Solution of Workshop 9

Solution of Workshop 9

1. Explain the difference between vouching and tracing.

Vouching means to find the underlying vouchers or documents for a transaction that is in the accounting records, and confirm the details in the accounting records are the same as the details on the documents. For example, go from an entry in the debtors account in the general ledger to the invoice recording the sales to the debtor and compare the details in the account with those on the invoice. This test gathers evidence about the accounting records and is particularly useful for tests of the assertions existence/occurrence (are the details in the accounts supported by documentary evidence; i.e. did the sale that is recorded actually occur?) as well as accuracy and cut-off.

Tracing means to start with the documents or books of original entry and follow the details through the accounting system. For example, inspect invoices for sales to customer and check if the details on the invoices (dates, customer details, amounts etc.) are recorded correctly in the records. It can also be used to go from a document such as a list of inventory counted in the stocktake to the account for stock to check if the stock items counted in the stocktake are recorded correctly in the accounts. Tracing is useful for tests of completeness (are the items on the invoice recorded in the ledger; that is, is the ledger complete?), as well as accuracy and cut-off.

2. Provide an example of (1) an error and (2) a judgemental misstatement that could affect the balance of property, plant and equipment documented?

Examples of errors include:

  • An addition posted to the repairs expense account instead of the PPE asset account (and vice-versa)
  • A transaction posted with the wrong date around year-end
  • Failure to record theft of items of equipment
  • Failure to remove scrapped items from asset register

Examples of judgemental misstatements include:

  • Inappropriate depreciation rates
  • Judgements around capitalisation of installation expenses and borrowing costs
  • Judgement of impairment/revaluation amounts

3. Which accounts and/or clients are more suitable for interim substantive testing?

The timing of substantive procedures is directly influenced by the level of control risk. The greater the assurance gained from control testing or the more effective controls are judged to be, the more likely that substantive testing can be done at an interim period. Therefore, clients with stronger internal controls, and accounts with stronger controls, are more suitable for interim substantive testing.

Also, for clients or accounts where there is low inherent risk or low materiality, substantive testing can be conducted at interim periods.

In addition, the accounts that accumulate transactions which mostly remain in the account balance at year-end are more suitable for interim testing. For example, the auditor can test additions and disposals to the fixed asset register prior to the year-end.

Clients with specific reporting requirements can also be suitable for interim testing. If the client needs to close its book promptly, interim testing is a great advantage.

4. Why is it important to consider the quality of the data used in analytical procedures? How important to this question are client controls over financial data?

The results of analytical procedures are only as good as the data used in the procedures. Therefore, client data that has not been audited is less reliable than audited data, and less faith can be placed on the results of analysis using unaudited data. Client data can also be unreliable if the client has restructured its operations or reporting lines. The more geographical or segment diversity within the client, the less useful aggregated data (rather than geographical or segment data) will be. Client controls over data, including budget data, affect the quality of the data, and its usefulness in analytical procedures.

Also, industry data that is used for comparisons can be of variable quality. Industry data could be outdated if the industry is subject to rapid changes, such as economic growth or decline. The industry could be less comparable with the client due to changes in conditions or differences between the client and the average industry member.

5. What conditions must be satisfied before we can regard evidence from analytical procedures as persuasive rather than corroborative or minimal? Why are these conditions important?

If the auditor is using the analytical procedure to provide primary evidence, controls over financial and non-financial data need to be more reliable. If the auditor is using analytical procedures to provide a general understanding of the client, data quality is not so important. However, if the procedures are designed to provide persuasive evidence, the underlying data should be tested. For example, if the debtor’s ageing report is being used to test the reasonableness of the provision for doubtful debts, the report should be tested for accuracy.

Another consideration for the auditor is that the analytical procedure could rely on non-financial data, such as quantities of raw materials, numbers of employees or customers etc. This data is usually not subject to the same controls by the client as the financial data, making it less reliable in analytical procedures. Where the client uses the data for management purposes, the data is likely to be more reliable.

Analytical procedures provide more persuasive evidence when they are able to generate an amount that the auditor believes is a reasonable estimate of what the balance should be, allowing a conclusion about whether it is free from material error. In this case, no further evidence is required.

