hello everyone and welcome to thispresentation on acca paper f8 audit and assurance. this presentation is going to look at the area of audit evidence. my name's sally and i'm a subject specialist in audit and financial reporting at bpp. so what is it then that we're actually going to go through in this presentation? well just a few things. we're going to first of all have a look at the examiner's comments on questions that have been set
in relation to audit evidence. we're also going to have a little bit of a look at the theory behind audit evidence what is it that you need to know to be able to pass the exam in this area. we're going to focus a bit more on thedifference between what is the test of control and what is a subsstantive procedure. we're then going to bring this togetherpractically when we have a look at a past exam question
and that's the question called tinkerbell toys from the june 2011 exam. so what is it then that the examiner's actually been saying about students' answers in relation to questions on the area of audit evidence? well the first thing that the examiner has pointed out is the examiner's a little bit unsure that students are confident as to the difference between what is a test of control and what is a substantive procedure. now sometimes in the examiner's questionsthe examiner will just say give me audit
procedures or describe audit procedures. but other times the question is much morespecific and it says 6 tests of controls or give me substantive procedures in relation tothe audit of receivables. so it's very very important that you are able to distinguish the difference because if you give a test of control when the examiner has asked for substantive procedures then there's not going to be any marks available for you in the marking guide. the next thing that the examiner says isthat sometimes students are providing too many
tests or too few tests. now often the examiner is saying "give me six tests of controls" and that was an example of tinkerbell toysin the june 2011 exam. some students actually provided eight, nine, or even ten tests when the examiner had actually just asked for six tests of controls. so clearly once you've done your six and you've got your six marks you're just going to be wasting your timeputting down other things where there are no more marks available.
other times where students have done too few answers is if there's say 8 marks available for a particular requirement, again tinkerbell toys part b), we had eight marks for substantive procedures on the area of receivables. now generally, as long as you've describedyour audit procedure fully you will earn one mark for every point that is valid so again we need 8 points, 8 audit procedures in order to gain those 8 marks. other things that the auditor has said is that students are using the word "check"
to start their audit procedure. now the wording is generally "describe audit procedures" and just saying "check this is accurate" that's not describingthat's not sufficient. the answer is therefore too vague and you're not able to earn one whole mark of credit. potentially you might get half a mark but that obviously means you've got to generate so many more tests to score and pass on that particular part of therequirement. the other thing that the examiner has commented on is sometimes instead of
providing a test of control which very much stipulates exactly howyou're going to check that particular control is working andtherefore gather audit evidence, students are just describing controlprocedures in terms of what the internal control maybe could be rather than saying how they're actually going to check it. so let's think initially about the theorybehind audit evidence what does the auditing standard say in relation to how much evidence auditors need to gather?
well it's very simple what the auditing standard says. it effectively says that in order to give your audit opinion, you need to gain sufficient appropriate audit evidence. now sufficiency is all about thequantity and that very much depends on the riskprofile attached to the company that you're auditing so if it's a risky audit and there's a high likelihood that there are material misstatements there and you're worried about your opinion being incorrect in any way then you need to gather more evidence
in order to have sufficient evidence. appropriateness, however, has two aspectsto it, to be appropriate evidence must be both relevant and reliable. now reliability affects the source of the audit evidence in terms of whether your evidence is documented, whether it's coming from vouching aninvoice to check an item or whether it's oral in terms of askingmanagement what they think about the likelihood oflosing
for example a case where they're being sued. so certain types of evidence are obviously more reliable. documented evidence, third-party evidence evidence generated by the auditor all of those are much better than simply asking questions where the answer could potentially be misconstrued. now really for the session that we'relooking at now the actual relevance of audit evidence ismuch more important because we need to generate a test that really focuses on the financial statement
assertion that the examiner is concernedabout.. so for example if we're auditing thearea of payables the biggest assertion that we're worried aboutis completeness. we're worried that there might be extra liabilities that the business actually has which are not recorded in thefinancial statements. that would then mean that the liabilities of the payables are incomplete, they're understated, they're just too low. so we need to make sure that the audittests that we give to the examiner
really ties into the financial statement assertion that we have concerns about. so how are we going to generate different types of audit evidence? well we have a toolbox available to us with lots of different techniques thatwe can use to generate audit tests or audit procedures. now at bpp we talk about aeiou as a handy little mnemonic in order togenerate audit tests.
