Question 1 Reperforming journal entry postings can be performed as a risk assessment procedure, substantive analytical procedure (SAP), or test of details (TOD), depending on how we design the procedures and what our objective is. Which statement is correct? 1. The objective of reperformance of entries as a test of details is to identify and understand SCOTS and related risks. 2. One of the risk assessment procedures is cash anchor testing to validate that Revenue is either settled in Cash or uncollected at period end. 3. We are NOT required to develop any expectations for when performing the procedure as a TOD. 4. SAP requires us to develop precise expectations around the volume and timing of activity postings between accounts.
Answer (1)
The question is related to the auditing process, particularly focusing on journal entry testing, which is crucial in assessing financial statement integrity and identifying potential risks or inaccuracies.
Reperformance of Entries as a Test of Details : Reperformance as a test of details aims to verify the accuracy of specific transactions or balances by performing the processes independently and comparing them to the recorded results. This is typically not focused on understanding SCOTs (Significant Class of Transactions) but more on verifying the detailed accuracy and completeness of the entries.
Risk Assessment Procedures (Cash Anchor Testing) : This option refers to performing procedures that help auditors assess risks within various accounts. Cash anchor testing is not generally classified as a risk assessment procedure designed specifically for validating revenue settlements or cash. Instead, risk assessments typically involve identifying areas of potential error or fraud.
Test of Details (TOD) Expectations : While performing tests of details, it is fundamental to have some form of expectation of what the correct result should be, as this is crucial in identifying discrepancies that need attention. Therefore, this statement is incorrect in saying that no expectations need to be developed.
Substantive Analytical Procedures (SAP) : Substantive analytical procedures involve making comparisons based on established expectations, such as external data, historical trends, or budgeted amounts. This requires developing precise expectations and conclusions drawn from those metrics, involving specific account activity, both in volume and timing.
Based on the information provided, Statement 4 is the correct choice because SAP indeed requires the development of precise expectations about the transactions between accounts to determine if any inconsistencies or unusual patterns arise. Such expectations are essential for identifying anomalies or potential areas of concern in the audit process. This analytical approach is critical for validating the reasonableness of financial information and ensuring it appropriately reflects the entity's financial activities.
