ACCA

Audit and Assurance (AA)

Final Mock – September 2019

Marking scheme and suggested

solutions
SECTION A
1 The correct answer is:
Intimidation Self-interest Self-review
Audit engagement team member to prepare 
Globe's financial statements
Shares in Globe have been inherited by Mr White 
Overdue fees  
Globe's audit fee is significant to Banham & Co 

If an audit team member were to prepare Globe's financial statements then this represents a
self-review threat as they would be auditing information they had prepared. They may therefore adopt an
uncritical attitude towards it, or could be unwilling to notify the audit team of any errors they do find in their
work.
Ownership of shares in Globe represents a self-interest threat as Mr White would have a personal
financial interest in Globe's financial performance.
The existence of overdue fees represents both a self-interest and an intimidation threat as Banham & Co
may not ask for misstatements to be corrected, or may not question the directors for fear of the overdue
fees not being paid.
Globe's audit fee is significant to Banham & Co, so there is a risk that Banham & Co may not perform a
sufficiently rigorous audit in order to reduce the risk of upsetting the client and losing the work.
2 The correct answer is: Banham & Co should require payment of the overdue fees before issuing the
current year's auditor's report.
It is important that the overdue fees are recovered from Globe at the earliest opportunity. Generally an
audit firm is expected to require payment of overdue fees before the auditor's report for the following year
is issued. If fees remain unpaid after the auditor's report has been issued, then the threat to
independence must be assessed and safeguards applied, eg review of work by an additional professional
accountant (ACCA Code of Ethics: s.290.218).
3 The correct answer is: Mr White should dispose of the shareholding in Globe at the earliest opportunity.
The ACCA Code of Ethics and Conduct prohibits partners from owning shares in an audit client due to the
insurmountable self-interest threat (ACCA Code of Ethics: s.290.108). As such Mr White should dispose
of the shares at the earliest opportunity.
It is possible for Banham & Co to withdraw from the audit engagement (Option C) but this is not really a
practical/commercial solution and would not necessarily be the case. Banham & Co should not
recommend another audit firm to its audit client, particularly in view of the fact that it is resigning because
it is not fully independent.
4 The correct answer is:
The nature, timing and extent of planned risk assessment procedures

 Industry-specific financial reporting requirements that may affect the audit of Globe

 The financial reporting framework adopted by Globe

 Globe's timetable for reporting its results and financial statements to its shareholders

The nature, timing and extent of risk assessment procedures should form part of the considerations for
the audit plan, not the audit strategy.

2
5 The correct answer is:
 Banham & Co's responsibilities in relation to the financial statements

 The planned scope and timing of the audit

Any restrictions of Banham and Co's liability

 Any material deficiencies of Globe's internal controls

Limitations of Banham & Co's liability are a matter that may be covered in the audit engagement letter,
but are not a matter which auditors are required to communicate to those charged with governance.
6 The correct answer is:
 One-for-one matching of purchase invoices to goods received notes before processing of
payment
 Use of hash totals to reconcile the inventory system input with the payables system

 Manual checks on invoices for evidence of authorised staff initials confirming that goods received
have been inspected for quality
Segregation of duties, ensuring inventory records are reviewed by a person independent of those
responsible for the receipt and control of goods
Segregation of duties is a general control, not an application control. General controls relate to many
applications, and support the effective functioning of application controls by helping to ensure the
continued proper operation of information systems.
7 The correct answer is:
Matching the total of the aged receivables listing to the sales ledger control account

 Comparing receivables turnover and the receivables collection period with the previous year

Tracing a sample of shipping documentation to sales invoices and into the sales and receivables
ledger
Verifying that price lists and terms of trade are documented, authorised and communicated

Comparing receivables turnover and the receivables collection period with the prior year is an analytical
procedure that tests the valuation assertion. Matching the receivables listing to the control account tests
primarily for completeness. Tracing shipping documentation to the sales and receivables ledger tests for
completeness. Verifying the documentation and authorisation of price lists and terms of trade is a test of
control, not a substantive procedure.
8 The correct answer is:
 To determine whether the financial statements adequately reflect the information and
explanations obtained during the audit
 To assess whether the financial statements are consistent with the auditor's knowledge of the
entity's and its environment
 To determine the effect on the financial statements of the aggregate of uncorrected
misstatements identified during the course of the audit and the preceding period's audit
To obtain explanations for significant variances from the prior year

Obtaining explanations for variances from the prior year is a purpose of analytical procedures at the
planning stage, not at the overall review of financial statements.