now a stands for analytical procedures which is purely a substantive test which we'll talk about later on but that's very much looking at trends, looking at ratios, looking at comparisons to see whether the information we've got this year makes sense compared to the financialstatements last year or compared to our understanding ofthe business and the journey that the company has takenthroughout the current period. enquiry and confirmation. well enquiryis an internal thing really on the
whole, asking people information so saying to the management "why did your premises costs go up?" they'll probably tell you that the rental has then been increased for the actual period that you're auditing but what would be better in terms of making the informationreliable is then to go and search out the agreement from the landlord
or go and have a look at some invoices received to give you that annual increase in the rental amount. so enquiry is very much a verbal thing, a fairly weak sort of audit evidence but it can be used as a starting point to then go on and make it a bit more reliable. confirmation though is a written thing so you might ask your client to send a receivables confirmation or receivables securisation
to their customers where they've then confirmed to the auditor atthe end of the year how much that particular customer owes them and that would then give you confidenceabout the existence of the debt but obviously it won't prove that they're actually going to pay the money to the company. and the third one that we've got available to us is inspection so with inspection you can say let's go and physically verify let's go and inspect a non-current asset in order to check that it actually exists.
so again in terms of your tests just sayingcheck non-current assets isn't going to gain you any marks. you need to say for a sample of thosenon-current assets i'm going to physically verify them to ensure that they exist and that will then gain you your mark. the next one that we have is observation this is particularly good for tests of controls because with a control you can always go and observe and watch it actually happening
and that will then help you know that it's beingcarried out properly. the other things that you can observe you can also observe the condition of inventory, if you want to see whether inventory is saleable or if it's got any damage or looks a bit obsolete then by observing the condition of it that might give you a bit of ahighlight that there's going to be a problem with the valuation of inventory and then later on you can follow up thecost and the net realisable value of inventory
to work out which value needs to go into the financialstatements so that it's valued in accordance with the accounting standard. the last thing that we have is a little bit tenuous, it's recalculation so for the aeiou the u is recalculation or reperformance if you prefer to think about it that way. so we're thinking there are there items thatwe can recalculate? so we could for example recalculate the depreciation charge
in order to verify that it's being calculated in accordance with the accounting policy that the company is stating in its accounts. we could re-perform some checks that the company has made again to make sure that they've beencarried out accurately. so the idea behind aeiou is really very much just to give you a little
toolbox that you can dip in and out of when you're trying to generate audit procedures for a particular area. think "is there something that i can analytically review?" "is there something that i could inspect?" "could i recalculate something?" and thatwill then just help you generate a little bit more breadth to your answer. the next thing that we want to talk about here is the difference between tests ofcontrols
and substantive procedures and this is absolutely fundamental to scoring you some great marks in the exam. now in terms of a test of control, it sounds absolutely obvious but in order to be doing a test of control you have to identify an internal control that the company has in operation and then you have to test it by checking you know that it's working properly by reperforming it,
by observing it, by inspecting to see thatan authorisation signatory has happened. there are lots, again, differentways that you can test that that test ofcontrol or that that control rather is actually operating as it should be. so with a test of control you must identifythe control from the scenario on the whole and then think "how am i going to verify that that control is actually working?"