Analytical procedures provide corroborative evidence if it (1) confirms findings from other procedures, and (2) supports management representations or otherwise decreases the level of audit scepticism. These results limit the amount of evidence required from other procedures.

If the auditor is using the analytical procedures for minimal assurance (i.e. not persuasive or corroborative), the auditor does not need to test the underlying data.

Professional Application Questions (PAQs)

  1. Q. 9.23

Jenny has been asked to join the team responsible for designing the audit program for a new client, Sangekar Industries Ltd (Sangekar), a manufacturing and wholesaling firm. Sangekar recently went ‘public’ and is now listed on the Australian Securities Exchange. Jenny has worked for the audit firm for a year and received a very high performance rating from her supervisors on last year’s audit of Haddin Pty Ltd (Haddin), a firm that provides marketing and other consulting services. Sangekar and Haddin have total revenue of approximately the same amount, so Jenny feels confident that she can apply her knowledge to the new audit. She takes a copy of the audit program for Haddin along to the first meeting, intending to suggest they use it as the basis for the audit program for Sangekar. Jenny thinks that the Sangekar audit program could use the same substantive procedures they used on the Haddin audit.

List some of the problems with Jenny’s idea of using Haddin’s audit program as a basis for designing substantive procedures for Sangekar.

Sangekar and Haddin have approximately the same amount of revenue, but there are substantial differences between the firms. Sangekar is a recently publicly listed manufacturing and wholesaling company. Haddin is a firm that provides marketing and other consulting services, listing status unknown.

The auditing standards require the auditor to gain an understanding of the client and its circumstances. For example, the auditor should gain an understanding of the operating conditions in the client’s industry as well as the economy generally, and the reporting requirements that apply to the firm (which would be influenced by its listing status). The auditing standards require audit plans to be based on the auditor’s assessments of inherent and control risks at the client, and the nature, timing and extent of substantive procedures should reflect these risk assessments.

Therefore, the main problems with using Haddin’s audit program as a basis for designing substantive procedures for Sangekar relate to the fact that by doing so the auditor may not properly work through the effects of Sangekar’s circumstances on the audit program.

Examples of specific problems:

  • The auditor may use the wrong type of substantive procedures, e.g. not incorporate tests of inventory balances (which would not be on Haddin’s balance sheet) and accounts receivable balances.
  • The auditor may not make a thorough assessment of internal controls at Sangekar and therefore not schedule control tests in time to use the results of the control tests to determine the nature, timing or extent of substantive procedures.
  • The auditor may not schedule tests of disclosures required by listed firms that are not required for Haddin.
  1. Q. 9.25

Boris Johnson has a suggestion for the audit program for the revenue account. He suggests:

Select a sample of sales from the sales journal and agree the details in the journal to the sales invoices, delivery dockets and customer orders.


Explain which assertion for the revenue account would be addressed by this test.

Selecting a sample of sales from the sales journal and agreeing the details in the accounting records with the original documents (invoices, delivery dockets and customer orders) provides evidence for the occurrence assertion for sales. The documents show whether the transaction, as recorded, did occur.

Agreeing the details with the underlying documents (known as vouching), also provides evidence about accuracy of sales.

Q. 9.28

A theme park business has a website that allows customers to make bookings online. The customers include the general public and local and international travel agents. Travel agents that wish to be able to make bookings on credit must complete an account application form with at least three references. The auditor’s tests provide sufficient appropriate audit evidence that credit is granted only after rigorous credit checks. However, large travel agents often settle their accounts between 60 and 90 days (not the required 30 days). Given the amount of business generated from these travel agents, the theme park business allows this practice to continue. The business has 720 travel agents as customers. Forty agents represent 65 per cent of trade debtors.


(a) Discuss which debtors would be selected for further testing.

(b) When would the testing of debtors be carried out?

The key assertions at risk for debtors are existence (do the debtors really exist?) and valuation (are the debtors valued appropriately?). The auditor is concerned about the risk of overstatement. This means that the larger debtors would be of most concern. The testing has revealed that rigorous credit checks are conducted before debtors are able to purchase from the client on credit, providing some assurance that the debts are collectible. However, the constant late payments increase the risk that accounts will not be paid, either because of financial deterioration of the debtor or a dispute between the client and the debtor about a particular sale.

