MODULE 9: SUBSTANTIVE TESTING PROCEDURES

MODULE 9: SUBSTANTIVE TESTING LECTURE

Cash Balances

Existence: Cash recorded on the books exist

1. Count cash on hand.

2. Confirm bank balances.
3. Examine interbank transfers.
4. Perform analytical procedures.

Completeness: All of the entity’s cash is included

5. Perform cash cutoff test.

6. Prepare proof of cash.

Rights and obligations: Any restrictions on cash have been identified

7. Examine standard bank confirmations and read the minutes of the board of directors’
meetings to determine whether any restrictions have been placed on cash.

Valuation and allocation: Cash is correctly valued.

8. Obtain bank cutoff statements directly from the bank and use them to test the bank
reconciliation as of the balance sheet date.

Presentation and disclosure: Cash is presented and disclosed properly.

9. Review financial statements and perform analytical procedures to determine whether

accounts are classified and disclosed in accordance with GAAP.

Cash Collections

Completeness: All receipts of cash and checks are recorded

For a sample of days, verify that all cash receipts are recorded by reconciling daily listing(s)
of cash receipts and validated deposit ticket to cash receipts journal.
Occurrence: Recorded receipts represent actual collections of cash from customers

For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts and to
remittance advice. For a sample of entries, reconcile daily deposit to validated deposit ticket.

Classification: Cash receipts transactions have been recorded in the proper accounts

Review account coding for a sample of entries in the cash receipts journal.

Accuracy (Valuation): Debits to cash and credits to accounts receivable are valued at
amounts received
MODULE 9 Substantive Testing Lecture 2
For a sample of entries in cash receipts journal, examine remittance advice and verify that
discount taken was appropriate. Foot accounts receivable subsidiary ledger and reconcile to
general ledger.

Cash Payments

Completeness: All cash payments made are recorded

Reconcile cash payments per books with cash payments per bank. Prepare or test bank
reconciliation.

Occurrence: Recorded cash payments occurred

Examine paid checks for appropriate endorsements. Examine documents underlying

payments.

Classification: Cash payments transactions have been recorded in the proper accounts

Check accuracy of accounts on invoices by reference to chart of accounts.

Accuracy (Valuation): Debits to various accounts and credits to cash are valued at proper
amounts

Recalculate invoices paid.

Sales and Accounts Receivable Balances

Existence or occurrence: Sales and accounts receivable are for shipments made to customers
10. Confirm accounts receivable and perform procedures for confirmations not returned.
11. Perform analytical procedures to test sales and accounts receivable.

Completeness: Sales transactions that occurred and existing receivables are recorded
12. Perform a test of sales cutoff.

Rights and obligations: Accounts receivable are owned by the client

13. Review minutes of the board of directors’ meetings, inquire of the client personnel, read
contracts and agreements, and confirm with lenders any indications that accounts have been
assigned, sold, or pledged.

Valuation and allocation: Accounts receivable are properly valued

14. Verify mathematical accuracy of the accounts receivable aging schedule and trace it to the
accounts receivable subsidiary ledger.
15. Test the adequacy of the allowance for uncollectible accounts.

Presentation and disclosure: Sales and accounts receivable are properly presented and disclosed in
accordance with GAAP.
16. Review financial statements and perform analytical procedures to determine whether accounts
are classified and disclosed in accordance with GAAP.
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Sales Transactions

Completeness: Sales transactions that occurred are recorded

For a sample of shipping documents, trace sales invoice and entry into sales journal and accounts
receivable subsidiary ledger. Perform cutoff tests.

Occurrence: Recorded sales are for shipments actually made to customers

For a sample of entries in the sales journal, compare sales invoice copy, customer order, and sales
invoice.

Classification: Sales and accounts receivable transactions have been recorded in the proper
accounts
For a sample of entries in the sales journal, verify the accuracy of account coding.

Accuracy (Valuation): Sales are correctly billed and recorded

For a sample of entries in the sales journal, (a) examine sales invoice, shipping document, and
customer for consistency of descriptions and quantities; (b) examine sales orders for credit
approval; and (c) check prices and extensions. Foot sales journal and general ledger account.

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