"what is the control? what check can i do to make sure that i'm happy it is operational?" with a substantive procedure though there are two types of substantive procedures. there are analytical procedures and tests of detail which is where you look at things like invoices in order to check the amount, you look at non-current assets to checkphysical existence.
so with the substantive procedure, you're very much looking at a number or an asset or the detail. the key thing is you're not looking at an internal control because that's tests of controls. so if your examiner is asking for tests of controls rather than substantive procedures, you need to identify the control, you need to figure out how you're going to verify it. so to give you a couple of examples, ifwe're looking at the area of payables, which
i've already mentioned, and we are concerned that the payables figures is actually understated, it is not complete in the financial statements, how could we maybe use a test of control to check the completeness of payables and how could we check it using a substantive procedure?
now in terms of the examples, as a test of control we could use thesupplier's statement reconciliation process. now at the end of each month lots of suppliers will send their companiessupplier statements saying all the transactions that have gone between the supplier and the companyduring the period and what you'll be able to do, hopefully, is reconcile the balance the supplier saysthe company owes to the balance that the company thinksthey owe
according to their purchase ledger. so you can go through a ticking off process between the two bits of information and see if you can agree those final balances at the end of the month. now obviously at the end of the year that'sa worthwhile exercise to do because the auditor could see if you can reconcile what you think youowe as a company to what the supplier thinks you owe as an external third-partyconfirmation then that gives good evidence about thecompleteness of that balance. so how would we check that using atest of control?
well we've got detail down here a way we could write that audit procedure out. so we could for a sample (you're not going to have to look at every single supplier statement reconciliation) but for a sample of those supplier statement reconciliations we could inspect to see whether the appropriate control has been done.
now there could be lots of different controls. one thing could be that the actual reconciliation is performed and youcould inspect to see that that's been done but you could also have the internal control where once a reconciliation has beenperformed it's reviewed by a manager or a supervisor and they then need to sign that reconciliation as evidence thatthey have reviewed it and are happy with the reconciling items,
they're happy with the balances that havebeen reconciled between the two figures. so you can inspect a sample of those supplier statement reconcilations in order to see the evidence that that signature, that authorisation,has been put onto the reconciliation and therefore the internal control has worked properly. that will then give you confidence that the reconciliations are accurate, and therefore that gives you some audit evidence towards the completeness of the balance of payables.
in terms of using a substantive procedure, what we could do is in the new accountingperiod have a look at the payments that the business is making to its suppliers and we'll get that information from thecash book payments. now we need to do this in the post year-end period because at the end of the year the company is saying how much they thinkthey owe to the supplier and presumably they'll then go on to payoff those balances in the coming months. so therefore what we need to be thinkingabout
is if they're making really massive payments in the post year-end period far greater than what's actually in the year end financialstatements then possibly there's a good reason for that but possibly it's that the year-end payable was actually too low, it was understated and therefore not complete because they're actually paying off more than what they said they owed at the endof the year. so we would inspect the cash book payments
to see what payments are being made postyear-end compare those to the year-end payable and that will then give us an idea about completeness of that balance. now i said that we'd be bringing this altogether and practically have a look at a past exam question so this is tinkerbell toys company fromthe june 2011 exam. we're just going to have a look at parts a), b) and d) and those are the parts of the question that focus quite heavily
on audit procedures. part a) is all about tests of controls and part b) is about substantive procedures as is part d) in relation to sales or revenue. now let's have a look at the requirement. reading the requirement is fundamentally important to passing the auditor's exam because the examiner is saying quite often students are answering the question they hoped would have been asked rather than the question
that they actually had presented to them in their exam paper. now if we have a look at part a) first of all, i've done some annotation bearing in mind the examiner's comments onthis area of key things that you as a student need to realise when you're reading this question requirement. so in terms of what we're being asked to do for 12 marks and you can work out thetime allocation - it's about 21 minutes or something like that,
we are recommending 6 tests of controls. so you can see that we've got a specifiednumber there is absolutely no point putting down 8, 9, 10 tests of controls because the examiner's just asked for 6. so we need to think before we write and then put down our best 6. it's test of controls that we've been asked to do so any analytical procedures which are a substantive procedure are not going to
earn us any marks whatsoever. we also need to say "well what are these tests of controls about?" and they're about the sales system of tinkerbell. now if you have a look at the actual exam question you can see it's broken down intosuccinct paragraphs and it's the middle section that's really giving us detailabout how the sales system works so you need to make sure that we focus on thequestion requirement and apply it to the actual scenario to make sure that our controls
are relevant. and we also need to explain the objectivefor each test. so that's going to give us the other half of our marks so one mark for the test of control and then a second mark for saying "okay how is it that we're actually going to be justifying why that test is done, what is the point, what's the objective, what's the reason
that we actually undertook that particular test of control?" now in terms of presenting your answer, a columnar approach is absolutely perfect where you've got requirements that say "tell me about this and tell me about something else" becausethen it forces you, once you've answered the first part of the requirement in the first column, it forces you to put something in thesecond column. the marker can then just go tick one mark for an accurate description inthe first column and then tick for the
second mark in the second column as long you've explained why the test needs to be done. now with the objective of the test, just saying to check that the control is operatingeffectively" isn't really good enough you need to really focus down on what the control was doing and then say "is it to make sure that we only sell to valid customers or to make sure that we can only sell to customers who are able pay us the money that they will owe us?"
