Chapter 10 _ substantive testing and balance sheet accounts.docx

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Financial Accounting
Kevin Ha

Chapter 10 – substantive testing and balance sheet accounts Learning objectives 1. Explain the relationship between the overall risk assessment for a significant account and the extent and timing of substantive procedures 2. Design and understand how to execute substantive procedures to address audit risk related to cash, receivables, inventory, PPE, and payables 3. Understand when to have additional substantive testing CAS 500 – audit evidence CAS 501 – audit evidence, specific consideration CAS 505 – external confirmation CAS 610 – using the work of internal auditors IFRS 7 – financial instruments: disclosures IAS 2 – inventories IAS 16 – PPE 10.1.1– extent of substantive procedures  Accounts that are trivial or immaterial are usually ignored or subject to analytical procedures 10.1.2 – timing of substantive procedures  Reviewing events occurring prior to year end: payroll bonuses or major FA additions/disposals  Reviewing activity in the period to date: things such as AR can be done during interim visit  Performing general audit procedures prior to year end: BoD minutes, JE, and legal can be done throughout the year  Reviewing provisions prior to year end: based on system-generated assessment, it can be carried forward  Leverage off internal audit: CAS 610 outlines auditor’s responsibilities 10.1.3 – matters to consider when designing substantive procedures  Ensure that substantive procedures respond to specific risks: understand the risks (i.e. assets = overstatement, thus test for existence, occurrence, and valuation assertions)  Take credit for work already undertaken: can take the work, but needs to understand their approach first  Set appropriate testing thresholds: dependent on the client and the environment 10.2 – substantive testing of cash  Audit assertions: existence, completeness, and classification  Existence is done by bank confirmations  Completeness is done by testing of bank reconciliation, cut-off testing, differences between bank and ledger statements  Classification for unused credit facilities and other information is important for cash flow disclosure  Rights and obligations for situations such as pledges (limitations on cash) needs to be disclosed 10.2.2 – factors impacting the audit of cash  Should assess audit evidence obtained from testing  Cash is qualitatively material, since there is high volumes of transactions and most entries involve cash 10.3 – substantive testing of trade receivables  Existence and valuation and allocation are major assertions  Existence is verified by sending confirmations, however there is still the issue about collectability  Valuation and allocation is tested through subsequent receipts by checking the receipt of payments after year-end; recalculation of AFDA is also necessary and AR aging  Items such as consignment must also be reviewed for rights and obligations  Completeness is done by
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