3
9 The correct answer is:
 Between the end of the reporting period and the date of the auditor's report, auditors have a
responsibility to perform procedures to identify subsequent events that may require amendment
or disclosure to the financial statements
Between the date of the auditor's report and the date the financial statements are issued, auditors
do not have a duty to perform procedures to identify subsequent events. If any new information
comes to their attention that may have caused the auditor to amend the auditor's report, this will
be considered during the following year's audit
 Between the date of the auditor's report and the date the financial statements are issued, auditors
do not have a duty to perform procedures to identify subsequent events, but they should act upon
any new information that comes to their attention, if it may have caused the auditor to have to
amend the auditor's report
After the financial statements are issued, the auditors have no responsibility to perform
procedures to identify subsequent events. If any new information comes to their attention that
may have caused the auditor to amend the auditor's report, this will be considered during the
following year's audit
After the auditor's report has been signed, auditors still have a passive duty; they are not required to
perform procedures or make enquiries to identify subsequent events, but if they become aware of a fact
which may have caused them to amend the auditor's report, they should discuss the matter with
management. This responsibility exists both before and after the financial statements are issued.
10 The correct answer is:
 Request written representations from management that all known actual or possible litigation has
been accounted for and disclosed appropriately
 Communicate directly with AB Co's external legal advisors to corroborate management's
assessment of the likely outcome
Request management to disclose the matter as a material uncertainty related to going concern

 Review board meeting minutes

It is possible that the litigation may give rise to a material uncertainty related to going concern. However,
the financial impact of the case is currently unknown, so the auditor cannot determine whether a material
uncertainty exists until further audit procedures are carried out.
11 The correct answer is: (2) and (3)
The audit concern here is that development costs have not been amortised once the asset is ready for
commercial production/use as required by IAS 38 Intangible assets. Audit procedures should therefore
focus on the calculation of the amortisation which should have been charged, and on assessing whether
it is material. It is not necessary to vouch a sample of the invoices which make up the $4.5 million
capitalised cost, as Figures & Co have already stated that the development costs have been correctly
capitalised.
12 The correct answer is: Qualified on the grounds of material misstatement
The development costs are deemed to have a useful life of three years and production of the product
commenced on 1 October 20X1, so the financial statements should show an amortisation charge of
$375,000 ($4,500,000  1/3  3/12). This amounts to 6% of profit before tax ($375,000 / $6,000,000) and is
therefore material. As no appropriate resolution has been reached on the issue, the auditor's opinion will
need to be modified. It should be qualified on the grounds of material misstatement, as sufficient
appropriate evidence has been obtained in relation to the matter.

4
13 The correct answer is: Include the issue relating to cash sales in the report they issue to those charged
with governance
The auditor's primary concern is to conduct the audit properly and to be in a position to give an opinion on
the financial statements for the year ended 31 January 20X2.
Occasion has only made a small number of cash sales and so the impact on the current year financial
statements is unlikely to be material. Therefore a qualified opinion is probably not required although any
modified opinion is likely to be modified due to insufficient appropriate evidence rather than due to
material misstatement.
The most likely action at the end of the current year audit is to report the issue to those charged with
governance so that they can determine the best course of action especially if the volume of cash sales is
likely to increase in future years.
14 The correct answer is:
Obtain a written representation from management confirming that they consider it appropriate to
prepare Occasion's financial statements using the going concern basis.
Agree the balance owed by AJ Co back to the original invoices and goods despatched notes.
 Review the cash flow forecasts prepared by management to determine whether any amounts
have been forecast to be received from AJ Co and the impact these have on overall cash flow.
 Review the minutes of Board meetings held post year end to determine any actions that have
been taken to secure additional finance.
The written representation is a valid source of audit evidence, however it is not as effective as reviewing
the cash flow forecasts and considering whether Occasion has managed to secure additional finance.
AJ Co has already responded to the receivables circularisation and confirmed the balance owed,
therefore there is no doubt as to the existence of the debt. The concern is whether Occasion will receive
monies from AJ Co, and if not then whether it can continue as a going concern.
15 The correct answer is:
Audit opinion Disclosure in the auditor's report
Qualified Emphasis of matter paragraph
 Adverse Material uncertainty relating to going concern section
Disclaimer Material uncertainty relating to going concern section
Qualified Key audit matters section

