Page 170 - AA Integrated Workbook STUDENT 2018-19

Chapter 10 3 4

2.3 Overstatement

Overstatement will occur if transactions or assets appear in the financial statements
that should not be recorded. For example inclusion of an asset that does not belong
to the company or inclusion a fictitious sale which has not occurred. In these
situations documentation to support the item will not exist.

To test for overstatement the auditor must select a sample of items from the financial
statements and accounting records and trace them through to the source of the
transaction.

Source of the
Financial Accounting transaction/
statements records/ledger Asset

Example 1

When testing for understatement (completeness) of sales the auditor can
select a sample of GDNs and trace the details through to the related sales
invoice and sales day book. The total of the sales day book can be agreed to
the sales figure in the trial balance and finally into the financial statements.
This procedure provides evidence that the sale has been recorded.

When testing for overstatement of sales (occurrence) the auditor can agree
the figure for sales in the financial statements to the trial balance and total of
the sales day book. They should then select a sample of sales invoices
recorded in the sales day book and trace the details through to the GDN. This
procedure provides evidence that the sale did occur.

166