SKANS School of Accountancy SKANS School of Accountancy

Substantive procedure
PROCEDURES on specific areas
Substantive procedure is an audit procedure which is designed to detect material misstatements at the assertion
level.
Substantive on Receivables Key risk: overstatement
Substantive procedures (or substantive tests) are those activities performed by the auditor that gather evidence
as to the completeness, validity and / or accuracy of account balances and underlying classes of transactions and
related disclosures.
Receivables circularization (3rd party confirmation of receivables)

Types of receivable confirmation letters

Substantive procedures comprise the following
a) Analytical procedures 1. Positive confirmation: Receivable asked to agree or disagree with the stated balance or write the
b) Tests of details (of classes of transactions, account balances, and related disclosures) balance owing.
a) Analytical procedures
Analytical procedures mean the analysis of significant ratios and trends. It also involves the investigation of
resulting fluctuations and inconsistent relationships. 2. Negative confirmation: Receivable asked to reply only if he disagrees with the balance. This type of
confirmation should only be used when:
b) Test of detail The audit client has a strong internal control system over sales and trade
Test of detail is carried out for transactions and balances. receivables.
Details of transaction Other good corroborative evidence with regard to the existence of trade
These are tests to obtain evidence of individual debits and credits that make up an account to reach a conclusion receivables has already been obtained from other tests carried out.
about the account. There are a large number of small balances.
The tests can be made through tracing and vouching of transactions. A substantial number of errors is not expected.

Tracing: Supporting documents traced to records/account books

Vouching: Records/account books vouched/verified by matching to relevant supporting documents

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Method of sending confirmation letter Substantive testing

1. Obtain the receivables ledger and reconcile it to the control account
2. Select a sample of debtors to be circularized Existence 1. Circularization of a sample of period end receivables (discussed above)
3. Inform the client of the intended list.
The receivable actually 2. Verify audit trail from records to source document: Select a sample of year-
4.
exists end receivable balances and agree back to valid supporting documentation
5. Get the letter signed by a senior person at the client.
of GDN and sales order to ensure existence
6. Record names and amount circularized
7. Post/fax letters ensuring the replies are sent directly to the auditor. Accuracy, valuation, 1. Circularization of a sample of period end receivables (discussed above)
8. Record replies received and test the ones not agreed. allocation
9. For non-replies: 2. Invoice: inspect and recalculate
- o send a follow up Receivables are included
in the financial 3. Recoverability procedures ( bad debts):
circularisation.
- statements at the
correct amount Select a significant sample of receivables and review whether there
permission, the senior should telephone the customer and ask whether they are
are any after date cash receipts(ensure that a sample of slow
able to respond in writing to the circularisation request.
- If there are still non-responses, then the auditor should undertake alternative moving/old receivable balances is also selected)
procedures to confirm receivables. These procedures include verifying post year end
receipts from that customer, verifying order placement and dispatch documentation Review the aged receivable ledger to identify any slow moving or old
and carrying out bad debt procedures receivable balances, discuss the status of these balances with the
credit controller to assess whether they are likely to pay

10. For responses with differences: Calculate average receivable days and compare this to prior year,
i. the auditor should identify any disputed amounts, and identify whether these relate to investigate any significant differences
timing differences or whether there are possible errors in the records of the client.
ii. Any differences due to timing, such as cash in transit, should be matched with cash Review customer correspondence to identify any balances which are
received after the year end in dispute or unlikely to be paid.
iii. The receivables ledger should be reviewed to identify any possible mispostings as this
could be a reason for a response with a difference. Review board minutes to identify whether there are any significant
iv. If any balances have been flagged as disputed by the receivable, then these should be concerns in relation to payments by customers.
discussed with management to identify whether a write down is necessary
4. Allowance for doubtful debts:

recalculate to ensure it is accurate

ensure rationale/basis reasonable and in line with your

written representation from management that the

basis/assumptions are reasonable and that the allowance is
adequate.

