Reference no: EM132563178

Question - Phil's Home Handyman Services (PHHS) is a small business providing home maintenance services in Christchurch and surrounding areas. Phil is interested in purchasing some new machinery for his business and has approached a bank for funding. In order to be given a loan the bank has requested an audited financial report. Phil has approached your firm for this service and you have been allocated the task of auditing PHHS's financial statements. Your initial review of the business indicates that a substantive testing approach would be appropriate and you are now preparing audit programmes. In particular, you are working on the testing of the revenue cycle. The information you have obtained from your review is as follows:

Phil usually works 50 hours a week. Part of this time is spent travelling between clients and is not charged to the clients. The remaining time is charged at $40 per hour, regardless of the task undertaken.

Phil is usually paid in cash, except for a small number of regular small-business customers whom Phil allows to pay on account on a monthly basis by cheque.

In all cases Phil provides the customer with a written receipt. Receipts are prepared manually from a receipt book purchased at a bookstore. The book contains prenumbered blank receipts, which are completed in duplicate.

REQUIRED -

(a) Define 'tests of controls' and 'substantive testing', and then compare and contrast these two forms of audit tests.

(b) For each of the following financial statement assertion categories, identify two substantive audit procedures you could use to audit revenue: (i) Accuracy and Cut-off (ii) Completeness (iii) Occurrence.