so you really need to think for yourtest of control exactly what it is that it's giving you comfort about. so that's the requirement for part a), let's have a look at the scenario. now in terms of the scenario, this is just the first paragraph we've got the second and third paragraphs in a moment but what i would do is i would go through the scenario really highlighting or annotating the scenario paragraphs as i go with the things that i want to say. now you might want to do this in yourreading and planning time. remember for your f8 exam
you get 15 minutes reading and planning time at the beginning and question 1 is a good place tospend probably 5 or 6 of those 15 minutes because you can then digest the scenario, think about what it is that the companydoes and how it's operating and then do these annotations in order to then be thinking what are the key worries that i would have from an audit perspective
or whatever it is that the requirement isasking you to do. now in terms of looking at the actual scenario, it says for the sales ordering system that each customer first of all has a unique customer account. so that's the control that they're operating, they've assigned every single customer an account so when they process an order for a particular customer it would then go by reference to that account number. now, we need to make sure
that obviously that control is working so as a test of control what we can do is try and defeat that, try and defeat that control by saying okay let's come up with a number that's just made up or a number that's maybe just one digit wrong and actually see if we can process an order for that customer number and if the control is working then the system, the sales system will refuse to process that order
because it's not a valid customer number. so really in my reading time i'm just writing there use an invalid or a fictitious account number so it then gives me an idea to think about, to generate a test of control. as we read on it then says the orders are entered by an order clerk and the system automatically checks that goods are available that the order will not take the customer over their credit limit. so again there's an internal control in place whereby customers are being assigned credit limits
so they can't rack up massive debts with us which they then potentially might not be able to pay. so what we could do is then just focus on that control of the credit limit and say again, "ok, let's try and defeat it, let's try and process an order that will take that particular customer over their predetermined limit and if the control is working, then it would not allow that invoice to be processed.
so, it's all about thinking what is the control that exists, how could we inspect it, how could we observe it, could we defeat it, in order to see whether it's working. as we go through the scenario, there's actually quite a lot in this first paragraph and as you can see i've made some annotations there. there's the credit application, we could inspect that to make sure that it's being done, being signed off by the appropriate level of authority and there's also the issue about somecustomers getting discounts and again we could try and process a discount for a customer that's not entitled
then the system should not allow that to happen. so effectively by looking at the scenario and identifying the controls we can then say how we're going to verify them, how we're going to test them but remember for the other part of the six marks we also need to say why, what's the objective of doing that test of control. now we've said there's twelve marks availablefor part (a) and we need six tests of controls. so there's four there in that first paragraph.
now that might be a bit heavy in terms of the amount of work that you're doing on that paragraph so it is obviously worth reading all three sections of the paragraph on the sales ordering system because you might want to make sure thatyou get breadth of answer, you get coverage of the scenario andmaybe pick two or three points out of this first paragraph aim for another two in the next one and another one or two in the last one so make sure you get breadth across the whole of your answer
and that will again just open up the marking guide to you because there'll be different areas of the scenario which have different allocations of marks and you need to access as much of it as you can. so what we've seen there by our annotation of the scenario is really very much how we're going to identify the controls and the types of tests that we can then think about performing. the question then remains how we're actually going to write this down in our answer so we get one mark for the test of control, and one mark for a proper explanation
of the objective of the tests. now again, i've written down just some examples of how you might want to write out your answer, try and avoid the word "check" because the examiner has said that we need to describe audit procedures and just saying check this, check that doesn't give sufficient detail for you to get that one whole mark from the marking guide. so in terms of how we might think about that first point which is about the
customer number we might say to the examiner we would like to process an order using either an invalid account number or a fictitious account number in order to see whether the sales system will block that order being processed.
