IAP please Steve

Glynis

Steve

Can you help me. How would I know what test to do on what item in the accounts?

Also how do you differentiate testing control accounts and substantave tests? Is there an easy way to do this. I am still waiting on my useless tutor to answer my requests.

Glynis

Glynis

Steve can you help?

SandyHood

Have you tried google?
I found this;
http://www.midsussex.gov.uk/Nimoi/sites/msdcpublic/resources/070103b.pdf
when I had this list
http://www.google.co.uk/search?hl=en&q=substantive+testing&meta=&aq=2s&oq=sustantive+

Steve Collings

Hi Glynis,

You don't give me much time to reply do you!

Sandy Hood has put some good links there for you which should help you.

However tests of control (also known as 'compliance tests') are mainly used when seeking to place reliance on the entity's internal controls. If you are unsure about these types of tests,then I would go back to the fundamentals of internal controls. In your organisation do you have procedures for purchasing inventory? If you do, that is a control. If it is reliable and reduces the risk of material misstatement within the financial accounts, then the auditor can place reliance on it and reduce the need for more detailed testing (substantive testing).

Substantive testing is applied in situations where tests of controls are inappropriate, for whatever reason (not necessarily because of identified weaknesses).

Substantive testing is where the auditor will trace a sample of transactions from their underlying documentation through to their ultimate destination in the financial statements (cost of sales, perhaps). For example, let us start from the goods received note in a purchases sample:

From the goods received note, the auditor will trace it to:

The invoice (checking the GRN has been signed to say the goods have been received) and checking the quantities, prices and calculations are correct;
Stock records;
The suppliers purchase ledger account;
The VAT account (if applicable);
The creditors control account; and
The nominal ledger.

Therefore substantive testing is primarily used on account balances, transactions and disclosures, and is used to detect material misstatements at the assertion level. Analytical review is also a substantive procedure.

Two key differences are that 100% sampling is not usually appropriate for tests of controls, but might be appropriate (depending on the circumstances) in tests of detail.

Ideally (for obvious reasons) the auditor will want to reduce substantive testing as much as possible. However, where weaknesses are identified in an entity's internal controls, then the auditor will default to substantive testing.

What study material are you using?

Regards
Steve

Glynis

Steve and sandy thanks.

Steve when you say material misstatement how do you know if its due to an error or weakness.
Also how is material decipherd.

Steve Collings

A material misstatement can be down to a weakness AND/OR error. Weaknesses generally turn into error so you're looking at a combination.

Materiality is very much a judgement call. There is an ISA on materiality, being ISA 320 (Audit Materiality). An item is 'material' if its error or omission could influence the decisions of the user of the accounts.

Assessment of materiality in audit is mandatory. In real life you assess materiality at the planning stage and revisit it at the completion stage to see if it is still appropriate. During the course of the audit, materiality is always considered.

For example if you have an entity with profit before tax amounting to £800,000 and during the course of the audit discover a prepayment has been omitted amounting to £1,500 then clearly this is not material as it is hardly going to impact significantly on the profits/net assets of the entity. You would record the £1,500 on the audit error schedule because despite its immateriality in isolation, it could become material when aggregated with other misstatements.

In contrast if you discover sales amounting to £100,000 have been omitted then clearly this is material in isolation because these sales represent 12.5% of profit before tax.

There are 'rules of thumb' calculations but materiality is not absolute and must be taken in a wider context.

Regards

Steve

Glynis

So if materiality is judgemental why have it?

How can accounts be said to be credable if the auditor uses judgement.

Steve Collings

Glynis wrote: »

So if materiality is judgemental why have it?

Because materiality is judged on the basis of the client's risk profile and internal control environment. There has to be a threshold - if you have a $40 million turnover business with zero materiality then everything immediately becomes high risk even down to a $200 prepayment. Clearly this is uneconomical and you could be auditing that client for about 12 months. All financial statements contain some degree of judgement and estimation (e.g. accruals) so the materiality level (also known as 'tolerable error') takes this into account.

Glynis wrote: »

How can accounts be said to be credable if the auditor uses judgement.

This links into your question above. The auditor cannot test every single element that makes up each area of the financial statements. If you are auditing a $100 million turnover pharmaceutical company then you are not going to check every single sales invoice through the system because that alone would take weeks!

ISA 315 states that the auditor will gain an understanding of the entity, its controls and the environment in which it operates. The planning helps the auditor establish risk profiles etc. I can't see these types of scenarios being tested at IAP level so I am unsure why you are digressing into such areas.

Glynis, as I have mentioned I implore you to get some study material for IAP. I can ask a tutor friend I have from Kaplan to recommend some material for you. Unfortunately, the forums are not a place to undertake such in-depth tuition and I do not have any study sessions planned for auditing in the next few weeks. I do usually do online tutorials for audit on opentuition.com but these sessions are not planned until November. Also, my articles are only designed to aid tuition, rather than be a substitute for it. Your studying for this unit seems very sporadic and you are not going to pass the unit if you are not studying the unit properly.

I am happy to answer technical queries via the forums but you really do need some good tuition material for this unit to succeed.

Kind regards

Steve

Glynis

I am waiting for my colege to get back to me with the material.

I wanted to ask you about different types of tests but I have been accused of mithering you by a fellow member on here. Also I tried to pm but your inbox is full.
Sorry if you feel I'm harrassing you.

Glynis

mikes

I'm afraid that i dont know about the audit subject yet. However i just typed in audit tests in Google and it came up with one particular site, that may be of help, it talks about different types of tests to use in auditing.

http://www.abrema.net/abrema/testing/index.html

It appears to be an Australian site, however the principles should still be the same regardless.

Julia

Glynis

Which college are you with. If it is BPP I can probably sort it for you as I am FR and audit.

I agree with Steve that the forums cannot be used as a substitute for tuition given their limitations ; though I doubt Steve will think of you as a mitherer.

Also I would advise you to take your time with this simulation!

julia

Steve Collings

Glynis wrote: »

I am waiting for my colege to get back to me with the material.

I wanted to ask you about different types of tests but I have been accused of mithering you by a fellow member on here. Also I tried to pm but your inbox is full.
Sorry if you feel I'm harrassing you.

Glynis

Glynis,

I think the word 'harrassment' is a bit overboard! I do have concerns about the way you are studying for the audit simulation because it seems very sporadic. You seem to have dived in without any structure to the paper and are trying to rush the subject just for the sake of passing AAT. Your queries don't seem to follow a logical structure that I would expect from a student of an auditing paper, which suggests you are trying to cram all sorts of audit related matters in your head as fast as you can! You can't do this with a professional qualification. You need to understand what it is you are studying and the only way you are going to do this is by following a structured study format, which the tuition provider will give you.

I wrote an article called Sampling Techniques in Audit recently for ACCA students. I suggest you have a look at that.

As I have said to you before, I would advise that you get your study material for the unit first before embarking on any further study as that material will be tailored to the requirements of the simulation. Some of the subjects covered in my article will go beyond the parameters of the syllabus for unit 17.

Regards
Steve

Glynis

Thanks steve that has helped a lot. My study materials have now arrived.

I have heard you have left accountancy students. Is this true? I hope it isnt.

Steve Collings

Glynis wrote: »

I have heard you have left accountancy students. Is this true? I hope it isnt.

Glynis

Where on earth have you heard this? This is complete and utter nonsense and I would like you to PM me the source of this rubbish so I can contact them direct.