7041.1 Application of tests of details

Jul-2017

Cash

Confirmations of balances and existence of pledges of cash as collateral or compensating balances or identification of debt arrangements.

(E/O, V, C, RO, PD)

Targeted test—ordinarily 100% or targeting accounts with significant activity and/or balances. See OAG Audit 7054 for approach to bank confirmations.

Testing bank reconciliations by selecting reconciling items to test. (E/O, V, C)

Where it is not practical to test all reconciling items, either target high value or high risk reconciling items or follow the guidance at OAG Audit 7580 for testing reconciliations to see that cheques have cleared subsequent to year-end.

Bank transfer test—selecting transfers before and after year-end. (E/O, V, C)

Targeted test—selecting transactions that are more subject to risk.

Test the mathematical accuracy of the cash receipts and disbursement journals (C, A)

Accept-reject testing of the mathematical accuracy of the cash receipts and disbursement journals.

Accounts receivable

Send confirmations on high value or high risk accounts or invoices. (E/O, V, C)

Targeted test based on monetary amount or risk. See OAG Audit 7055 for approach to accounts receivable confirmations.

Send confirmations on account balances or open invoices not targeted. (E/O, V, C)

Audit sampling.

Testing a selection of account balances or invoices (not high value or high risk) through examination of subsequent cash received either using specialists/experts or the client to identify cash receipts. Perform alternate procedures on amounts not collected, such as examination of shipping documentation. (C, E/O, V)

If not at high controls reliance, sample items and agree to cash deposit and remittance advice from customer. Note: samples are selected from the listing of customers or invoices and not cash collected.

(Note: If at high controls reliance, we may agree items on an accept-reject basis back to a cash receipts run which has been subjected to controls testing.)

Sales/AR cut-off testing for entities that have effective sequential controls over invoicing and shipping such that risk of cut-off error is in last or first shipments of the period. (C, CO)

Risk based targeted testing if able to assess the cut-off risk as being related to the last/first transactions. For example, test the last 10 shipments prior to year-end and the first 10 shipments in the new period.

Sales/AR cut-off testing for entities that do not have effective sequential controls over invoicing and shipping. (C, CO)

Accept-reject test (e.g., test a minimum of 25 items prior to year- end and 25 items after year-end for entities that ship more than 200 items a month—minimum assumes no exceptions tolerated).

Review of accounts for the reasonableness of the allowance for bad debt by reviewing long outstanding balances. (C, V, E/O)

Targeted test of outstanding balances subject to higher risk of non-collection (e.g., significant items over 90 days outstanding).

Roll-forward of early substantive testing of accounts receivable by testing sales, cash receipts and credit transactions in the roll-forward period. (C, V, E/O)

See roll-forward testing guidance in OAG Audit 7015

Test bad debt write-offs. (V, E/O)

Targeted test of high value or high risk balances written off during the period or perform audit sampling if the bad debt write-offs consist of a large number of small value debtors balances.

Test accounts receivable balances factored, assigned or pledged as collateral. (C, E/O, CO, RO)

Targeted test of those account balances that have been factored, assigned or pledged as collateral and agree terms, conditions and balances to supporting documentation

Prepaid expenses

Test prepaid expense analysis (C,A,E/O,CO)

Targeted testing of high value or high risk items or audit sampling.

Confirm details of agreements from which prepaid expenses arise with third parties (A,E/O)

Targeted testing of high value or high risk items or audit sampling.

Inventory

Observation of physical inventory by performing recounts of client inventory counts. (E/O, C, V)

For most inventory observations we ordinarily plan to conduct 60-120 test counts (30-60 floor to count tag and 30-60 count tag to floor). It is generally appropriate to target the items to be counted based on higher value or higher risk. All differences resulting from our test counts are evaluated as to their significance (see OAG Audit 7062).

Audit sampling would be appropriate in certain limited circumstances such as when we

• expect significant count exceptions, and

• combine test counts with price testing.

Perform the test counts when the client is not counting and feels comfortable that their cycle counts or other procedures have provided accurate quantities. We project any errors identified as a monetary value.

Tie in of physical inventory counts to the final priced inventory run. (E/O, C, V)

Accept-reject testing of quantities both from the OAG count records to the final run and from the final run back to copies of count sheets. This can be a separate test from test counting.

Price testing, including standard cost testing (V)

Targeted testing or audit sampling.

Testing net realizable value of client run of gross margin by product or NRV. (V)

Targeted testing or audit sampling as NRV results of items selected could be projected, if representative of the population of inventory.

Review the need for and calculation of valuation provisions (V, A)

If material, target test inventory items that are subject to higher risk of obsolescence, items which are slow-moving, or included in the list of scrapped or damaged items.

Test inventory received after year-end for items in transit (CO)

Targeted test high value or high risk items, or accept-reject test goods received after year-end for items relating to the year-end not included in the closing inventory.