-Inspect post year-end sales returns/credit notes and consider

whether an additional allowance against receivables is required.

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Rights & obligation 1. Circularization of a sample of period end receivables (discussed above)

The receivable belongs 2. Invoice: inspect to confirm right over the receivable Substantive testing- Sales Revenue
to the client
Completeness 1. Verify audit trail from source document to record: 1. Arithmetical accuracy of invoices checked

There has been no Select a sample of GDNs and agree to valid supporting 2. Recalculate discounts to ensure accuracy
omission in recording of documentation of invoice.
receivables 3. Compare the overall level of revenue against prior years and budget and investigate any significant
Ensure these invoices have been entered in the day books and
fluctuations.
individual ledgers.

Ensure the individual ledger is reconciled with the control 4. For a sample of invoices match rates to standard price list to confirm accuracy
account)
5. Select a sample of credit notes raised, trace through to the original invoice and ensure invoice correctly
2. Compare ratios/balances of this period to prior periods and budgets, removed from sales.
investigate any significant differences.
6. Completeness as above: Select a sample of trade customer orders placed and agree these to the
3. Ensure all disclosures relevant to receivables have been made.
despatch notes and sales invoices through to inclusion in the sales ledger to ensure completeness of
revenue.

7. Cut-off: Note down the last GDN for the year. Take a sample of GDNs immediately before AND after the
year end and ensure they are recorded in the correct accounting period

Attempt questions to check your understanding:

Sept. 2016- Q16d

June 2015-Q6a and biii
Dec 2014-Q5b

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Substantive testing: Inventory- Key risk: overstatement During Inventory Count

Inventory count -end inventory count is to assess the effectiveness of the

inventory counting procedures in order to determine whether reliance can be placed upon them to
Before Inventory Count provide assurance about the existence and condition of inventory.

1. Review the prior year audit files to identify whether there were any particular warehouses/areas where
significant inventory issues arose last year
2. Discuss with management whether any of the warehouses this year are new, or have experienced
significant control issues. 1. Observe the counting teams to confirm whether the inventory count instructions mentioned above are
3. Consider locations. Ensure all locations are covered OR decide locations the audit team members will being followed correctly.
attend, basing this on materiality and risk of each site. 2. Perform a test of controls (i.e. test the system used for recording, issuing inventory etc.)
4. Obtain a copy of the proposed inventory count instructions, review them to identify any control 3. Confirm the procedures for identifying and segregating damaged goods are operating correctly, and
deficiencies and if any are noted, discuss them with management prior to the counts. assess inventory for evidence of any damaged or slow moving items.
5. Arrange to verify any inventory held by 3rd party 4. - Perform two-way testing: Match
6. Establish whether expert help is needed physical stock with stock records(completeness) and records with physical stock(existence
7. If an internal audit department exists, discuss the procedures that they carried out and review their 5. Check cut-off arrangements- Identify and make a note of the last goods received notes and goods
working papers. despatched notes for the year end in order to perform cut-off procedures.
6. Note any inventory that is set aside or specially marked, providing possible indicators that inventory is
The following matters should be covered in the instructions for the physical inventory count: not owned by the company
7. Enquire as to the possibility of consignment or third party inventories being held by the company and
1. There should be adequate supervisory controls, with one individual assuming overall responsibility for
record appropriate notes for subsequent follow up
the inventory count.
2. Employees involved in the inventory count should be independent of those working in the stores and 8. Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing on
production areas the final audit.
3. Counters should work in pairs with one counting inventory and the other recording and checking
quantities counted.
4. y of After Inventory Count
double counting or omission.
5. There should be adequate control over the issue and returning of inventory control sheets, possibly 1. Discuss any weaknesses discovered during count with the management
involving the use of pre-numbered sheets with returned sheets being agreed to issued sequences for 2. Match final inventory sheets with the photocopies that you did at the time of inventory count- Check to
completeness. ensure that all sheets and records used at the inventory count are included in the final inventory count
6. Inventory sheets should be completed in ink and signed by the relevant individuals involved in the sheets and records.
counting and recording process. 3. Ensure that slow-moving and obsolete inventory lines recorded at the inventory count are properly
7. Movement of inventory during the count should be prohibited where possible and a special quarantine highlighted in the sheets and records to be used in the valuation process.
area should be created in which to store any goods received. 4. Follow-up on any other matters recorded in working papers at time of count
8. In order to minimise disruption to the production process, raw materials together with parts and
finished goods inventories should be counted first with work-in-progress inventory being counted at the
end of the working day.
9. There should be stringent controls over cut-off issues with careful note being made of the number of the
last goods received, goods returned and goods despatched and raw materials/parts issued notes prior to
the inventory count.
10. There should be adequate procedures to identify, count and record inventory that is slow moving or
obsolete.

