population for testing

goldring

It's about auditing again.
I just can't get my head around to understand why
the population from which the sample should be selected for:
Obtain evidence of the existence of a non-current asset
is
Non-current asset register
Not physical asset

surely non-current asset register only proves it in paper not the real existence?

coojee

goldring wrote: »

It's about auditing again.
I just can't get my head around to understand why
the population from which the sample should be selected for:
Obtain evidence of the existence of a non-current asset
is
Non-current asset register
Not physical asset

surely non-current asset register only proves it in paper not the real existence?

It's to do with directional testing. In directional testing we test DR balances for over statement and CR balances for under statement. To test for over statement we start with the figure in the accounts and check that that is accurate, for understatement we start outside the accounts at the source of the transaction and work back up to the accounts figure. Non current assets are a DR balance so they need to be tested for over statement. We're therefore checking that what's in the accounts isn't overstated. That means we need to start from the accounts figure, since the accounts figure is usually taken directly from the register then that is our starting point. We then test on a sample basis that everything in the register is correct. If someone were to overstate assets they could only do it by putting something in the register that didn't exist, we find this out by checking the register to physical assets, invoices, log books etc.

goldring

coojee wrote: »

It's to do with directional testing. In directional testing we test DR balances for over statement and CR balances for under statement. To test for over statement we start with the figure in the accounts and check that that is accurate, for understatement we start outside the accounts at the source of the transaction and work back up to the accounts figure. Non current assets are a DR balance so they need to be tested for over statement. We're therefore checking that what's in the accounts isn't overstated. That means we need to start from the accounts figure, since the accounts figure is usually taken directly from the register then that is our starting point. We then test on a sample basis that everything in the register is correct. If someone were to overstate assets they could only do it by putting something in the register that didn't exist, we find this out by checking the register to physical assets, invoices, log books etc.

Thank you for your explanation.
Am I undertanding this right, Coojee?
In a directional testing, the population is always the next direct source linked to the testing item.
so if the question changed to:
Obtain the evidence of the existence of some inventroy,
the population will be the inventory records, right?
Or
Obtain the evidence of the existence of one trade receivable,
the population will be the sales ledgers?

coojee

goldring wrote: »

Thank you for your explanation.
Am I undertanding this right, Coojee?
In a directional testing, the population is always the next direct source linked to the testing item.
so if the question changed to:
Obtain the evidence of the existence of some inventroy,
the population will be the inventory records, right?
Or
Obtain the evidence of the existence of one trade receivable,
the population will be the sales ledgers?

Both of your examples are debit balances so yes. When it comes to credit balances things get a bit more difficult as you're looking for something which isn't there but should be there. So testing sales for understatment you can't start from the sales records you have to start somewhere else, normally a combination of something like order books and analytical review (to make sure that ratio of purchases to sales looks right - if you were understating your sales you'd still record the purchase of the goods for resale as that will reduce your profit but you won't record the sale, this will depress your GP %age)

Checking for existence is slightly different though but you'd still start from the same place. If we look at trade creditors (a cr balance) we test for understatement so we'd look at payments after the year end and supplier statements to try and find any creditors which should be in the accounts but aren't there. By checking these things we're also verifying the existence of the creditors that are in the accounts. We're not specifically testing for it, it's a by product of the tests we're doing.

goldring

In directional testing do we always test DR balances for over statement and CR balances for under statement?
Is there any situation that tests for understatement of DR balances, or overstatement of CR balances?
e.g. overstatement of creditors ( maybe the management would try to manipulate the accounts, so that it would seem that the creditors' situation improves over the year by overstating in one year and understating the following year?)
then does the same rule applies here? checking payments after year end and supplier statements?
Or am I just being silly here?

coojee

goldring wrote: »

In directional testing do we always test DR balances for over statement and CR balances for under statement?
Is there any situation that tests for understatement of DR balances, or overstatement of CR balances?
e.g. overstatement of creditors ( maybe the management would try to manipulate the accounts, so that it would seem that the creditors' situation improves over the year by overstating in one year and understating the following year?)
then does the same rule applies here? checking payments after year end and supplier statements?
Or am I just being silly here?

You could be required to test for overstatement of creditors or sales but the basic premise that auditors work to is DR's for overstatement and CR's for understatement. Just found this article which sums things up nicely:

http://forum.accafriends.com/topic237.html

goldring

coojee wrote: »

You could be required to test for overstatement of creditors or sales but the basic premise that auditors work to is DR's for overstatement and CR's for understatement. Just found this article which sums things up nicely:

http://forum.accafriends.com/topic237.html

thank you for your link.
I have a better understanding. It seems that it is not really that simple.