

5. Use Generalised Audit Software to scan the client’s computerised accounting records for 2015 for any transactions which have a date of 1 October 2015 or later.

6. Check the results of the Integrated Test Facility (ITF) report to identify whether unauthorised journal entries writing off debtors were processed or were rejected by the client’s computerised accounting system.

Required: For each of the procedures above:

a) Identify whether it is a Test of control OR Substantive test.

b) Identify one assertion (for each procedure) that will be tested.

c) Identify a potential misstatement that could occur (i.e. if the procedure yielded unsatisfactory evidence, explain how the accounts concerned could be misstated)

Please do not copy & paste others' wrong answer. Thanks

Answer 1

As per International Standards on Audting (ISA) 330 -Test of Control is an audit procedure designed to evaluate the operating effectiveness of control in preventing, or detecting and correcting, material misstatements at the assertion level.

As per International Standards on Audting (ISA) 330 -Substantive Testing is an audit procedure designed to detect material misstatement at assertion level. These include:
a) Test of detail
b) Analytical Procedure

Answers for the questions :

a)(i)	Test of control
a)(iI)	Substantive Procedure
a)(iii)	Substantive Procedure
a)(iv)	Substantive Procedure
a)(v)	Substantive Procedure
a)(vi)	Substantive Procedure

B) Assertions :

b)(i)	Existence and Accuracy
b)(ii)	Completeness, Existance, Accuracy and Valuation
b)(iii)	Completeness,Existence and Accuracy
b)(iv)	Completeness,Existence and Accuracy
b)(v)	Completeness and Accuracy
b)(vi)	Existence and Accuracy

C) Potential Misstatement :
c)(i)	Incorrect changes/amendments are made to invoices with respect to price, terms etc. resulting in inaccurate sales
c)(ii)	Incorrect write off/ adjustments recorded in books or incorrect creation of debit/ credit note
c)(iii)	Overstatement/ understatement of revenue
c)(iv)	Overstatement/ understatement of revenue
c)(v)	Revenue booked in incorrect period
c)(vi)	Incorrect write off/adjustments recorded in books