Which of the following statements are true? A. Substantive testing of routine expenses is undertaken before controls testing is undertaken. B. Substantive testing of rountine expenses is never undertaken because these expenses are always present. C. Substantive testing of routine expenses is usually undertaken if controls are not effective. D. Substantive testing of routine expenses is always undertaken such that the auditor exhaustively examines all of these expenses.
Question
Which of the following statements are true? A. Substantive testing of routine expenses is undertaken before controls testing is undertaken. B. Substantive testing of rountine expenses is never undertaken because these expenses are always present. C. Substantive testing of routine expenses is usually undertaken if controls are not effective. D. Substantive testing of routine expenses is always undertaken such that the auditor exhaustively examines all of these expenses.
Solution 1
The statement that is true is C. Substantive testing of routine expenses is usually undertaken if controls are not effective.
Explanation:
A. This statement is not necessarily true. The order in which testing is done can vary depending on the situation. Often, control testing is done first to determine if the controls in place are effective. If they are, less substantive testing may be needed.
B. This statement is false. Just because an expense is routine does not mean it should not be substantively tested. All expenses, routine or not, should be subject to some level of testing to ensure accuracy and compliance.
C. This statement is true. If controls are found to be ineffective during control testing, substantive testing is usually undertaken to ensure the accuracy of the financial information.
D. This statement is not necessarily true. While it's important to thoroughly examine expenses, it's not practical or efficient to exhaustively examine all expenses. Auditors often use sampling techniques to test a subset of transactions.
Solution 2
The statement that is true is C. Substantive testing of routine expenses is usually undertaken if controls are not effective.
Explanation:
A. This statement is not true because the order of testing can vary. Usually, auditors perform tests of controls first to determine the extent of substantive testing needed.
B. This statement is not true because the presence of routine expenses does not eliminate the need for substantive testing. Auditors still need to verify the accuracy and legitimacy of these expenses.
C. This statement is true. If controls are not effective, auditors will perform substantive testing to gather evidence about the accuracy of the recorded expenses.
D. This statement is not true because the extent of substantive testing depends on the auditor's risk assessment and the effectiveness of the entity's internal controls. It's not practical or necessary to exhaustively examine all expenses.
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