Directional testing Explain the meaning of "directional testing" and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions

Answer 1

Directional testing involves testing transactions or balances primarily for one type of error, either overstatement or understatement, but not for both at the same time. For example, an audit test for an understatement of Accounts Payable also tests for an understatement of Purchases. Directional testing also leads to audit efficiency for the following reasons:
? Misstatements of some accounts are more likely to occur in one direction than the other.
? Directional testing of an account balance provides evidence on a complementary set of accounts.
? Specific assertions are normally tested directionally. An example is the testing of the existence assertion for overstatements or the completeness assertions for understatements.
An example of directional testing for existence includes the sampling of assets recorded on the balance sheet, such as fixed assets and tracing those items back through the system to original source documents such as vendor invoices. This procedure tests for the possible overstatement of the fixed assets. Item(s) selected from the general ledger that are found to lack adequate supporting vendor invoices to substantiate existence are evidence of the overstatement of assets.
Testing directionally for completeness, on the other hand is just the opposite. Source documents are sampled and traced forward through the journals, ledgers and to the general ledger. An example may be vendor invoices for expenses. Invoices that are not found in the general ledger balance prove that the system is incomplete. In the example of an expense, net income would be overstated and liabilities may be understated.