Accounting Treatment: Current assets, including cash and cash equivalents, short-term investments, accounts receivable, inventories, and other current assets, are typically considered a company’s most liquid assets.
The accounting treatment for these assets involves the proper classification and accurate measurement of the assets on the balance sheet.
The following are the top audit risks associated with current assets:
- Misclassification of assets – Classifying an asset as current when it should be long-term or vice versa can significantly impact the financial statements.
- Overstatement of accounts receivable – Overstating accounts receivable results in an increase in current assets, which can result in a distorted picture of a company’s financial performance.
- Overstatement of inventories – Overstating inventories can lead to an overstatement of the cost of goods sold, which, in turn, results in an overstatement of net income.
- Underestimation of reserves for bad debts – Underestimating the allowance for doubtful accounts can result in an overstatement of accounts receivable.
- Inadequate documentation – Inadequate documentation can result in incorrect or incomplete information about the assets.
- Fraudulent activities – Fraudulent activities, such as misrepresentation of sales or misappropriation of assets, can impact the accuracy of current assets.
- Inadequate internal controls – Inadequate internal controls can increase the risk of errors or fraud in current asset accounts.
- Unsupported transactions – Unsupported transactions can result in incorrect or incomplete information about the assets.
- Inaccurate measurement – Inaccurate measurement of current assets can result in a distorted picture of a company’s financial performance.
- Lack of segregation of duties – Lack of segregation of duties can increase the risk of errors or fraud in current asset accounts.
The following are the key audit assertions related to current assets:
- Existence – The assets exist and are properly recorded on the balance sheet.
- Completeness – All current assets are included in the financial statements.
- Valuation – The assets are valued accurately and in accordance with accounting standards.
- Rights and obligations – The company has the right to the assets and the liabilities are accurately recorded.
- Presentation and disclosure – The assets are presented and disclosed in accordance with accounting standards.
Walkthrough testing involves the auditor reviewing the company’s processes and controls related to current assets. This helps the auditor to gain an understanding of how the assets are recorded and controlled and identify any areas of weakness.
Test of Control:
Test of control involves the auditor testing the effectiveness of the company’s internal controls related to current assets. This includes testing controls such as segregation of duties, authorization, and documentation.
Substantive Audit Procedures
Substantive audit procedures are detailed and thorough tests performed by auditors to obtain sufficient evidence to support the financial statements. These procedures are designed to detect material misstatements in the financial statements and to provide a reasonable basis for the auditor to express an opinion on the financial statements.
The following are some common substantive audit procedures for current assets and other current assets:
- Review of the client’s accounting policies and procedures for current assets and other current assets. This includes understanding the client’s methodology for valuing, classifying, and recording current assets and other current assets in their financial statements.
- Analytical review of the balances of current assets and other current assets. This includes comparing the current year’s balances to the prior year’s balances, industry benchmarks, and other relevant information.
- Inspection of physical assets, such as inventory and cash. This includes observing the client’s inventory counting procedures and reviewing bank statements and other supporting documentation for cash transactions.
- Testing of the client’s internal controls over current assets and other current assets. This includes reviewing the client’s segregation of duties, approvals, and authorizations for transactions related to current assets and other current assets.
- Confirmation of balances with third parties, such as customers and suppliers. This includes requesting confirmations from customers and suppliers to verify the accuracy of accounts receivable and accounts payable balances, respectively.
- Review of transactions in detail, such as purchases and sales. This includes reviewing the client’s documentation, such as invoices, purchase orders, and bank statements, to verify the accuracy and completeness of transactions.
- Tests of detailed balances, such as accounts receivable and accounts payable. This includes performing a detailed audit of the client’s accounts receivable and accounts payable to verify that all transactions are recorded accurately and that there are no unrecorded transactions.
- Review of adjusting entries. This includes reviewing the client’s adjusting entries for accuracy and ensuring that the client’s accounting policies are consistent with Generally Accepted Accounting Principles (GAAP).
- Recalculation of balances, such as inventory and prepaid expenses. This includes recalculating the client’s inventory and prepaid expenses to verify the accuracy of the client’s balances.
- Review of aging reports, such as accounts receivable and accounts payable aging reports. This includes reviewing the client’s aging reports to verify that all transactions are recorded accurately and that the client’s aging reports are consistent with GAAP.