lOMoARcPSD|28964921
Ch11 sm moroney 2e - Solutions Manual to accompany
Auditing: a practical approach 2nd edition by
Management Accounting (University of Newcastle (Australia))
Studocu is not sponsored or endorsed by any college or university
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Solutions Manual
to accompany
Auditing: a practical
approach 2nd edition
by
Jane Hamilton
CHAPTER 11
Substantive testing and income statement accounts
© John Wiley & Sons Australia, Ltd 2013
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Solutions manual to accompany Auditing: a practical approach 2e
Chapter 11 – Substantive testing and income statement
accounts
REVIEW QUESTIONS
11.11 How do the key differences between balance sheet accounts and income
statement accounts affect the nature, timing and extent of substantive
testing of each?
Balance sheet accounts are ‘permanent’ and their balance is carried forward from one
period to the next. Income statement accounts are ‘temporary’ and their balance is
closed to the income account at the end of each financial year. Therefore, the audit
work done in one year on a balance sheet account carries forward to the next year, but
the audit work done in one year on an income statement account does not.
Another difference is that income accounts typically comprise many transactions of
the same type and are usually exclusively either debit or credit (except for closing or
adjusting entries. Balance sheet accounts may contain very few entries, but they could
be both debits and credits and the transactions could be made up of several different
types of transactions. This means that controls over income statement accounts
typically are designed to control the regular type of transaction, but controls are not
usually so standardised for balance sheet accounts.
The balances of payables and receivables (balance sheet accounts) are typically made
up of the purchases, expenses, and revenue transactions from the last 30 or 60 days.
Income accounts, such as sales, purchases, and other revenues and expenses, comprise
the transactions from the entire year.
Audit testing needs to take all these factors into account. The focus for substantive
testing for income statements is on testing the assertions for a year of transactions,
which are relatively regular and predictable. Analytical procedures are useful for this
type of auditing because of the predictable patterns between the revenue and expense
accounts, and between them other measures of activity.
Analytical procedures are more likely to be chosen as the type (nature) of substantive
testing for income accounts than for balance sheet accounts. This is supplemented
with some tests of details, such as vouching back to underlying documentation.
Timing of substantive procedures for income accounts can be done during interim
periods, to confirm relationships, although cut-off testing is done around year-end.
The extent of substantive testing is usually less for income accounts relative to the
number of transactions because of a greater reliance on control testing.
11.12 What are the most important assertions for sales revenue? Compare these
with the most important assertions for other revenue. Are they different?
Explain.
© John Wiley and Sons Australia, Ltd 2013 11.2
Downloaded by john gatheca ()
Ch11 sm moroney 2e - Solutions Manual to accompany
Auditing: a practical approach 2nd edition by
Management Accounting (University of Newcastle (Australia))
Studocu is not sponsored or endorsed by any college or university
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Solutions Manual
to accompany
Auditing: a practical
approach 2nd edition
by
Jane Hamilton
CHAPTER 11
Substantive testing and income statement accounts
© John Wiley & Sons Australia, Ltd 2013
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Solutions manual to accompany Auditing: a practical approach 2e
Chapter 11 – Substantive testing and income statement
accounts
REVIEW QUESTIONS
11.11 How do the key differences between balance sheet accounts and income
statement accounts affect the nature, timing and extent of substantive
testing of each?
Balance sheet accounts are ‘permanent’ and their balance is carried forward from one
period to the next. Income statement accounts are ‘temporary’ and their balance is
closed to the income account at the end of each financial year. Therefore, the audit
work done in one year on a balance sheet account carries forward to the next year, but
the audit work done in one year on an income statement account does not.
Another difference is that income accounts typically comprise many transactions of
the same type and are usually exclusively either debit or credit (except for closing or
adjusting entries. Balance sheet accounts may contain very few entries, but they could
be both debits and credits and the transactions could be made up of several different
types of transactions. This means that controls over income statement accounts
typically are designed to control the regular type of transaction, but controls are not
usually so standardised for balance sheet accounts.
The balances of payables and receivables (balance sheet accounts) are typically made
up of the purchases, expenses, and revenue transactions from the last 30 or 60 days.
Income accounts, such as sales, purchases, and other revenues and expenses, comprise
the transactions from the entire year.
Audit testing needs to take all these factors into account. The focus for substantive
testing for income statements is on testing the assertions for a year of transactions,
which are relatively regular and predictable. Analytical procedures are useful for this
type of auditing because of the predictable patterns between the revenue and expense
accounts, and between them other measures of activity.
Analytical procedures are more likely to be chosen as the type (nature) of substantive
testing for income accounts than for balance sheet accounts. This is supplemented
with some tests of details, such as vouching back to underlying documentation.
Timing of substantive procedures for income accounts can be done during interim
periods, to confirm relationships, although cut-off testing is done around year-end.
The extent of substantive testing is usually less for income accounts relative to the
number of transactions because of a greater reliance on control testing.
11.12 What are the most important assertions for sales revenue? Compare these
with the most important assertions for other revenue. Are they different?
Explain.
© John Wiley and Sons Australia, Ltd 2013 11.2
Downloaded by john gatheca ()
