Question

In class, we discussed the notion of an audit philosophy of tests of accounts for overstatement and understatement to gain audit efficiencies. Consider the following statements: I. Testing Sales for UNDERstatement, conceptually, also tests Accounts receivable for UNDERstatement. II. Assume that company management made the following journal entry: Capital Asset (i.e. Building) XX Repairs and Maintenance Expense XX If the auditor tests the asset account for Overstatement, then conceptually: Expenses are also tested for Overstatement.

a. I is true; II is true. b. I is true; II is false. c. I is false; II is true. d. I is false; II is false.

Answer 1

Ans is

b. I is true; II is false.

Reason:-

Statement 1

Understatement of sale also causes understatement of account receivable because both are connected by accounting entry

Account receivable Dr

Sales Cr

Statement 2

Entry is

Capital asset

Repair and maintenance expenses account

So there is inverse relationship between both accounts.

If capital assets account is overstated, then repair and maintenance account is understated.

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