Furniture can either be office equipment or any other non current asset that helps in thriving the business objectives. Irrespective of the nature, the testing approach is same. Audit of furniture includes identifying the risks, determining the appropriate controls that address risks and designing substantive procedures.
Table of contents
- What are the risks relating to Audit of the Furniture?
- What next steps do the audit of Furniture includes?
- What’s the consequence of non-reliance on controls?
- Audit of Furniture includes following testing steps:
- What does statistical vs non-statistical Sampling?
- What are considerations when verifying support?
- Key Takeaways:
What are the risks relating to Audit of the Furniture?
The risk of material misstatement for Furniture is –
- Furniture is not recorded at all or recorded with the incorrect amount (Valuation)
- Furniture does not exist (Existence)
- The entity does not hold rights on Furniture (Rights)
- The entity does not record all the furniture assets (Completeness)
- Furniture is not disclosed as per the applicable financial reporting framework (Disclosure risk)
Refer here for assertions relating to the statement of profit and loss.
What next steps do the audit of Furniture includes?
Identify the controls within the fixed assets business process and determine if design and operation are effective. So, the audit team need to test those relevant controls.
How about an example?
Crash Company installs a robust internal control system around accounting for fixed assets, additions, disposals and transfers. Let’s see one of the control descriptions:
Wooden Workstations (Furniture) ordering takes place only after obtaining tenders from at least five vendors and then choosing the best tender based on the quality of wood, price and other aspects such as vendor expertise, years in this field and relationship with the entity.
Procurement Manager & Vice president, and the CEO shall approve the orders.
Hero Entity is appointed as internal auditors for testing the controls. Per testing, they noted that the manager only approved all the transactions.
So, it is a clear case of missing segregation of duties, and internal control is not operating as designed.
Therefore, the auditors performing substantive testing (either Test of details or Substantive analytical procedure) can’t rely on the controls.
What’s the consequence of non-reliance on controls?
If the controls are not operating effectively, then it’s not a favourable scenario. Auditors need to increase the extent of testing to gain more comfort and appropriate audit evidence.
Audit of Furniture includes following testing steps:
Furniture balances include the testing of the following:
- Opening Balance (if this is the first-time audit team is testing this balance)
The audit team must request the complete list of current period transactions for all the above balances, and we will test these balances separately.
Audit team need to subject each of the above four populations separately for sampling. The team can choose either a statistical or non-statistical sampling approach.
There will not be any change in results for any of the methods. The auditor will decide on the methodology.
So, the auditor considers the following for determining the best sampling method:
- Testing objective,
- Historical testing results,
- Tolerable misstatements and
- Professional Judgement
What does statistical vs non-statistical Sampling?
Statistical Sampling is the sampling technique in which each item in the population has an equal chance of selection for testing.
Examples of statistical sampling approaches are random Sampling and MUS sampling.
Non-Statistical Sampling is a method wherein the sample selections depend on the auditor’s professional Judgement.
Wanna see an example?
Auditor considers that the transactions at month end have a high risk of material misstatements and selects those as samples for testing.
What are considerations when verifying support?
Test of details will be best method for audit of furniture account balance. The samples are tested by requesting support such as purchase invoices, contracts or purchase orders, email correspondence if any etc.
The audit team will verify if the sample transaction details per the General ledger agree with the supports. The major details which are verified are
- Vendor name to confirm that the transaction is not fictitious
- Date of Purchase if the transaction occurs within the accounting period
- Description of item purchased to determine whether it’s a furniture
- Purchased Quantity to match the GL record
- Value of the asset shall equal to the amount recognized as an asset
- In the case of Furniture disposal, check for the realization of any residual income from scrap sales and verify if it’s properly recognized in the books of accounts.
The logic here is to ensure that high-value items must be tested. If there is a misstatement in the value of such large items, then the risk of material misstatement and audit risk is high. Thus, it results in not achieving the audit objectives.
Auditing does not end with simply verifying the transaction with the GL.
It also necessitates critical evaluation by determining whether the transaction serves a business purpose and confirming that proper accounting is in place.
Also Read: Sold Furniture Journal Entry
Audit of Furniture is to address the following risk of material misstatements
- Valuation and Allocation
- Disclosure risk
The audit team shall design substantive audit procedures for all the above-identified risks. Another critical consideration here is the design and operational effectiveness of controls. If the controls are working properly, there will be less control risk and thus less audit risk.
As a result, team can test lesser of number of samples .
Auditors need to perform testing by requesting related support such as invoices and purchase orders from the client. The accounting portion must also be given adequate weight. If there are no misstatements, then the audit team can conclude that the furniture balance is accurate and free from material errors.