The balance of $9 million owed by AJ Co does not appear to be recoverable, so both receivables and
profit before tax are overstated. The amount represents 60% of profit before tax ($9m / $15m) and is
certainly material. It may be both material and pervasive if it threatens Occasion's ability to continue as a
going concern. As such, either a qualified opinion or an adverse opinion may be appropriate.
Regarding disclosure in the auditor's report, the auditor should also include a 'material uncertainty related
to going concern' section to highlight the directors' going concern disclosures to shareholders. An
emphasis of matter paragraph is not appropriate for going concern issues already disclosed, and this is
not a key audit matter because it has given rise to a modified auditor's opinion.

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SECTION B

16 All-parts Motor Company

Marking scheme
Marks
(a) Objectives of audit planning
Appropriate attention devoted to important areas 1
Resolves potential problems on a timely basis 1
Auditor can properly organise and manage the audit 1
Assists in the selection of appropriate team/assignment of work 1
Facilitates the direction, supervision and review of work 1
Facilitates the co-ordination of work by others 1
Maximum 5

(b) Control deficiency and recommendation (only six issues required)

Inventory count to be supervised by warehouse manager 2
Inventory count instructions not circulated in advance of the count 2
Inventory count sheets are not pre-printed or sequentially numbered 2
Warehouse staff count alone, rather than in pairs 2
Damaged inventory is to be valued by the warehouse manager 2
Large delivery expected during inventory count 2
Movement of inventories 2
Lack of segregation of duties 2
Maximum 12

(c) Procedures for inventory valuation

Discuss process 1
Compare with actual costs 1
Identifying variances 1
Treatment of variances 1
Maximum 3

(d) (i) Difficulties of using audit software

Set up costs 1
Cost of experienced staff 1
Program errors 1
Dangers of live and non-live testing 1
Maximum 2

(ii) Procedures using audit software

Cast inventory listing 1
Inventory ageing 1
Sample year-end inventory 1
Analytical procedures such as variance analysis 1
Maximum
4
(e) Advantages of outsourcing internal audit work
Staff do not need to be recruited 1
The firm has specialist skills 1
Immediate internal audit department 1
No staff training costs 1
Service contract can be for the appropriate time scale 1
Time scale is flexible, a team of staff can be provided 1
Maximum 4
30

6
Suggested solution
(a) Objectives of audit planning
 Proper planning helps the auditor devote appropriate attention to important areas of the audit.
 It helps the auditor identify and resolve potential problems on a timely basis.
 It helps the auditor properly organise and manage the audit so it is performed in an effective
manner.
 It can assist in the selection of appropriate team members and assignment of work to them.
 It facilitates the direction, supervision and review of work.
 It assists in the coordination of work done by auditors of components and experts.
(b) Identification and explanation of control deficiencies and recommendations

Control deficiency Control recommendation

The warehouse manager has overall
responsibility for the inventory count.
The warehouse manager is not independent, as
he maintains day-to-day responsibility for the
inventory of All-parts. He has a vested interest in
the safe custody and recording of inventory and
may be reluctant to record errors. Furthermore
any fraud could go undetected.
The inventory counting instructions are not
circulated before the day of the count, and only a
verbal briefing is provided to counters.
The counters may not have time (or may be too
embarrassed) to ask any questions about how
the count is to be conducted should they have
any concerns about their role. This in turn could
lead to inaccuracies or errors in the inventory
count.
Inventory counters are provided with blank
sheets of paper on which to record the results of
their count. This may mean that the items
counted are not recorded properly or in an
organised way.
If items are recorded in a haphazard way, it will
be more difficult to reconcile the amounts
counted with the inventory system after the
count has finished. This may lead to errors,
omissions or incomplete data.
Also, because the count sheets are not
pre-numbered and sequentially numbered, it is
impossible to be certain that all sheets
completed are collected at the end of the count.
The warehouse manager has specific knowledge of
All-parts' inventory and so can assist in an advisory
capacity. However the overall responsibility and
supervision of the count should rest with an
independent official, such as the finance director.
The warehouse manager and the finance director
should prepare written inventory count instructions
and circulate these to all counters at least one week
before the count is due to take place. They should
also provide a contact point to which any questions
or queries should be directed.
Counters should be allocated count sheets that are
pre-numbered and sequentially numbered. They
should detail the inventory lines to be counted but
not include the quantity per the inventory system.
At the end of the count, a sequence check of the
count sheets should be performed by a member of
the accounts department to ensure the count sheets
have all been returned.