then in terms of my objective in the other half of the column why do i want to do that well it's not just to check that the control is effective it's much more than that much more detailed than that and we need to say to ensure that the orders are only accepted from those valid customers because those are the onesthat have been credit checked and have been given that account number. so really what is the detailed test of control we want to conduct and why
is it that specifically we need to be doing that or we want to do that. to give you another example of a test from the first paragraph that you could have put down, this picks up on the discount point that we saw at the end of that paragraph. our test could be to attempt to apply a discount to a customer who is not entitled to a sales discount again why is it that we're doing that? to ensure that sales discounts are only awarded to customers who've been authorised and approved to receive those discounts.
so it's very much writing out a little bit of a story if you like relevant to the scenario so people know what is it that i need to go and check, what do i go to, where do i find the information what am i looking for, what am i verifyingagainst and then in the second column why am i doing it. let's have a look at the second paragraph in that sales ordering system not so
much in this one. it says that once an order is entered, an acceptance is sent to the customer either by email or by normal post. now again what could we do that's an internal control that exists? well we can inspect an acceptance, so once they've received an order we can inspect the acceptance to obviously check that it did get generated and it did get sent out
or we could observe the process whereby when we're with the ordering clerks, we could watch them watch them process that order and then see that email being generated, see that letter being printed and posted and again then we know that the control is operational. other things it talks about in this paragraph at the bottom, is the warehouse team actually getting the goods ready for dispatch, so it says the warehouse team pack the goods
from the dispatch list and before they're sent out a second member of the team will double check the list to the goods dispatch note so that's making sure the right goods are sent and then that would then be dispatched accompanying the goods. so again we could observe that process to make sure that it's happening as the client is telling us that it should. so again how would we actually write that down in our answer, i just picked on one of those, that second point there
we could have as our test of control that we're going to visit the warehouse and we would then observe the process of the goods being dispatched. now we need a little bit more information toget our full mark what is it that we're actually worried about vouching or verifying? we're then going to verify that the goods are double checked back to the goods dispatch note before they are actually sent out so really verifying that that control of double-checking
is operational by observing it happening. why do we want to do that in terms of the objective, to earn our second mark? well we want to make sure that obviously the company is sending the right goods to the right customers so they've got customer satisfaction, repeat orders and things like that. in terms of the final paragraph in the sales ordering system, again nowhere near as much in that short paragraph as we had in the first one but it says once dispatched a copy of the goods dispatch note is sent to the accounts team
at the head office and a sequentially numbered sales invoice is raised and that is checked back to the goods dispatch note. now remember sequential numbering is a brilliant internal control, we like everything to be sequentially numbered because then we can just run a check through the system to see if there are any numbers missing and then follow up you know why that dispatch note wasn't used why that invoice wasn't recorded in
the accounting system. so sequential numbering is a brilliant type of internal control that the company could use and we could check as auditors. so knowing that the invoice is raised and that it's checked back to the goods dispatch note, well we could obviously inspect that that process is happening, we could observe that it is happening and inspect the documentation that it has happened and we can obviously pick this goods dispatch note up at random and say
can we see evidence it has been verifiedand vouched to an invoice in terms of its details order quantities and all of those bits and bobs that it needs to have documented on it. the other bit of the scenario says that periodically a computer sequence check, so just picking up on what we've just been talking about that's performed to see if there have been any sales invoices where there are numbers missing we'd obviously expect the period to have the numbers from one
hundred twenty-three up to say three hundred and forty and if number two hundred and seven is missing that begs the question why maybe that sales invoice you know wasn't raised and it shouldhave been or maybe it wasn't and that's fine but again seeing that it's happened we need to then focus in on that to see whether that sequential number control is working properly or not.