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e) Compare the gross margin for current year with prior year.
Substantive procedures Fluctuations in gross margin could be due to inventory valuation
issues. Discuss significant variations in the margin with management.
Completeness During the inventory count, take a sample of physical inventory and ensure it is
f) Follow up any damaged/obsolete items noted by the auditor at the
completed recorded in the records/inventory ledger
inventory counts attended, to ensure that the inventory records have
Existence During the inventory count, select a sample of inventory from the ledger and verify its
been updated correctly
physical existence.
Rights and obligation 1. Inspect invoices/supporting documents to confirm right g) Determine estimated costs to completion. These costs represent
another important element of net realisable value. Determine costs to
2. IF there is any inventory at the 3rd party, confirmed it is owned by the client
be incurred in marketing, selling and distributing directly related to
by circularizing the 3rd party.
the items in question.
3. IF there is consignment stock, the agreement will need to be inspected to
h) Get a written representation from the management that inventory
confirm when risks and rewards(control) are transferred.
has been correctly valued.
Accuracy, Valuation. 1. Select a representative sample of goods in inventory at the year end, agree
4. WIP
Allocation the cost per the records to a recent purchase invoice and ensure that the cost
is correctly stated. a) Cast the schedule of total WIP and agree to the trial balance and financial
statements.
2. For a sample of manufactured items obtain cost sheets and confirm:
b) Obtain the costing records for a sample of WIP and:
raw material costs to recent purchase invoices
labour costs to time sheets or wage records Agree labour costs to payroll;
overheads allocated are of a production nature. Agree labour hours to time sheets;
Recalculate the overhead absorption rate

3. Net Realisable Value: c) Obtain the breakdown of WIP and agree a sample of WIP assessed during the
count to the WIP schedule, agreeing the percentage completion as recorded at
a) For a sample of inventory, review post year end sales to see if
the inventory count.
adjustments are required d) Select a sample of items included in WIP at the year end and ascertain the final
unit cost price, verifying to relevant supporting documentation, and compare
b) For unsold items, discuss with mngt to determine whether they are
to the unit sales price included in sales invoices post year end to assess NRV.
slow moving and provision has been created

c) Review aged inventory reports and identify any slow moving goods,
discuss with management why these items have not been written 5. Procedures to confirm use of standard costs for inventory valuation
down a) Discuss with management the basis of the standard costs applied to the
inventory valuation, and how often these are reviewed and updated.
d) Perform a review of the average inventory days for the current year
b) Review the level of variances between standard and actual costs and discuss
and compare to prior year inventory days .Discuss any significant
with management how these are treated.
variations with management.
c) Obtain a breakdown of the standard costs and agree a sample of these costs
to actual invoices or wage records to assess their reasonableness

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Cut-off Note down the last GDN and GRN for the year. Take a sample of GDNs and GRNs Audit procedures for continuous (perpetual) inventory counts
immediately before AND after the year end and ensure they are recorded in the
correct accounting period
the auditor should ensure that:

