Auditing Assignment free essay sample

Substantive testing involves directly obtaining audit evidence to detect material misstatements at the assertion level. It is different from tests of control as we do not rely on the internal controls to detect or prevent material misstatements. Substantive testing is divided into two parts which are analytical procedures and tests of detail. Analytical procedures involve comparing accounting information with previous years, budgets and the ratio analysis, whilst tests of details focus on testing the account balance and transactions. There are various procedures that the Auditor can carry out to obtain sufficient and appropriate audit evidence to assess whether the equipment have been fairly and truthfully valued under AASB 116 or impaired correctly under AASB 136. The main assertions at risk are the existence, rights and obligation and valuation/allocation assertions. One of the main procedures carried out would be the physical examination of the equipment themselves. This would confirm that equipment recorded on the balance sheet actually exists and identify any unrecorded or unutilized equipment that exists. Additionally, it allows the auditor to assess the condition of the equipment on its face. This includes assessing whether it is damaged or not and if the company actually impaired the equipment to reflect the recoverable amount if there actually was damage. Thus this would verify the existence, completeness and valuation/allocation assertions. Substantive analytical procedures are useful for examining equipment as well. The auditor can compare the balances of equipment with previous years and budgets to detect changes or trends for the auditor to focus on. Changes that can be detected include miscalculating the depreciation expense for the year if there was a large increase or decrease in depreciation, change of depreciation methods and purchase or sale of equipment. Recalculating the depreciation expense is a method of verifying that depreciation has been calculated correctly and is accurate as some depreciation methods are very complex. It can also inform the auditor the method of depreciation used for the year, whether it has been consistently applied over the previous years and if the deprecation method selected best reflects the pattern of benefits from the equipment under AASB 116 instead of reporting the most beneficial depreciation expense amount. Inquiring the operating management and personnel about equipment in detail is another viable procedure. The auditor can ask and confirm whether there have been any purchases or sales of quipment during the year, any revaluations that have occurred due to change in market value, the revaluation model utilized and even the storage location of the equipment themselves that would affect the account balances. Additionally, the Auditor can ask whether there has been a change in the depreciation method and the reason behind the change if there was. Hence, the assertions affected are existence, completeness and valuation/allocation. If the auditor does not have sufficient knowledge of the equipment, they could seek to use an expert to value the equipment and compare with the values in the balance sheet. Any large discrepancies would require the auditor to confirm by utilizing more experts to value the equipment. However, before using the expert’s opinion, under ASA 620, the auditor must assess the expert himself as to whether he is capable and competent to form an opinion, understand his work and evaluate whether their work is appropriate as audit evidence. Tracing from the source documents to the accounting records would prove to the auditor as to whether the transactions for equipment are complete, meaning that all transactions have been recorded. Though this procedure, the auditor can find if a particular piece of equipment had further additions, retirements, revaluations and the particular allocation method used during the time of recording the equipment directly from the relevant source documents. Additionally, if revaluation is using a management’s expert than they should disclose their name, qualification and independence. Vouching from the accounting records to the source document proves that whether the transaction of equipment actually exists and not just fabricated by the management to increase assets. The auditor can vouch to the source documents such as sales/purchases invoices, receiving reports and independent expert’s opinion. These source documents can be used to prove whether equipment purchased during the year actually exists, sale of old equipment actually occurred and whether revaluations of equipment were conducted with sufficient supporting evidence that the equipment’s market value changed. The auditor can test the initial cost of the equipment as to whether it includes any costs to bring the asset to condition and location ready for usage under AASB116 actually exists by vouching to individual source documents for each additional cost. Additionally, this verifies if depreciation is calculated accurately. To test whether the additional costs are actually recorded, the auditor would use the tracing procedure. There are general procedures the auditor can take which involve reading the minutes recorded during the meetings, making general inquiries and inspecting agreements. This can assist the auditor by identifying issues such as the expected life left of the equipment which would affect the depreciation calculation, existing equipment being redundant but not yet impaired, location of existing or new equipment not yet recorded that would affect the equipment account balance and whether the equipment is leased and the type of lease if it was. These procedures can be used to test all of the assertions related to the equipment account in the balance sheet. Substantive testing involves the auditor gathering sufficient and appropriate evidence to verify in this case, as to whether the equipment and related depreciation are correctly recorded in all material aspects under AASB 116 and impaired to their market value under AASB136. The three main assertions affected are whether the asset actually existed, if the entity has the right to the assets and if the entity has recorded the assets at their market value. The auditor can use various substantive procedures to test these assertions of management; the key procedures include physical examination, inquiries, and vouching or tracing to and from valid source documents to gather their audit evidence.