7
 Control deficiency
Inventory counters are warehouse staff and are
responsible for counting inventory on their own,
rather than in pairs.
If staff count alone and a second count is not
conducted by another staff member, then any
errors or omissions by the first staff member
could go undetected.
Damaged inventory is to be valued by the
warehouse manager.
The warehouse manager has a vested interest
in the inventory, and may deliberately overstate
the value of the damaged inventory in order to
hide any problems relating to the safe custody of
inventory.
All-parts is scheduled to take delivery of a large
order of raw materials during the year-end count.
If the delivery is not properly recorded and is
included in the year-end count, then inventory
may be understated at the year-end or cut-off
errors may occur.
There is movement of inventories throughout the
count which increases the risk that the count
may not be performed accurately.
This may lead to inventories being overstated
(due to being counted twice), or omitted
altogether, and inaccurate amounts recorded for
inventory which could materially misstate the
financial statements.
There is a lack of segregation of duties as the
warehouse manager is responsible for
overseeing the count, collecting the counters'
sheets and inputting any changes on the
inventory system.
The lack of segregation of duties leads to an
increased risk of fraud and error.
Control recommendation
The inventory count should be carried out in pairs,
ideally with one person from the warehouse staff and
a second person who is not involved with the
inventory on a day-to-day basis (for example a
member of the accounts department). The counters
should count independently and where there are
discrepancies in the amounts counted, a third count
should be performed.
Sufficient staff need to be made available for
counting inventory, as this is an important internal
control.
The damaged inventory should be separately
identified and valued by the finance director in
conjunction with the warehouse manager.
Goods received on the day of the inventory count
should be kept separately and their quantity recorded
on the inventory count sheets, so that they are
correctly recorded in the financial statements.
Ideally there should be no movement of inventory
during the count, however this does not seem
possible given that a significant customer order is
due out on the last day of the year.
Inventory that is due to be despatched during the
count must be controlled. It should be segregated
and clearly labelled, and counters should be
instructed that it is not to be included in the count.
The duties described should be allocated as far as
possible to independent officials. The finance director
should supervise the count and a member of the
accounts department should input any adjustments
to the inventory system. These should also be
authorised and reviewed.

Note. Only six deficiencies were required.

(c) Procedures regarding standard costing system
 Discuss with the production director the process used for initially establishing the standard cost
cards, and for evaluating the need to revise standard costs subsequently.
 For a sample of products obtain cost cards and compare standard costs used with actual costs to
determine whether standard costs are reasonable:
– Compare material costs to supplier invoices
– Compare labour rates with payroll records

8
  Confirm the nature of overheads allocated (to determine that they relate to production) and the
basis on which they have been allocated, eg compare machinery depreciation cost allocated to
depreciation policy.
 Review the process for identifying and calculating variances.
 Discuss with the production director why any variances have arisen, and confirm how they have
been accounted for.
Note. Only three procedures were required.
(d) (i) Difficulties of using audit software
 The costs of designing tests using audit software can be substantial, as a great deal of
planning time will be needed in order to gain an in-depth understanding of the client's
systems so that appropriate software can be produced.
 The overall audit costs may increase because experienced and specially trained staff will
be required to design the software, perform the testing and review the results of the
testing.
 If errors are made in the design of the audit software, audit time and hence costs, can be
wasted in investigating anomalies that have arisen because of flaws in how the software
was put together rather than by errors in the client's processing.
 If audit software has been designed to carry out procedures during live running of the
client's system, there is a risk that this disrupts the client's systems. If the procedures are
to be run when the system is not live, extra costs will be incurred by carrying out
procedures to verify that the version of the system being tested is identical to that used by
the client in live situations.
Note. Only two difficulties were required.
(ii) Audit procedures using audit software

