To those who have experience in audit

[Jamesaccountant]

Hi, I just started working as an associate for an audit firm but I got some question.

When conducting substantive tests, how do you determine what test to do? or how much in detail we do a test?

For example, when testing PPE, we can inspect the asset in person to verify the existence, which I think is the strongest assurance regarding the existence.
However, for the client I'm working on right now, we just recalculate the depreciation expenses and we inspect the invoice if there is any purchase of a new asset.

How do you determine which test or how much in detail we inspect items? Is it determined by the manager/partner in your engagement?

Thank you very much!

 

[kirby]

The audit senior will determine the tests. The selection of the test is based on how much risk the PPE represents. For many companies, the PPE is not the largest amount on the balance sheet, so testing can be limited.

 

[Jamesaccountant]

Thank you for your reply.

In a nut shell, the selection of tests and the amounts (extent) of tests such as sample siz are determined by senior auditors based on RMM of the assertions?

Thank you in advance.

 

[kirby]

Unfamiliar with RMM abbreviation. Radical Mickey Mouse? But anyway testing is based on such things as risk and auditor's judgment.

 

[Jamesaccountant]

RMM stands for risk of material misstatements. Okay noted. Thanks for your tips!

 

[Dave In Capital]

Vouching back to the invoices and inspecting for existence assertion in addition to reperformance of the depreciation tend to be adequate. But, you might also check for capital lease considerations and related party status of any financing of the equipment. Also, correlate the serial numbers. Sometimes assets can be unique to the industry, so look into any trends of obsolescence. Any significant changes in market value will have an impact on the salvage value, balance sheet considerations. Assets should be marked to market when applicable.