Tests of details

Accounting Ahead | Original study resource | accountingahead.com.au

Tests of details

MODULE 3 | 3.3.2 | STUDENT COMPANION

Tests of details examine individual transactions and the items in a balance, and the direction of a test

decides the assertion it supports. Positive confirmations are stronger than negative ones, non-responses

need alternative procedures, and the auditor must control the whole confirmation process. Stocktake

attendance tests existence and completeness by counting both ways, along with condition and cut-off.

Cut-off tests check the period of transactions around year end, and the search for unrecorded liabilities

looks beyond the payables list for what's missing.

Two kinds of tests of details

For a significant risk addressed only by substantive procedures, tests of details are required, because they give

the most direct evidence about specific items.

Kind What it examines How

Tests of transactions Individual transactions recorded

during the period

Vouching from the records back to supporting

evidence tests occurrence; tracing from source

evidence forward into the records tests completeness

Tests of balances The items making up a closing

balance

Confirmation, inspection, physical counts, recalculation,

and evidence from after the year end such as cash

received or paid

Tests of details and the assertions they support

Test of details at Voltana Direction or source Assertion it supports

Vouch recorded sales back to signed installation completion forms From the records to the evidence Occurrence

Trace completion forms forward into recorded sales From the evidence to the records Completeness

Positive confirmations of partner electricians' balances Third party direct to the auditor Existence; rights

Cash received after year end; the ageing of each balance Later evidence Valuation (and existence)

Credit notes issued after year end Later evidence Occurrence of sales

Test counts from the stock list to the shelf From the records to the asset Existence

Test counts from the shelf to the stock list From the asset to the records Completeness

Sales and goods received either side of 30 June Around the year end date Cut-off

Payments and supplier invoices after year end Outside the payables list Completeness of payables

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | STUDENT COMPANION

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External confirmations

A positive request asks the third party to reply in every case, either agreeing with the balance stated or giving

the correct figure. A negative request asks for a reply only if the recipient disagrees, so silence is treated as

agreement. Because silence may simply mean the letter was ignored, negative requests can be the only

substantive procedure for an assertion only when all four conditions below hold; otherwise they can at most

support other procedures.

Positive or negative confirmations?

Risk low?

Assessed risk low,

controls tested

effective

Yes

No

Many small

balances?

A large number of

small, similar

balances

Yes

No

Few exceptions?

A very low

exception rate

expected

Yes

No

Replies likely?

No reason to think

recipients will

ignore it

Yes

No

Negatives can be the

only procedure

Silence is taken as

agreement: weak evidence

Any no: negatives can't stand alone

Use positive confirmations, or add other substantive procedures

Voltana's partner electricians:

positive confirmations

No reply: alternative procedures, such as cash received after year end and the underlying

installation records

A different figure: every exception is investigated, because it may be a timing difference or a

genuine misstatement

Case note: Parmalat's forged confirmation

Parmalat was a large Italian dairy and food group. Its accounts showed about 3.95 billion euros of cash and

securities held by a subsidiary in the Cayman Islands, in an account at Bank of America. In December 2003 the

bank said that no such account existed and that the document confirming it was a forgery. Within days Parmalat

was insolvent, with a hole in its accounts that later reached around 14 billion euros, and its founder was

eventually convicted. Reports later suggested the forged confirmation had been produced inside the company

and had reached the auditors without the bank ever being involved. The lesson: a confirmation is independent

evidence only if it travels directly between the auditor and the real third party. Once the client can touch it, it is

just another document the client could have made.

Source: US SEC Litigation Release 18527 (December 2003); Italian court decisions (2008-2014).

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | STUDENT COMPANION

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Attending Voltana's stocktake on 30 June

1. Observe the count

Are staff following the

instructions: tagging counted

items, controlling movements?

2. Inspect the stock

Note damaged items and older

battery models that may sell

only at a discount

3. Record cut-off details

The last goods received and the

last goods dispatched, to test

cut-off later

4. Test count both ways

From the list to the shelf, and

from the shelf to the list

Stock list

The records: what Voltana

says it has

The shelf

The batteries physically there

List to shelf tests existence

It finds phantom stock: items recorded but not there

Shelf to list tests completeness

It finds missing stock: items there but not recorded

Inventory is material, so the auditor attends the count, unless that is impracticable

Cut-off at Voltana

Area What the team does

Sales Selects sales recorded in the two weeks either side of 30 June and matches each to its

installation completion form, checking the installation date

June manual revenue

journals

Traces each one to signed completion forms; where no installation had happened by 30

June, the revenue belongs in the following year

Purchases Compares the last goods received notes before year end with the purchase records

Cells at sea on 30 June Uses the shipping terms to decide whether Voltana owned them yet, and so whether

they belong in inventory and payables

The search for unrecorded liabilities. Examining the payables list can't find a liability that isn't on it, so the

team looks outside: payments made in the weeks after year end, supplier invoices received after year end, and

statements from major suppliers, asking of each whether it relates to goods or services received before 30 June.