Test
Re-cast the inventory listing
Re-perform the ageing of inventory in the
inventory listing
Select a sample of inventory lines to count
at the year-end inventory count
Perform variance analysis on inventory
balances at the year end compared with
prior year or budget
Reason
To verify the accuracy of the calculation of the final
inventory figure
To ensure that the ageing is accurate before using
an aged listing to identify items that might be
obsolete and hence need to be written down
This will be a quicker and more objective method
of selecting a sample rather than doing so
manually
Once established this is a quicker and more
accurate method of performing the calculations

(e) The benefits of outsourcing the internal audit work include:

 Staff do not need to be recruited, as the accountancy firm has good quality staff.
 The firm has specialist skills and can assess what management require them to do.
 Outsourcing can provide an almost immediate internal audit department.
 Associated costs, such as staff training, are eliminated.
 The service contract can be for the appropriate time scale.
 Because the time scale is flexible, a team of staff can be provided if required.
Note. Only four advantages were required

9
17 TYN Co
Marking scheme
Marks
(a) 1 mark for an explanation of materiality and 1 mark for each factor explaining the
impact of materiality on the audit
Explanation of materiality 1
Which items to examine 1
Whether to sample 1
Whether to seek adjustment for misstatements 1
Whether to give a modified audit opinion 1
Maximum 4

(b) Audit risks and responses (only six risks required)

New accounting system introduced during the year 2
Accounts department overworked 2
Accounting treatment of rented shop 2
Risk of items held for repair being treated as inventory 2
Inventory valuation 2
Shop manager bonus based on sales 2
Calculation of redundancy provision 2
Maximum 12

(c) Substantive procedures for the redundancy provision

Inspect Board meeting minutes 1
Review supporting documentation to confirm present obligation 1
Recalculate provision 1
Written representation to confirm completeness 1
Review post year-end period to compare actual payments to amounts provided 1
Review disclosures for compliance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets 1
Maximum 4
20

Suggested solution
(a) Materiality and its impact on the external audit
Misstatements or omissions are generally considered material (individually or in aggregate) if they can
reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements.
An item may be material because of its monetary amount or its nature.
Materiality will affect the external audit in several ways:
 Materiality helps auditors determine which items to test, as material items must be subject to
substantive procedures.
 Materiality helps auditors determine whether to use sampling (for example, if all items in a
population are material individually, sampling will be inappropriate).
 Materiality helps auditors to determine whether or not to seek for misstatements in the financial
statements to be corrected. Misstatements should be considered both individually and in
aggregate.
 Materiality helps auditors to determine what level of misstatement will lead to a modified audit
opinion, and also whether the modification is material but not pervasive or both material and
pervasive.

