Question

For each of the following substantive procedures, first note whether it is a test of details of transactions or a test of details of account balances. Then decide for which assertion the test provides the best evidence.

Trace large cash receipts and payments to the source documents and the general ledger.

Examine copies of note and bond agreements.

Recompute accrued interest payable.

Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.

Examine due dates on notes and bonds for proper classification between current and long term debt.

Answer 1

1. Trace large cash receipts and payments to the source documents and the general ledger.

answer :- Test of details of transaction

reason :- because tracing cash receipts are in the nature of events occured during the period not representing financial positions individually of the group to which they belongs i.e. cash balance.

2. Examine copies of note and bond agreements.

answer :- Test of details of transaction

reason :- because Examining copies of note and bond agreements are in the nature of events occured during the period not representing final financial position individually of the group to which they belongs i.e. financial liability whether short term or long term.

3. Recompute accrued interest payable.

answer :- Test of details of account balances.

reason :- because recomputing accrued interest payable directly contributes to the current liability that means it is shown in balance sheet under current liability head which contributes to representing financial position of the organisation.

4. Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.

answer :- Test of details of transactions.

reason :- because given assertion itself is related to the review of debt transactions not balances.

5. Examine due dates on notes and bonds for proper classification between current and long term debt.

answer :- Test of details of account balances.

reason :- because examining due dates to assure the proper classification of notes and bonds as current and long term debt to be represented in balance sheet to represent true and fair view of financial position of the organisation.

Amongst all of the 5 assertions, assertion 3 provides for the best evidence because

assertion 1 :- there may be some small amount cash reciepts and payments also which could be left out while auditing.

assertion 2 :- copies may be altered. But if there were original documents they would have provide higher assurance.

assertion 3 :- recomputing involves totally separate calculations which is further used to compare with the provided figures. Calculating separately on own provides higher assurance leading to least chance of undetected misstatements in figures. That is why it is best amongst all.

assertion 4 :-just reviewing near the date of closing ignores the misstatements occurred during the period earlier than the closing month which could lead to misstatements.

assertion 5 :- examining due dates to classify as current and long term may be incorrect because the nature of debt may have changed at the time of year end. For example:- debtor declared insolvent or charged with severe penalties.