I. Inventory records are kept up to date.

Inventory Held by Third Parties II. All inventory lines are counted at least once a year with higher value and desirable lines being counted
more frequently.
Where the entity has inventory that is held by third parties and which is material to the financial statements, the III. The counting of inventory is carried out by suitably experienced independent individuals in a systematic
auditor shall obtain sufficient appropriate audit evidence by performing one or both of the following: and orderly manner.
IV. All corrections to inventory records are authorised by a responsible official of the company.
V. Any material discrepancies noted between inventory records and physical quantities are investigated
Direct confirmation from the third party regarding quantities and condition (in accordance with ISA 505
immediately and reported to management for immediate further follow up as appropriate.
External confirmations) VI. There are satisfactory procedures with regard to cut-off and receipt/issue documentation at the time of
inventory counts.
Inspection or other appropriate audit procedures (if third party's integrity and objectivity are doubtful, for
example)
Procedures
The other appropriate audit procedures referred to above could include the following:
1. The audit team should attend at least one of the continuous (perpetual) inventory counts to review
Procedures to confirm inventory held at third party locations whether the controls over the inventory count are adequate.
2. The audit team should confirm that all of the inventory lines have been counted or are due to be
1. Send a letter requesting direct confirmation of inventory balances held at year end from the third party 3. counted at least once a year by reviewing the schedules of counts undertaken/due to be undertaken.
regarding quantities and condition. 4. Review the adjustments made to the inventory records on a monthly basis to gain an understanding of
the level of differences arising on a month by month basis.
5. If significant differences consistently arise, this could indicate that the inventory records are not
2. Attend the inventory count (if one is to be performed) at the third party warehouses to review the
adequately maintained. Discuss with management how they will ensure that year-end inventory will not
controls in operation to ensure the completeness and existence of inventory. be under or overstated.
6. Consider attending the inventory count at the year end to undertake test counts of inventory from
3. Inspecting documentation in respect of third party inventory (eg warehouse receipts) records to floor and from floor to records in order to confirm the existence and completeness of
inventory.
4. Requesting confirmation from other parties when inventory has been pledged as collateral
Attempt questions to check your understanding:

March/June Hybrid 2016-Q5

Sept/Dec Hybrid 2015-Q6a, bi
Dec 2014-Q6bii
June 2014-Q3b

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3. Recalculate profit/loss on disposal agree to the statement of profit or loss

Substantive testing: Property, Plant & Equipment Key risk: overstatement

4. Check authorising documentation to ensure that the disposal was appropriately

Completeness 1. Take a sample of physical assets and ensure they are completely recorded in the authorised
NCA Register
5. Examine the sales documentation relating to the disposal and ensure that the
2. Re-perform the NCA Register reconciliation to the General Ledger sale details match those in the authorising documentation.

3. Obtain a breakdown of additions, cast the list and agree included in the non- Revaluation
current assets register to confirm completeness of PPE.
1. Obtain a schedule of assets revalued this year and cast to confirm completeness
4. Review the repairs and maintenance ledger to ensure capital expenditure has and accuracy of the revaluation adjustment.
not been accidently expensed off
2. Ensure all similar assets have been revalued
Existence 1. Select a sample of assets from the NCA Register and inspect them to verify their
3. Verify depreciation has been calculated on the revalued amount
physical existence
4. Agree the valu
2. Ensure disposed-off assets have been removed from the NCA Register as they
no longer exist. 5. I

Rights & Obligation 1. Inspect the ownership documents (title deeds, registration documents etc) to 6. Agree the revalued amounts for these assets are included correctly in the non-
current assets register.