For receivables, valuation is tested through the ageing, cash received after year end, and credit notes issued

after year end, which can also reveal sales that should never have been recorded.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | STUDENT COMPANION

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Practice questions

MODULE 3 | 3.3.2 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Choose a test of details

Tarnwick Outdoor Distributors Pty Ltd (imagined) imports tents, sleeping bags, stoves and other camping gear

and sells them to retailers. Its year ends on 30 June. Choose one test of details for each assertion.

Assertion Test of details you would perform

(a) Existence of trade receivables

(b) Valuation of trade receivables

(c) Completeness of trade payables

(d) Existence of inventory

(e) Completeness of inventory

(f) Valuation of inventory, including last

season's camping stoves

(g) Cut-off of sales

(h) Rights to stock held at a third-party

logistics warehouse

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | STUDENT COMPANION

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Question 2 - Positive or negative confirmations?

Decide which form of confirmation would suit each group of Tarnwick's customers.

Group of customers Positive or negative, and why

(1) Seven national outdoor and department store

chains, each owing between $180,000 and

$950,000; together 70% of receivables; two dispute

recent deliveries

(2) About 1,600 scout groups, schools and clubs on

small trade accounts, mostly under $400 each;

credit controls tested and effective; very few

disputes in past years

(3) About 45 independent camping stores owing

$5,000 to $40,000 each; a new credit controller

started in May, and several stores pay slowly

Question 3 - Plan the stocktake attendance

Tarnwick counts its stock on 30 June at its main warehouse and at a smaller regional warehouse; more stock

sits at a third-party logistics warehouse. A container of tents is due to arrive on 1 July, and the stock includes last

season's stoves, which are selling slowly. Plan your attendance: what you would do before, during and after the

count.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | STUDENT COMPANION

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Worked answers

MODULE 3 | 3.3.2 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Tarnwick Outdoor Distributors (suggested)

Assertion Test of details

(a) Existence of receivables Positive confirmations of a sample of balances, with alternative procedures for

non-replies

(b) Valuation of receivables Review the ageing and cash received after year end; assess the allowance for slow

payers and disputes

(c) Completeness of payables Search for unrecorded liabilities: payments and invoices after year end, supplier

statements

(d) Existence of inventory Test counts from the stock list to the shelf

(e) Completeness of inventory Test counts from the shelf to the stock list

(f) Valuation of inventory Compare cost with selling prices achieved after year end, especially for the stoves;

inspect condition at the count

(g) Cut-off of sales Match sales either side of 30 June to dispatch records and their dates

(h) Rights to stock held by others Confirm the quantities with the logistics provider and check the purchase invoices:

is the stock Tarnwick's, not a customer's?

Question 2 - Tarnwick's customers (suggested)

Group Form and reason

(1) National chains Positive. Large balances, a high share of receivables and live disputes: the risk isn't low, and

silence would prove nothing

(2) Small trade accounts Negative can suit, even on its own: low risk with controls tested as effective, many small,

similar balances and very few exceptions expected, provided there is no reason to think the

groups will ignore the request

(3) Independent stores Positive. Medium balances, a recent change in credit control and slow payers mean the risk

isn't low

Question 3 - Stocktake attendance (sample answer)

Before: read the count instructions, list the locations and the stock at each, and decide which counts to attend;

plan to confirm the logistics warehouse's quantities directly, or attend there too; note the slow lines to inspect.

During: observe that the instructions are followed, including tagging and no movements; inspect condition,

especially the stoves; test count both ways; record the last goods received and dispatched, and confirm the tents

arriving on 1 July are excluded unless Tarnwick already owns them under the shipping terms.

After: agree the test counts to the final stock listing, follow up differences and cut-off, and use the stoves' prices

after year end to judge whether they must be written down.

ADVANCED AUDIT AND ASSURANCE | M3 | 3.3.2 | WORKED ANSWERS

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