10
(b) Audit risks and responses
Audit risk
TYN introduced a new accounting system during
the year, but the new system was not run in
parallel with the old system. Any errors in the
transfer of information from the old system to the
new system, together with any errors which have
occurred whilst the accounts department staff
become familiar with the new system, could result
in material misstatements in the year-end financial
statements.
The accounts department are currently
overworked. This increases the risk that material
misstatements occur in their work, and may also
make it more difficult to obtain answers to audit
queries because TYN's staff do not have sufficient
time to deal with them.
TYN has rented a fifth shop during the year
however the rental costs appear to have been
capitalised with the four properties which are
owned. If the rental costs are not correctly
classified, both PPE and profit for the year will be
overstated.
At the year end each shop will hold customer
owned watches and jewellery which are in the
process of being repaired. There is a risk that
inventory will be overstated if these have been
recorded in the year-end inventory figure.
At the year end the finance director is planning to
value inventory such as precious gemstones. Any
errors in this valuation may result in inventory
being over- or undervalued due to the specialised
nature of the inventory.
Shop managers will be paid a bonus based on the
sales for the last quarter of the year. The shop
managers may be tempted to overstate revenue in
order to gain financially from the bonus, and this
may lead to an overstatement of revenue in the
financial statements.
Four sales assistants have been made redundant
during the year although the redundancy payment
will not be made until the following year. There is a
risk that the redundancy provision is not properly
calculated and is understated, and that the
relevant disclosure is not properly made in the
financial statements.
Note. Only six audit risks and responses were required.
11
Auditor's response
Perform detailed testing to confirm that the closing
balances from the old system were correctly input
in to the new system.
Review journals posted to the new accounting
system during the year to determine the level of
errors which have occurred in the accounting
system.
Consider whether it would be appropriate to
decrease the materiality level for the current year
audit.
Prepare a schedule of documents and other
information required from TYN's accounts
department, and provide this to them at the earliest
opportunity so that they have sufficient time to
gather the required information.
Discuss the costs with the finance director to
determine whether he has processed a journal
entry to remove the rental costs from PPE.
Obtain a breakdown of the costs recognised as
PPE at the year-end, and review the costs to
determine whether they include any rental costs
relating to the fifth shop.
Review TYN's inventory count procedures to
determine the internal controls in place to
segregate customer-owned items and ensure that
they are excluded from the year-end count.
Request that TYN engage the services of an
independent valuer to determine the value of
year-end inventory such as gemstones.
Perform analytical procedures on the sales
revenue for each shop during the last quarter of
the year to determine whether the percentage
increase in sales is consistent with the other shops
and the prior period.
Perform analytical procedures on the gross profit
margin for the last quarter of the year to ensure
that it is consistent with the rest of the year.
Consider whether the requirements of IAS 37
Provisions, Contingent Liabilities and Contingent
Assets have been satisfied and the provision
correctly calculated and disclosed.
(c) Substantive procedures for the redundancy provision
 Inspect the minutes of the November/ December Board meetings to confirm that the decision to
make the redundancies and to assess the probability that the redundancy payments will be paid.
 Inspect copies of letters sent to the four shop assistants to determine whether the decision was
formally announced and they were notified before the year-end date.
 Discuss the basis on which the redundancy cost was calculated with the finance director, and
recalculate the redundancy cost per shop assistant to confirm the accuracy and completeness of
the provision.
 Obtain a written representation from the Board of TYN confirming the completeness of the
provision.
 Review the post year-end cash book to determine whether the redundancy payments were made
in January 20X2 and whether the amount paid agrees to the year-end provision.
 Review the disclosure note for the redundancy provision to ensure that it complies with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

12
18 DRS Co
Marking scheme
Marks
(a) Control strengths and tests of control (only five required)
Overtime authorised 2
Supervision of clocking-in and clocking-out process 2
Creation of personnel files 2
Authorised new joiner report 2
Checking of standing data 2
Reperformance of calculations 2
Comparison of costs to budget 2
Authorisation of payments 2
Maximum 10

(b) Substantive procedures relating to payroll

Proof in total of payroll and agree to the financial statements 1
Review monthly payroll to prior year and budget 1
Compare total payroll to prior year 1
Verify joiners/leavers and recalculate first/ last pay 1
Agree sample of weekly overtime sheets to overtime payment in payroll records 1
Agree wages and salaries paid per payroll to bank transfer list and cashbook 1
Agree the individual wages and salaries as per the payroll to the personnel records 1
Recalculate gross and net pay 1
Recalculate statutory deductions 1
Cast payroll records ½
Agree wages and salaries per payroll to trial balance ½
Maximum 6

(c) Substantive procedures relating to PPE

Valuation
Agree year end valuation to valuer's report 1
Consider basis of valuation 1
Consider whether to place reliance on valuer 1
Recalculate revaluation gain 1
Recalculate depreciation charge 1
Perform proof in total of depreciation charge 1

Rights and obligations

Inspect title deeds and land registration documents 1
Vouch additions to invoices including directly attributable costs 1
Maximum 4
20

