Group Three

Q3(a) Describe what is meant by Substantive testing. Discuss in detail how you undertake
substantive testing for the following:

(i) Sales and Purchases

(ii) Wages and Salaries
(iii) Receipts and Payments
(iv) Bank reconciliation
(v) Assets and Liabilities
(vi) Share Capital
(vii) Accounting estimates

Answer
Substantive testing refers to the audit procedure that that examines the financial statements
and supporting documentation to see if they contain errors, material misstatement and fraud at
the assertion level. These assertions include existence, occurrence, completeness, rights and
obligations, accuracy and validation, and presentation and disclosure. The auditor determines
the best procedure depending on the assertion. For example, if an auditor wants to check for the
existence of a bank balance, confirmations should be obtained from the bank to confirm if the
balance actually exist and if the balance as per confirmation does not agree with the one as per
TB then another procedure will be done which is inquiry with the client to resolve the variance.

(i) Sales and Purchasessubstantive testing

sales

Assertion Substantive procedure

Occurrence An Auditor inspects the receipts against the sale transaction in
question to check whether the sale has actually occurred.
Trace sale invoice to customer order and bill of lading to ensure
that sales have actually happened. To ensure the delivery of goods
sold an auditor can check the delivery note if it has the same
information with the invoice and if it was signed by the customer
as an evidence of receipt.
Completeness Auditor recalculates the total of all sales occurred in the period
under review in the sub/general ledger to check if the total agrees
with the amount as per income statement.
Accuracy Verifies the sales invoice with the supporting documents e.g
journal entries to make sure that they are recorded correctly.
Cut-off Auditor checks the last receipts of the period under review to
ensure that sales are recorded in the period they belong to.

Purchases

Occurrence An auditor inspects the Good received Voucher (GRV)against the

invoice and other supporting documents to ensure that the
 ordered are received.
Completeness Verifies the total amount of all purchases in the general ledger
versus the amount of purchases in the income statement.
Accuracy Checks whether the GRV details are the same as the ones on other
supporting documents e.g invoice, purchase order etc. The details
include the amount, quantity, quality and supplier’s information if
its correct.
Cut-off The Auditor compares the dates of invoices versus year end to
ensure that the purchases transactions are recorded in the correct
period in which they occurred.

(ii) Wages and salaries substantive testing

Assertion Substantive procedure

Completeness Compare the total payroll cost with the total wages and salaries
recorded in the profit and loss.
Accuracy Verifies the grades of employees by trade unions (NEC) to check if
the employee’s salary is accurate as per his/her grade. The auditor
can also verify whether the amount of contributions (NSSA) on the
payroll is the same with the one on the remittance forms.
Recalculation of leave days to ensure that the leave days on the
payroll are accurate.
Occurrence Auditor observes the number of permanent employees and casual
employees on the actual ground versus the number on the payroll.
For example, payments may be made to workers who did not work
for that company or left the company.

(iii) Receipts and payments substantive testing

Receipts and payments.

Assertion Substantive procedure

Existence Auditor inspect the cash book and the bank statements to confirm if
the amount actually exists.
Completeness Recalculate the cashand bank reconciliation and compares it to the
one done by the client and agrees the balance c/d to the amount in
the statement of financial position to ensure that all transactions
have been recorded.
Cut-off Check the receipts and payments dates to ensure that all receipts
and payments are recorded in the correct period.
Valuation
Accuracy Monthly or annual cash receipts and payments journal must agree
to general ledger to ensure accuracy.

(iv) Assets and liabilities substantive procedure

Assertion Substantive procedure
Completeness Compare the total balances in the asset register with the ones in the
TB or general ledger to see if all assets are recorded.
Occurrence/ Existence Perform a physical count to see if all assets in the asset register
really exist. Inspect the purchase receipt and compares it with the
asset register confirm the asset additions.
Valuations Inquire with the client on the asset valuation policies for example
inventory asset is valued at lower of cost or NRV whichever is lower.
Accuracy Recalculate the asset register figures to ensure that the total
amounts of costs, depreciation and net-book values in the
statement of financial position are correct.
Presentation and Checks whether the assets are presented correctly in the financial
disclosure statements. PPE under non-current assets at their NBVs and
inventory, debtors, prepayments and cash and cash equivalents
under current assets.

(vi) Share capital substantive testing

Assertion Substantive procedure

Completeness Compare the subledger to
Occurrence/ Existence Perform a physical count to see if all assets in the asset register
really exist. Inspect the purchase receipt and compares it with the
asset register confirm the asset additions.
Valuations Inquire with the client on the asset valuation policies for example
inventory asset is valued at lower of cost or NRV whichever is lower.
Accuracy Recalculate the asset register figures to ensure that the total
amounts of costs, depreciation and net-book values in the
statement of financial position are correct.
Presentation and Checks whether the assets are presented correctly in the financial
disclosure statements. PPE under non-current assets at their NBVs and
inventory, debtors, prepayments and cash and cash equivalents
under current assets.