More auditing-my brain has turned to mush

what would be an appropriate population from which to select the sample of creditors for understatment

Comments

  • Steve Collings
    Steve Collings Registered Posts: 997
    Hi,

    The 'population' is what makes up a balance on an account. So for example, the individual creditors on a trade payables listing is the population that makes up the balance on the trade payables account shown under current liabilities.

    Creditors are tested for understatement and therefore an appropriate 'population' would be trade payables.

    Kind regards
    Steve
  • coojee
    coojee Registered Posts: 794
    Sorry, I had to butt in on this one as auditing is one of my bug bears. Too many people just don't "get" directional testing. Steve is correct that creditors as a credit balance get tested for understatement. I'm afraid what he says next is incorrect. If you're testing for understatement you're looking for something that isn't there but should be. So if you're looking for something that isn't in the list of creditors (trade payables) then it's pointless using that as your starting point for testing. You need to look elsewhere. That would be payments after the year end (what invoices were they paying off, were they before Y/E invoices and if so were they correctly included in creditors) and also purchase orders and Goods Received Notes just before the Y/E.
  • Steve Collings
    Steve Collings Registered Posts: 997
    coojee wrote: »
    Sorry, I had to butt in on this one as auditing is one of my bug bears. Too many people just don't "get" directional testing. Steve is correct that creditors as a credit balance get tested for understatement. I'm afraid what he says next is incorrect. If you're testing for understatement you're looking for something that isn't there but should be. So if you're looking for something that isn't in the list of creditors (trade payables) then it's pointless using that as your starting point for testing. You need to look elsewhere. That would be payments after the year end (what invoices were they paying off, were they before Y/E invoices and if so were they correctly included in creditors) and also purchase orders and Goods Received Notes just before the Y/E.


    The OP asked what an appropriate population would be - this would be trade creditors using techniques such as after date cash payments/post balance sheet date invoices/supplier statements which is what I was saying. I don't see how this is incorrect as you then go on to say that payments after the year end etc would be checked - surely this is using 'trade creditors' as a base population is it not?

    Kind regards
    Steve
  • Julia
    Julia Registered Posts: 78 ? ? ?
    Coojee

    What steve has said is correct. What other population could you base understatement of creditors on?


    Regards
    Julia (BPP)
  • coojee
    coojee Registered Posts: 794
    The population is where you draw your sample from. For creditors you don't draw the sample from the creditors, you draw it from payments after the Y/E and purchase orders.

    Sarah (FCCA)
  • Julia
    Julia Registered Posts: 78 ? ? ?
    Hello sarah

    I am not disagreeing with you but similarly steve also has a much valid point. I have worked for the QAD as a verifier and have seen tests where the auditor has based such tests on samples of trade creditors extracted for earlier tests. This is based on the same population.

    The auditor can design such tests based on the trade creditors population. There is nothing in the standards to suggest otherwise and I believe such a practice is still very common.

    Julia
  • coojee
    coojee Registered Posts: 794
    Ah, so your talking about the difference between what the standards allow and what actually happens in practice? I've worked in audit for over 20 years so I think I have a pretty good grasp of auditing, well I should do anyway! I also assess Unit 17 and I'm finding that lots of students are ill prepared for the assessment. The thing that they consistently get wrong is directional testing. If I was presented with a Unit 17 paper where they had selected a creditors sample for testing for understatement from the list of creditors, I would assess that task as not competent. Even if they've done the test that Steve agrees with, ie payments after Y/E. If you select a creditor from the list of creditors and agree it to a payment after the Y/E all you've done is agree that that one creditor is valid. You haven't tested for understatement. You need to select from the payments after Y/E and test back to invoices and thereafter back to creditors if applicable. That makes the payments after the Y/E your population not the creditors.

    Sarah
  • Julia
    Julia Registered Posts: 78 ? ? ?
    I think if a student were to suggest such a test and provided it achieved the overall audit objective then I would think it quite harsh to render such a student incompetent.

    Lots of IAP students work in audit practice and thus would apply their practical knowledge to simulation based papers. Also I am of the opinion that if a student uses such judgement then credit should be awarded as auditing is very much judgement based.

    As there is nothing prescribed in auditing standards then clearly assessors (as I have also been) should take students practical experience/knowledge into account here.

    I think we will have to agree to disagree on this one.