13
Suggested solution
(a) Control strengths and tests of control
Control strength
All overtime is authorised and summarised on an
overtime schedule by the manufacturing plant
manager.
This ensures that overtime hours are only paid in
respect of additional hours required by the business
and at the appropriate rate.
The clocking-in and clocking-out process is
supervised. This should prevent staff clocking-in and
clocking-out for each other, thereby ensuring that
the clock cards show hours actually worked.
Human resources creates personnel files for new
employees and allocates them an employee
number.
These procedures provide evidence that employees
actually exist and are bone fide individuals.
For new employees human resources sends an
authorised new joiner report form from which the
employees data is added to the payroll.
This provides assurance that only genuine new
joiners are added to the payroll and reduces the
chances of fraud.
Input of standing data is checked by the payroll
supervisor and the new joiner report form is
stamped to indicate that this is the case.
This reduces the possibility that systematic errors
will be made.
A sample of calculations and deductions is
reperformed on a weekly/monthly basis and the
results are recorded on a spreadsheet.
This ensures that the system is operating correctly
and accurately and reduces the risk that
computational errors are made.
The finance director reviews payroll costs and
compares them to budgeted figures.
This enables the finance director to identify any
unusual or unexpected variations and increases the
likelihood of detection of errors or fraud.
A bank transfer list is prepared and the payroll and
BACS transfer list are authorised by the finance
director.
This ensures that the correct amounts are paid to
the right individuals.
Note. Only five control strengths/tests of control were required.
14
Test of control
For a sample of weeks where overtime has been
paid, obtain the overtime schedule and confirm
evidence of authorisation eg signature of
manufacturing plant manager. Agree overtime
rates used to those specified by company policy.
Observe clocking-in and clocking-out process
and confirm that a supervisor is present
throughout.
For a sample of new staff on the payroll, review
existence of personnel file and allocation of an
appropriate employee number.
For a sample of new staff included on the payroll
confirm that an authorised new joiner report has
been produced and received by the payroll
department.
For a sample of new staff agree standing data on
the system to the new joiner report form and
confirm that the report has been stamped as
checked.
Review the calculations spreadsheet to confirm
that the reperformance of the calculations does
occur on a regular basis, and that any
discrepancies are followed up and dealt with.
Review budgeting procedures. Inspect
documentation providing evidence of the finance
director's review including notes of unusual
amounts and results of investigations.
Examine final payroll report and BACS transfer
list for evidence of review and authorisation by
the finance director.
(b) Substantive procedures relating to payroll
 Perform a proof in total of total wages and salaries, incorporating joiners and leavers and any
annual pay increase. Compare this to the actual wages and salaries expense in the statement of
profit or loss and investigate any significant differences.
 Obtain a breakdown of the monthly payroll charges for head office staff and manufacturing staff
and compare this to the prior year expense and/ or current year budgeted cost. Discuss any
significant differences with management.
 Compare the total payroll expense to the prior year and investigate any significant differences.
 Select a sample of joiners and leavers, agree their start/leaving date to their human resources
contract and the new joiner report, recalculate that their first/last pay packet was accurately
calculated and recorded.
 Select a sample of weekly overtime schedules and trace to overtime payment in payroll records to
confirm completeness of overtime paid.
 Agree the total net pay per the payroll records to the bank transfer (BACS) listing of payments and
to the cashbook.
 For a sample of employees, agree the individual wages and salaries per the payroll to their salary
details according to their human resources records.
 For a sample of employees, recalculate the gross and net pay and agree to the payroll records to
confirm accuracy.
 Re-perform the calculation of statutory deductions to confirm whether correct deductions for this
year have been made in the payroll.
 Cast a sample of payroll records to confirm completeness and accuracy of the payroll expense.
 Agree the total wages and salaries expense per the payroll system to the trial balance, investigate
any differences.
Note. Only six substantive procedures were required.
(c) Substantive procedures relating to PPE
Valuation:
 Obtain a copy of the independent valuer's report to determine the year end valuation for the two
production facilities and the warehouse, and trace this balance through to the financial
statements.
 Consider whether the basis on which the PPE has been revalued is consistent with prior years
and in accordance with IAS 16 Property, Plant and Equipment, and whether this is disclosed in
the financial statements.
 Consider the reputation, professional qualifications and experience of the independent valuer to
determine whether they are sufficiently independent of DRS and sufficiently experienced/ qualified
to perform the valuation.
 Recalculate the accounting adjustments made to recognise the revaluation in order to verify that
the gain or loss recognised in other comprehensive income/revaluation surplus is appropriate.
 For a sample of assets, recalculate the depreciation charge for the year to determine whether the
second production facility was initially depreciated based on cost, and the other assets on their
revalued amounts.
 Perform a proof in total calculation of depreciation, considering the timing of additions and
disposals and compare this expectation to the actual charge. Investigate any significant
differences.

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Rights and obligations:
 Inspect the title deeds and land registration documents relating to the second production facility in
order to verify that the facility is owned by DRS.
 Vouch the balance capitalised for the new production facility to purchase invoices, including any
professional fees which have been capitalised to verify that they are directly attributable to the
acquisition.
Note. Only four substantive procedures were required.

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