MGAD10H3 Lecture Notes - Income Statement, Audit Risk, Audit Evidence

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Published on 29 Jun 2013
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Chapter 11 substantive testing and income statement accounts
Learning objectives
1. Explain the relationship between the overall risk assessment for a significant account and the
extent and timing of substantive procedures, and the differences between auditing income
statement and balance sheet accounts
2. Design and understand how to execute substantive procedures to address audit risk related to
revenue, cost of sales and expenses
3. Understand when to have additional substantive testing
CAS 330 the auditor’s responses to assessed risks
CAS 500 audit evidence
CAS 520 analytical procedures
CAS 530 audit sampling
IAS 38 intangible assets
11.1.1 differences between auditing income statement and balance sheet accounts
Typically for BS items, it is audited through confirmations, vouching, and tests of balances at
year-end
For IS items, what is usually done is substantive analytical procedures, coupled with tests of
details, and verification of expense classification
11.2 substantive testing of revenue
Occurrence, accuracy, and cut-off are the main assertions
Occurrence is done by testing AR for existence
Accuracy can be done ensuring the recorded amount is correct
Cut-off can be done by shipping documents
Completeness can be an issue when companies want a “head start” on the following year’s sales
or tax reasons
11.3 substantive testing of cost of sales and other expenses
Accuracy, completeness, and cut-off are the main assertions
Accuracy is verified by vouching recorded amounts to supporting documentations (i.e.
depreciation )
Bad debt is done through trade receivables; inventory is done through inventory and payables;
purchases is done through controls testing
Completeness and cut-off is to ensure that expenses are not deferred to the following year
Classification for disclosure purposes (i.e. depreciation, interest)
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Document Summary

Chapter 11 substantive testing and income statement accounts. Cas 330 the auditor"s responses to assessed risks. 11. 1. 1 differences between auditing income statement and balance sheet accounts. Typically for bs items, it is audited through confirmations, vouching, and tests of balances at year-end. For is items, what is usually done is substantive analytical procedures, coupled with tests of details, and verification of expense classification. Occurrence, accuracy, and cut-off are the main assertions. Occurrence is done by testing ar for existence. Accuracy can be done ensuring the recorded amount is correct. Cut-off can be done by shipping documents. Completeness can be an issue when companies want a head start on the following year"s sales or tax reasons. 11. 3 substantive testing of cost of sales and other expenses. Accuracy, completeness, and cut-off are the main assertions. Accuracy is verified by vouching recorded amounts to supporting documentations (i. e. depreciation )

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