    Regards

    Julia
  • coojee
    coojee Registered Posts: 794
    If the student hasn't tested for understatement then I don't see how you can allow the task if that was the requirement of the task. They haven't demonstrated to me that they know how to test for understatement and therefore they haven't achieved the overall audit objective.

    If they work in audit practice then they should know where to select their sample from to test for understatement so they shouldn't get it wrong. If they did I'd be even more concerned than coming from someone who doesn't do it every day.

    But as you say we will have to agree to disagree.

    Sarah
  • Steve Collings
    Steve Collings Registered Posts: 997
    This is getting interesting isn't it!!:001_tongue:

    Can I just clarify that I was not suggesting that a student simply says trace a sample of creditors from the list and check after date payments! Clearly this doesn't test for understatement, more confirms 'existence' rather than completeness.

    In real life audit practice (and certainly what I have done for the last ten years whilst working as an Audit & Technical Manager) is allow audit staff to use a sample of trade creditors (based on the population) that they have used in previous tests (such as after date cash). This sample would then be reviewed for post-date purchase invoices/orders/delivery notes and such like.

    Completeness of creditors can be verified by supplier statement review using the sample extracted from earlier tests.

    Bear in mind, when I contribute to the forums or publish articles on auditing subjects I am writing/advising purely from a "real-life" perspective. I do think there is a dividing line between what happens in a tutorial environment as opposed to what happens in real life. For example, our firm has had numerous quality assurance audit file reviews and never once has my method of creditor understatement been challenged - even by the most experienced and well-respected of auditing professionals, most of which have written auditing related publications. Our firm has always received first-class comments from file reviewers (which aren't that common I believe) and it is this method of testing that we adopt (depending on the audit client in question).

    I also agree with Julia in relation to her comments concerning auditors judgement. Provided the audit procedures are responsive to the assessed level of risk then (in real life) these would be deemed to be acceptable - I also think the same should apply in auditing assessments (I know I applied practical knowledge when I did auditing papers at ACCA level). I do think it is somewhat unfair if a student (for example one of our trainees) were to cite a method, which would be deemed acceptable in practice, were to fail the Unit 17 simulation.

    Kind regards

    Steve
  • Julia
    Julia Registered Posts: 78 ? ? ?
    Hi steve

    I take it the clarified ISAs have not changed the procedures in that auditors still use their judgement in designing tests.

    Julia
  • Primble
    Primble Registered Posts: 734
    god i didn't mean to cause a fight when asking for help. i do not want to be an auditor but mainly picked the unit as i work in industry rather than pracice so want to understand what is going on when we are being audited.
  • coojee
    coojee Registered Posts: 794
    Sorry Primble, it wasn't my intention to start a fight either, I was just trying to help and make sure you got correct information. You are probably more confused than before you asked the question so I am sorry for that. I will try to remember not to help anyone again as my help seems to cause such controversy.
  • Steve Collings
    Steve Collings Registered Posts: 997
    coojee wrote: »
    Sorry Primble, it wasn't my intention to start a fight either, I was just trying to help and make sure you got correct information. You are probably more confused than before you asked the question so I am sorry for that. I will try to remember not to help anyone again as my help seems to cause such controversy.


    I think the word "fight" is a little over exaggerated - this wasn't a fight, more a difference of opinion which is going to happen lots on a message board and it would seem a shame for people not to offer their contributions just because not everyone agrees with an answer - especially in auditing where interpretation and judgement calls often cause disagreement!:001_smile:

    Regards

    steve
  • Julia
    Julia Registered Posts: 78 ? ? ?
    Hi primble

    Apologies for the controversy! My intention was to explain that in the audit world there are not prescribed methods of audit testing and lots of different methods can be used to verify the amounts and disclosure info in a set of accounts. As long as the objective is demonstrated - such as testing for understatement- then regardless of how you base your procedures as long as the procedures generate sufficient evidence then there is no reason to fail a student.

    As Steve points out, and as my colleagues also agree, there is a dividing line between real life and the classroom and judgment calls are needed which not everyone may necessarily agree to.

    Once again I apologise for the controversy.
  • Golebatax123
    Golebatax123 Registered Posts: 54
    Please help!
    where can i find past papers for level 4 External Auditing and cash Management,i'm left with these two modules to complete AAT.Please help
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