so how might we present our answer? well just picking up on that final point rather than both of them we could review that check that sequence check that the computer has undertaken, have a look at the last one that they've done, in order to identify if there were any invoice numbers that had been omitted and then if there have we need to follow itup because we need to know why. it could be for a valid reason, it could not be for a valid reason.
so once we spot that there's an omission, we then need to go and discuss it with the appropriate person that could be the dispatch people, it could be more likely the sales invoicing people or some sort of manager or supervisor to verify you know what happened to that particular item. now why is it that we're doing that test? well it's all about completeness of income or completeness of sales revenue because the idea is if all the invoices that they've raised during the period
have then been recorded in the accounting system then that sales figure should be as complete as it possibly could be. but if there's a few invoices missing then potentially there's revenue earned that's not being recorded in the financial statements. so that really just gives you an idea about how we can use tests of controls. we need to look at the scenario, we need to identify the internal control, focus on how we're going to verify it, maybe using from aeiou
not the a because that's substantive, but the eio and u, and then give a specific test of what we want to check and then try and may be tie it into a financial statement assertion if possible and then the objective is very much why is it that we are concerned that it operates the way that it does. looking at part b) to the question tinkerbell toys this was actually done very well by the examiner sorry not by the examiner by the reports that the examiner has
suggested rather. it says describe the substantive procedures that the auditors should perform to confirm the receivables balance. now the reason i think that the examiner issaying that this was, on the whole, done quite well is because receivables is a key area on the statement of financial position and it's a key area that students will most likely have practised and be quite good at generating audit procedures in relation to receivables.
so i won't spend as much time on this because it was done well but again thinking how much do we actually need to write? now part b) is for 8 marks and we know that if we describe properly an audit procedure that we'll get one mark for that detailed audit procedure. so therefore we need to come up with 8points. and that was the examiner's main criticism in this part of the requirement is that students sometimes didn't put eight items down and even though they probably knew
8 tests they weren't then able to access the full 8 marks according to the marking guide. so we need to just be thinking substantive procedures. could we analytically review something, do some analytical procedures, are there tests of detail that we could undertake such as inspecting invoices, looking at cash received from customers, looking at the aged receivables listing? we're going to avoid controls because we're looking here at substantive procedures.
now in terms of what we could write as our answer i have put here some fairly wishy washy you know answers that really are going to score us zero possibly half a mark if we're very lucky and the examiner's having a great day but more likely zero marks. so what some students might have said is ok, i'm going to check the valuation of receivables. well we're looking at receivables i've talked about valuation which is a financial statement assertion
so surely that's okay obviously i've used the word check which the examiner doesn't like but i've talked at least about an assertion, and i've tied it into the area but the examiner isn't going to be able to give us any marks for that because the examiner's going to say well how are you going to do that? just saying you're going to check the valuation that doesn't mean that i can give that testto an audit junior and tell them to go off, find the relevant documentation, ask the questions they need to do inorder to gather that evidence i need to be much more specific.
