Question 1 – Substantive Testing Part A When the auditor conducts substantive te

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Question 1 – Substantive Testing

Part A When the auditor conducts substantive tests each side of the journal entry is affected, i.e. double entry accounting. For each of the following substantive tests, (and related assertion) indicate one other account, and one specific assertion relating to that account, for which evidence is also being provided. Substantive Test and (related assertion) Related Account Balance Specific Assertion Example:

Part B

Your firm is auditing Rainbow Paints Ltd, a large manufacturer of painting products. You have been assigned the audit of property, plant and equipment (PPE) for the yearended 30 June 2014.

Rainbow Paints Ltd maintains a computerised fixed assets register. The company has three main classes of PPE: (1) Freehold Land & Buildings, (2) Manufacturing Machinery, Plant & Equipment, and (3) Motor Vehicles.

You are concerned that the depreciation rates for Motor Vehicles may be inadequate. You are also concerned that the recent revaluation of Freehold Land and Buildings by 20% is too high in the current economic climate.

Required: For each management assertion listed in the table below, provide one substantive audit procedure specifically in relation to one of the above PPE accounts that would be used to gather sufficient appropriate audit evidence.

Explanation / Answer

1 Testing accrued salaries for understatement – Indirect Expenses Account – Accuracy

2 Review repairs and maintenance for correct classification – Direct Expenses – Classification

3 Ensuring that the write down for obsolete stock under the lower of cost and net realizable value rule is adequate – Stock in hand – Valuation

4 Testing all purchases are recorded and not understated – Purchase Account – Completeness

5 Ensuring that all bad debts that are legally bad have been written off – Debtors / Accounts Receivables – Completeness

Management Assertion – Audit procedure

Existence – Checking of all the assets in use physically and concluding the representation of management

Completeness – Checking the fixed assets held by the company at year end including the additions and disposals during the year in the fixed assets schedule to be displayed with the financial statements

Valuation & Allocation – Auditing whether the rate of depreciation applied on the assets is as per the regulated rate of depreciation.

Classification & Understandability – check whether the assets listed under specific heads in the financial statements are properly classified according to the regulated classes of fixed assets.

Rights & Obligations – Check whether the company is the rightful owner of the fixed assets or nor. Whether there is any debt to be repaid on them and if yes then it has been stated in the financial statements accordingly.

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