Forty debtors represent 65% of the debtors. A sample of the forty debtors should be selected. An additional sample of other late-paying travel agents should also be selected. A small sample of the remaining debtors (equivalent to 35%) should also be selected.

There are strong controls over credit approval. If other controls over debtors and sales are also strong, the testing for existence could be carried out prior to the year end with roll-forward procedures. Testing for valuation should be carried out closer to the year-end as evidence of deteriorating financial position of debtors would be more likely to be gathered closer to year-end. Testing of subsequent receipts from debtors (post balance date) would provide strong evidence to support debtor valuation at year-end.

  1. Q. 9.34

Chan & Partners Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2017 year, Chan & Partners gained a new client, Medical Services Holdings Group (MSHG), which owns 100 per cent of the following entities:

  • Shady Oaks Hospital, a private hospital group
  • Gardens Nursing Home Pty Ltd, a private nursing home
  • Total Cancer Specialists Limited (TCSL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all MSHG entities is 30 June.

You are a senior auditor working on the Shady Oaks Hospital engagement for the 2017 year and are currently in the planning stage of the audit. In discussions with management you discover that Shady Oaks has recently acquired two new, full body scanning machines. These machines use the latest technology and cost the company more than $10 million each. Although they are more than 50 per cent more likely to detect tumours and other abnormal internal growths, there are new academic studies suggesting there may be potential long-term side effects for patients scanned by these machines. However, because the machines are new the evidence about long-term effects will not be known for many more years. Despite this, there has been some bad press for Shady Oaks highlighting the potential risks to patients.

Shady Oaks charges a premium price for using the scanning machine and there is extremely high demand. To manage the demand Shady Oaks requires that all patients pay for their scans in full at the time of booking, and the payments are immediately recognised as revenue by the hospital. Shady Oaks has taken bookings for four months in advance — although it is only April 2017, the hospital has bookings for July and August 2017.

The Australian Doctors and Hospital Association is currently reviewing the use of the scanning machines and is considering banning their use within Australia until the issue is resolved. A decision is expected on 1 August 2017, and management tell you that they believe there is an 80 per cent chance the scanners will be approved.


(a) Identify two key account balances likely to be affected by the above information.

(b) For each account balance identified in (a) above, identify and explain the key assertions most at risk.

(c) For each assertion identified in (b) above, identify specific substantive tests of detail that would be responsive to the identified risk.

No. Key Account balances (a) Key assertion and explanation (b) Substantive tests of detail (c)
1 Scanning revenue Occurrence – has revenue occurred? Recognising revenue at time of receipt of cash is not consistent with revenue recognition principles (services has not been delivered).
Read the contracts for use of the scanning machines. Is there anything to support the early recognition of the revenue and the claim against the patient? (e.g. the hospital has the right to deliver an alternative service; the patient does not have the right to a refund). Obtain a legal opinion.
2 Scanning machine (fixed asset account Valuation and allocation – what is the appropriate value for the scanning machines given the uncertainty around their approval?
Consider the documentation surrounding the regulation of the scanning machines. Is the Australian Doctors and Hospital Association the relevant approving body? If this body withholds approval, is the hospital still able to use the machines legally?
Talk to management. What evidence does management have to support their view that there is an 80% chance of the scanners being approved? Obtain an independent expert’s view of the regulatory situation.
Read the press reports. How extensive is the bad press surrounding the scanning machines? Is it likely to affect patient demand for the services? Would all these factors affect the value of the machines?
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Choose HelpHub


Quality Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.


Qualified Writers

We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.


Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account.


On Time Delivery

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. We will always strive to deliver on time.


Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text.


24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:

How it works?

Follow these simple steps to get your paper done

Help Hub

Place your order

Fill in the order form and provide all details of your assignment.

Help Hub

Proceed with the payment

Choose the payment system that suits you most.

Help Hub

Receive the final file

Once your paper is ready, we will email it to you.

HelpHub Writing Services

No need to work on essay at night. Sleep tight, we will cover your back. We offer all kinds of essay writing services.

HelpHub HelpHub


Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

HelpHub HelpHub


Admission Essays

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

HelpHub HelpHub


Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

HelpHub HelpHub


Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied.