 Hello, and welcome to the session in which we would look at a bunch of audit procedures and we have to determine whether they are a test of control or substantive test of transaction and how do they relate to the audit objectives? Audit related objectives. Well, what are they? Well, you got to make sure you know them, occurrence, completeness, accuracy, posting and summarization, classification, timing and presentation. If you don't know these, what each one of them means, you want to go back to farhatlectures.com and review that session because I'm going to be working an exercise here, although I'm going to be illustrating those concepts in an example, but you really have a good understanding about them. I don't replace Farhat Lectures, don't replace your CPA review course. You can keep your course, I'm a useful addition to your CPA review course, I can help you understand the material differently than your CPA review course. It will help you with your CPA review course, it will help you on your CPA exam. My subscription is quite nominal, you can try it for a month, you like it, you keep it, otherwise you cancel. Your potential gain is passing the exam itself. If not for anything, take a look at my website to find out how well or not well your university is doing on the CPA exam, I do have resources for other CPA sections and courses. If you have not connected with me on LinkedIn, please do so, like this recording, share it with others, connect with me on Instagram, Facebook, Twitter and Reddit. So again, let's take a look at those activities, those audit procedures and determine first whether this audit procedure is a test of control or substantive test of transaction and if so, which audit objective it is satisfying. Okay, and these are the audit objective and make sure you are comfortable with those. You make sure you are comfortable with those. These are very important on the exam. Starting with the first transaction. Before we start actually, do you have an idea how do we perform test of control? I hope you do. Well test of control would require you to perform certain procedures. You want to make sure you are comfortable, like make an enquiries as a test of control, examine document, observation, performance, but examine comes a lot. So if you see the word examine, be careful, this could be a test of control. And just things you want to remember, make sure you know the difference between a test of control versus substantive test of transaction. Let's start with the first one. Trace a number of shipping document to entry in the accounting system. So we're looking at the shipping document, which is a physical document that support our transaction and we're taking those documents and tracing them back to the entries, to the entries in the accounting system. What do you think that is, first of all, is this a test of control or is this a substantive testing? Because this is what you need to know first. When do you perform this step? Well, we perform this step as substantive test of transaction. Why do we do so? This is not a test of control. Why do we do so? Well, we want to make sure that if we have a shipping document, we shipped something, we made a sale that sale is recorded in the accounting system. What is the fear here? Fear is completeness. It means we did not record it. The transactions are not complete. We perform this step as a substantive test of transaction and the audit objective is completeness. So let's take a look at the second transaction. Examine a sample of warehouse removal slips for signature of authorized individual. Well, once you hear the word examine, it's a good chance it's a test of control and this is a test of control. So examine, I would say, we go with test of control. Now, which audit objective it is satisfying? Well, you examine the sample of a warehouse slip to see if the removal slip has been signed by the authorized individual. So did this actually happen? This is what we're trying to find out. Did the authorized individual actually signed the removal slip of the warehouse? And if the answer is yes, then yes. So we're looking to see if it actually happened. So here what we are testing for is occurrence. Occurrence, that's the objective that's being that's being met in this test. Occurrence, it's test of control and it is occurrence. Let's take a look at the third transaction. Examine a contract term for large unusual sales transaction to determine whether management has included adequate disclosure of those transactions in the footnotes. Now, although I said most of the time it will be test of control, but here you have to be careful, it doesn't have to always be a test of control. Here we're examining, but look what we're examining, a contract. A contract means the whole thing. So when you're examining a contract, you're not looking at a sample. You're looking at the whole thing. You're looking at the whole picture, okay? For unusual sales transaction, well, hopefully the word transaction will kind of ring the bell that you are substantive test of transaction. This is a substantive test of transaction. So although the word examine, okay, we could have, for example, review rather than examine. We put the word review contract terms, okay? They put the word examine kind of to trick you, and although I said examine most of the time is test of control, but look, it doesn't have to be. So be careful. So I could review contract terms. So it's a test of transaction. Now, which audit objective do you think it is satisfying? Well, I would say, I mean, in a sense, it's easy to know this. Why? Because you are looking at disclosure. You are looking at disclosure. You are determining whether they made the appropriate disclosure. And what does disclosure deals with? Disclosure deals with the presentation. Are you presenting everything that need to be presented in those footnotes? So it's a test of transaction, and the audit objective is presentation. Presentation. What is presentation? It means you are showing everything that needs to be showing about the financial statement. You are reporting. You are appropriately describing all the relevant information in an understandable way. This is what you are doing. Let's take a look at the fourth transaction. Again, the word examine. Examine here. Examine. Notice. OK, examine. I would say I will start to lean toward test of control until I find out. Where am I examining? Examine duplicate copies of shipping document for evidence that quantities were being verified before shipment. So all what I'm looking for here is an indication of whether we verified the shipment. We verified the quantity. And how do we know this? We're looking at those shipping document and there should be someone's signature that evidence that they verified the quantity. When do we do this type? When do we do this? Do we do this during the substantive test of transaction? Or are we looking for some indicators? Indicators. We're looking for some indicators. Evidence that quantities were being verified. That's all we're doing. Did they do it? Yes or no? I would say this is a test of control. So the word, notice, the word examine here is definitely taking you toward the test of control for sure. And it is a test of control. Now, which objective this is being satisfied? Well, hopefully it makes sense that they are going over after the accuracy. They want to make sure that when it's verified, the information is accurate. The information is accurate. So it's the accuracy objective. Let's take a look at this transaction. Select a sample of payroll payment processed and agree hours to employee time record. When do you perform this transaction? So you want to make sure what you're doing here is you want to make sure that the employee hours and the payroll payment, sample of the payroll payment, they agree. They agree. And basically what you're looking at here is the dollar amount if they agree. You can take the number of hours versus the payroll payment. And depending on how much the employee is making, you're agreeing this. Do you think you do this during the test of control or substantive testing? I would say we're dealing with a dollar amount. I would say this is a substantive test of transaction. Now, what is the objective of something like this? Well, you're agreeing two numbers to each other. You're making sure they are correct. What does that mean? You are dealing with accuracy. Again, the objective here is accuracy. Let's take a look at number six. Now, you are using an audit software to foot and cross foot sales journal and trace the balance to the general ledger. So simply put, you are using some software to do what? To make sure that when I add up all my transaction and cross foot the sales journal, I'm going to trace them. I'm going to make sure they match the general ledger. Make sure they match the general ledger. And what happened is this. You have to understand basic accounting here. In order to require you to understand basic accounting before we go any further. Do you think this is a test of control or substantive testing? That's the first thing we would like to answer before we determine what type of objective is being met. Well, I would say this is a test, a substantive test of transaction. What you are doing here is making sure that the transaction that occur in the sales journal are appropriately posted in the general ledger for each client. Now, so it's a substantive test of transaction. What is it testing? Well, here, what's testing? We have an objective that's called posting, posting and summarization. And this is what it is testing. It's making sure that after you posted in the sales journal, you posted a sales, let's assume a sales on credit, you update, you updated the customer's account, the general ledger, to make sure everything is matching. You have all the information you are posting appropriately. And posting is something that we need to be aware of, something that account and do. So this is posting and summarization. That's the audit objective that's being met. Seven, examine, examine. Again, what did I say? Every time we see the word examine, we lean toward test of control, but not necessary. So, but I'm now, I'm leaning just by looking at the word examine voucher package and related vendor invoice for evidence of approval. Am I looking for a dollar amount? No, I'm looking for some evidence, for some indicator, for some indicator. So this is definitely a test of control, test of control. Okay. Now, the question is, what is it testing? Well, approval of account classification. Guess what? We have an audit objective that deals with classification. So it's a test of control and the audit, that's the audit related test is classification. What's classification? How do you misclassify something? For example, you might have something as an expense cost of goods sold, but you posted it rather than cost of goods sold. That's still an expense, but you put it under advertising expense or something to do with repairs. It's under miscellaneous. So it had to do with classification. This is what classification is. Here you're examining the voucher package and related vendor invoice that dose transaction were posted in the right account in the right classification. Looking for evidence that that happened. That's what we're looking for here. Therefore, it's a test of control, test of control. So it's not being misclassified. Somebody approve this transaction. We're looking to see if that approval is there. Usually the approval is a initial, the individual initialed it. So yeah, it's going into the right classification. Now select a sample of sales invoices, sales invoices and agree prices to the approved price list. Again, once you see the dollar amount, kind of lean more toward substantive test of transaction. And this is what you're doing here. We're looking at the sales invoice and comparing it, making sure the dollar amount is correct. Well, I kind of gave you the answer correct. It means accuracy and agree prices to the approved to the approved price list. You're determining whether the transaction is accurate or not. So it's a substantive test of transaction and the audit objective that's being met is accuracy, accuracy. Is it correct? Yes or no? Select a sample of entries in the cash receipt journal. So we're looking at the cash receipt journal and what we're going to be doing, we're going to trace in it back to posting an individual customer account record. All right? So I can tell you the audit objective is posting and summarization because it's the word posting is here. So it's clearly posting. So we want to make sure that the cash receipt journal, it's being posted. And this is important because if we received cash from customers, we want to post that amount to the individual's personal account. OK? So it's definitely posting and summarization. Is this a test of control or substantive test of transaction? Well, I would say this is substantive test of transaction because it deals with the dollar amount that we are comparing, making sure the cash receipt journal accounts are being traced back to the individual account receivable. Now, test of control for this will be do we have approved that this is being done? If we select the sample to see if it's being done, proof of being done, OK? For example, after we do it, someone initials it. Then it will be a test of control. Here, it's a substantive testing because we are comparing the dollar amount and trace it to the posting. We're looking to see if it's posted in the individual account receivable account, cash receipt. We want to make sure we do that. If we don't do that, customers are not going to be happy with us because when they send us the money, they want their account to be updated. They send us the money. We posted to their account receivable. They are satisfied. I would say this type of account, this type of exercise, is important for you to study when studying for the exam. Why? Because it tells you about the audit related objectives. Remember occurrence, completeness, accuracy, posting, summarization, classification, timing, and presentation. I don't believe we had anything with timing. We had presentation. We did classification, posting, completeness, yes. So just want to make sure timing means is it in the right? Is it on the correct date? We did not have an example, but you need to know those. You need to know those by heart before sitting on the exam. Also, at the end of this recording, I would like to remind you, if you have a CPA review course, that's great. Keep it at farhatlectures.com as a supplemental tool to your CPA review course. My monthly subscription is nominal. You are investing for your CPA exam. Don't shortchange yourself. Your CPA exam is a lifetime investment. Good luck, study hard, and stay safe.