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9.32 Evaluating Substantive Testing Results

In the Audit papers:

1. Sales transactions included in Y.E 30/6/14 but evidence from the cut off procedure suggests that the sales should be dated 1/7/14. Worth 1 250 000

2. Warranty expenses in the trial balance for the year to June 2014 totaled 150 000; the provision for warranty claims as at 30/6/13 was 100 000. Evaluation of correspondence suggests that an additional 200 000 in warranty claim could result from ongoing disputes with customers. no provision for these claims have been made. Manager has made a warranty provision for 2014 for 120 000.

3. Redundancy expenses related to re organisation of head office administration incorrectly charged to rental expenses

4. No expense for impairment of assets has been made by management. A drought induced recession has adversely impacted property value in regional cities where 7 branch offices are located (head offices and two branch offices are located in the capital city). Total land and buildings in the trial balance is 5 500 000.

Substantive Testing

b. When would the testing of debtors be carried out?

Test to be carried out prior to year end.

  • Auditor to be adding together the transactions and figure for outstanding credit account balance
  • Sufficient controls in place - tested at interim, Auditor is given flexibility to perform substantive procedures
  • Auditor may also perform roll forward procedures
  • Roll Forward Procedure: Procedure performed during the period between interim, and year end, to provide sufficient and appropriate audit evidence to base conclusions at year end when substantive testing is performed

a. Discuss which debtor would be selected for further testing

Substantive Testing: Audit procedure designed to detect material misstatement at the assertion level related to the account balance.

Usually involves techniques:

  • Key item testing
  • Representative testing
  • Other tests of transactions
  • Analytical procedures

For this question...

Key Item Testing:

  • Select the large travel agents as they represent 75% of the trade debtors of business - ensure that auditor are able to obtain sufficient coverage of the customer base
  • Often, large debtor do not settle their credited accounts within the due date, it would be worthwhile for the auditor to test the risk of misstatement of accounts to large debtors as they would be settling accounts on random dates after the deadline
  • This practice is continue because they contribute greatly to the performance of the business - check these clients

9.28 Selecting debtors for substantive testing:

  • Theme park business with website to make online bookings.
  • Customer base: general public, Local and international travel agents
  • Bookings on credit - complete account application with at least 3 references
  • Auditor test provides sufficient audit evidence that grant is granted after rigorous credit checks
  • However, large travel agents often settle their accounts 60-90 days rather than the 30 days.
  • Only allowed because of the amount of business they provide
  • 450 travel agents as customers, 60 agents = 75% trade debtors

a. Evaluate each item above and explain whether is an error or judgemental misstatement. What action do you recommend for each

b. Which Accounts would be affected and how if an adjustment is made for each item

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