Fixed assets

Testing fixed asset additions, sales and retirements. (E/O, V)

Targeted testing of high value or high risk items. Assess whether additional evidence is necessary after considering results of other audit procedures performed, including tests of controls and substantive analytical procedures. If necessary, as a last resort, perform audit sampling.

Testing repairs and maintenance expense. (C, V)

Targeted testing of high value or high risk items or audit sampling.

Recalculating depreciation expense by selecting individual items for recalculation. (V, C)

Reasonableness analytic tests at a disaggregated level may provide sufficient evidence or reduce the level of assurance needed from individual items or audit sampling.

Physically inspect fixed assets (E/O, C)

Accept-reject test assets or targeted testing.

Consider whether adjustments are necessary to reflect the inability to recover the carrying value of assets due to replacement, changes in client business, property held for sale, valuations performed, etc. Record adjustments as appropriate. (V)

Targeted test of high value assets or assets susceptible to permanent diminution in value.

Review valuations performed on fixed assets (V)

Targeted test of high value assets re-valued during the year.

Accounts payable

Perform a search for unrecorded liabilities on all accounts payable sources (disbursement records, processed and unprocessed invoices, receiving documents for goods received and not yet invoiced, etc.) to determine the completeness and accuracy of liabilities and whether liabilities are recorded in the proper period (cut-off). (C, V, CO)

Targeted testing for both significant value invoices and those subject to higher risk of inclusion or exclusion from the proper period (e.g., closer to year-end).

Ordinarily, if we perform appropriate substantive analytical procedures on completeness of expenses, and set our targeted testing % at an appropriate level, it would not be necessary to perform audit sampling of the remaining balance after targeted testing unless significant or multiple misstatements were detected by our testing resulting in unacceptable risk.

Note: The reason accept-reject testing would not be appropriate is that we typically find unrecorded liabilities when performing a search. After finding one or two exceptions (unrecorded liabilities), we would consider rejecting the test, which would leave us with no ability to assess the impact of potential unrecorded liabilities.

Accruals, provisions and other liabilities

Examine supporting documentation for accruals, provisions and other liabilities. (A, E/O)

Target test high value or high risk accruals or provisions. Assess whether further assurance is necessary after considering results of other audit procedures performed, including controls testing and substantive analytical procedures.

Debt

Send confirmations to lenders for balances, and significant terms for high value and/or risk (e.g., new, unscheduled payoffs, refinancing, etc.). Note that, in connection with our cash testing, we ordinarily send inquiry confirmations for all banking relationships. (C, V, RO, PD)

Targeted testing (generally 100%).

Test, to an extent based on materiality and inherent risk, notes payable and long-term debt, by examining documentation that supports additions, renewals, payments of principal and interest and redemptions. (A, E/O, CO)

Targeted testing (generally 100%).

Covenant compliance and testing of other key terms. (RO, PD)

Targeted test—Generally, targeting 100% of significant borrowings with covenants.

Capitalized lease testing (confirmations or examination of lease contracts) including changes, revisions, extensions, and renewals of existing leases. (V, C, RO)

Targeted test of capitalized leases based on higher value and/or risk. If there is a large volume of capital leases or lease transactions where targeted testing would not be efficient, audit sampling could be applied to test the accuracy of lease capitalization.

Determine whether appropriate information, including five year payment schedules and debt covenant violation, has been obtained for required disclosure in the financial statements. (PD)

Targeted testing (generally 100%).

Equity

Confirm shares outstanding with third party transfer agents or registrar. (C, V, E/O)

Targeted test—Targeting 100% of each class of shares, including both common and preferred.

Verify recording of repurchases and issuances of shares, including purchases and re-issuances of treasury stock. (V, RO)

Targeted test—Generally, targeting 100% of transactions.

Testing of dividends paid and payable. (C, V, E/O)

Targeted test—Generally, targeting 100% of balances and transactions.

Revenue

We ordinarily presume that there is a risk of material misstatement due to fraud relating to revenue recognition.

Develop auditing procedures based on the understanding of the entity and its environment, including the composition of revenues, specific attributes of the revenue transactions, and unique industry considerations. If there is an identified fraud risk of material misstatement, consider:

• Disaggregated substantive analytical procedures.

• Confirming contract terms and the absence of side agreements.

• Inquiring about shipments near year-end with unusual terms and conditions.

• Performing sales and inventory cut-off tests, including being physically present.

• Other procedures to respond to identified fraud risk.

Depending on the facts and circumstances, and if the presumption of fraud risk can be overcome, substantive analytical procedures may be sufficient testing. If not, consider the following:

• Targeted testing of material or unusual transactions or significant risks.

• Audit sampling of revenue transactions.

Refer to OAG Audit 7011.1 for additional information on designing revenue testing strategies.

Expenses

After performing precise substantive analytical procedures, if additional evidence is needed, perform other tests of details, based on facts and circumstances (i.e., testing the details of payroll).

Depending on the facts and circumstances, substantive analytics may be sufficient testing. If not, consider the following:

• Targeted testing of material or unusual transactions or significant risks.

• Audit sampling of expense transactions.