so a little bit more specific maybe we could just say we're going to agree that the receivables are recoverable because valuation is all about are they actually going to pay is that balance fairly stated, can the money be recovered from the recievables and again the examiner's going to say well how are you going to do that? that is not good enough to earn yourself any marks. so maybe we can just say well we'll check the cash that has been received from customers and to that the examiner's probably going to say
when? and how? so again none of those are really goodenough to get us any marks certainly not the whole mark that we are desperately trying to earn. so what should we do instead? well again we just need to be specific in the audit procedures that we write down. so one thing we might say is we're going to review the cash book receipts, money coming into the business from our
customers and we're going to do that post year-end because at the end at the date of the statement of financial position we have this receiveables balance which is owed to us by our customers and we want to make sure that that's recoverable i.e., we're going to be able to collect in those monies after the end of the year. so if we look post year-end at the cash that comes in then what we can do is trace that to the amount that they owed at the year-end and we can see that year-end balance being recovered bit by bit and that gives us confidence that
the amount is fairly stated, the valuation is okay in the financial statements. other things that we could do once we've looked at what cash has come in we could discuss any significant balances which are still outstanding. now the idea really is you discuss those things with the credit control department because those are the ones responsible for managing the sales ledger on a day-to-day basis. they'll know the customers, they'll know the position in terms of can
they pay or can't they pay and they'll be the ones best placed to give you that information. so we're doing that, why are we doing that because it might be that somebody needsto have their balance written down or maybe some sort of allowance made against that balance to take it from the amount in the accounts down again to a recoverable amount. so you can see there those tests, yes they're longer but they're very much more specificexactly what do i want someone to do
and why tying into those assertions that we have for the financial statements. the last item part that we're going to look at in this question is item d) or requirement d) now this is still all about describing substantive procedures so really it's exactly the same requirement as we had for part b) but this one is looking at confirming tinkerbell's revenue. now the examiner has said students didn't do anywhere near as well on this part, part d)
as they did on part b). now the only reason i can think of for that is because we like the area of receivables we're maybe not so happy checking income statement balances such as revenue or purchases or other sorts of expenses. so generally on the whole part d) wasn't done terribly well. it's exactly the same requirement, we've got to be specific, we've got to think about the
assertions that we're trying to test and we're going to get one mark as long as we describe that test properly so we need to generate four points. so just to give you an idea of the types of things that we could have used, remember aeiou analytical review, analytical procedures is particularly a really good tool to generate some evidence on the income statement. cut off is also quite important and if you calculate gross profit percentage
and it moves from one period to another, that might just be because the company has done better or worse but it might actually be that there's a cut off problem in terms of they've got next year's sales in this year's figures or vice versa or they've got purchases which are in the wrong accounting period. and if that cut off is wrong either for sales or for purchases then that is automatically going to make your gross profit margin move not because of better or worse performance
but purely because there's an error in the accounting records. so the test that i've generated for part d) i haven't written 4 out, which i would need to do in order to score full credit but i've given you some examples of how we can use analytical procedures and how we can also test the area of cut off. so let's just have a look at those. firstly, to do analytical procedures, we might get a breakdown of the income.
now we know that tinkerbell toys makes children's toys, they focus on building blocks and things like that so there's going to be lots of different products, i'm sure, that they will manufacture. they're not just going to have one building block that they make and that's it. so what we could do is maybe ask management for an analysis per different type of toy category, how much their sales were for each of the months of the year, for this year and also for last year. we can just put that information on a simple spreadsheet or just use a calculator
to write down the difference, the variance from one period to another. and it might be that there are certain months which jump out as being you know unusually high or unusually low and then we can hone in on those areas and then go and ask maybe the sales director for explanations as to why those particular variances have been seen in the information we've got to try and back up what we're told with some documented audit evidence to see whether or not we think that that sales income figure
is fairly stated. other things we could do to check cut off which is test 2 there we're going to do this for a sample of items, we're not going to check every single goods dispatch note and make sure it's in the correct accounting period but for a sample of goods dispatched notes just before the end of the current year and just into the next year what we can do is have a look at the actual delivery, when that took place, was it
pre year-end or post year-end and check that the sales invoice that belongs to that note has been recorded in the correct accounting period as well. okay the final test that we might like to do in relation to sales that i've written up for you is to look at credit notes that have been issued post year-end. now obviously when they sell goods to their customers and customers are people that are then going to be owning toy shops you might find that there are some returns that come back so credit notes will be issued in the post year-end period
in relation to sales made at the very end of this accounting period. so we could also review a sample of the credit notes that they have issued post year-end and see obviously if they relate to pre year-end sales and if they do whether they've put through the appropriate adjustment to reduce sales because otherwise the sales figure in the financial statements will be too high.
so there's an example there of three particular tests that you can do, there are loads more tests that you can do in relation to sales revenue and you needed four to score full marks on that area. well that brings us to the end of this presentation and what we've looked at really is the difference between tests of controls and substantive procedures
and we've also looked at the level of detail that you need to put to describe your audit procedure in order for the examiner to award you one whole mark rather than no marks or just half a mark. so i hope that you'll build this into your question practice and wish you every success with your exam.
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