2. 7. Review the financial statements disclosures of the revaluation to ensure they

comply with IAS 16
Accuracy, valuation, Additions during the year
allocation Depreciation
1. Select a sample of additions and agree cost to supplier invoice to confirm
valuation. 1. Review the depreciation policy of the company to ensure that it is consistent
and appropriate(this can be done by comparison with last year and with
2. Ensure all additions were authorized by inspecting the minutes of the board
industry practice)
meetings
2. recalculate and re-perform depreciation charge to ensure its accuracy.
3. Review the list of additions and confirm that they relate to capital expenditure
items rather than repairs and maintenance. 3. assess depreciation method is reasonable:

Disposals during the year compare with last year

1. Disposal proceeds matched to supporting documents such as invoices and to compare with industry practice
cash book and bank statement
review NCA Register with Net Book Value of zero which are
2. Verify that the correct cost and depreciation has been removed from the still in use
records
review NCA Register for excessive profit/loss on disposal.

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Enquire from the management the reason for this. Intangible assets

4. enquire from the management whether they consider the depreciation method 1. Obtain and cast a schedule of intangible assets, detailing opening balances, amount capitalised in the
to be reasonable- current year, amortisation and closing balances.
2. Agree the opening balances to the prior year financial statements.
5. Review the disclosure of the depreciation charges and policies in the draft 3. Agree the closing balances to the general ledger, trial balance and draft financial statements.
financial statements. 4. Recalculate the amortisation charge for a sample of intangible assets and confirm it is line with the
amortisation policy.
General

Review the disclosure of the additions and disposals in the draft financial statements Research and Development
and ensure it is in line with IAS 16 Property, Plant and Equipment.
1. For those expensed as research, agree the costs incurred to invoices and supporting documentation and
to inclusion in profit or loss.
2. For those capitalised as development, agree costs incurred to invoices and confirm technically feasible
Repairs and Maintenance by discussion with development managers or review of feasibility reports.
3. Review market research reports to confirm client has the ability to sell the product once complete and
1. Obtain a schedule of the expenditure and cast to ensure accuracy. probable future economic benefits will arise.
2. For those items treated as capital and included with property, plant and equipment, agree to purchase 4. Review the disclosures for intangible assets in the draft financial statements are in accordance with IAS
invoices and ascertain whether they are in fact of a capital nature. 38 Intangible Assets.
3. For items treated as repairs, agree to invoices to ensure they are not of a capital nature and that they
have been correctly expensed to the statement of profit or loss (income statement).
An acquired brand/patents/license.

1. Review board minutes for evidence of discussion of the purchase of the acquired brand, and for its
approval.
2.
Attempt questions to check your understanding:
3. Obtain the purchase agreement and confirm the rights of client in respect of the brand.
4. Discuss with management the estimated useful life of the brand and obtain an understanding of how
Dec 2014-Q6bi the useful life has been determined.
June 2013-Q4a 5. Recalculate the amortisation expense for the year and agree the charge to the financial statements
6. Confirm adequacy of disclosure in the notes to the financial statements.

Attempt questions to check your understanding:

Sept/Dec Hybrid 2015-Q6bii

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Bank and cash Audit procedures on the bank letter include:

1. Agree the balances for each bank account to the relevant bank reconciliation and
General 1. Agree the bank balance on the trial balance to the yearend balance in the financial statements.
procedures - the year end bank balance on the computer system, and
2. Agree total interest charges on the letter to the interest expense account in the
- the balance on the financial statements.
general ledger.
2. Review the cash book and bank statements for any unusual items or large transfers 3. For any details of loans, ensure repayment terms are correctly disclosed in the
around the year end, as this could be evidence of window dressing. financial statements between current and non-current liabilities.
3. Review the financial statements to ensure that the disclosure of cash and bank
balances are complete and accurate. Period-end Bank
Reconciliation
Bank confirmation Procedure for obtaining a bank letter Statement (BRS)
letter 1. Cast the reconciliation to check arithmetical accuracy
1. The auditor will produce a confirmation letter in accordance with local audit 2. Agree the bank balance to the trial balance.
regulations and practices. 3. ance per the cash book to the year-end cash book.
2. The letter will be sent to the client to sign and authorise disclosure and then it will 4. Agree the balance per the bank statement to an original year-end bank statement
b and also to the bank confirmation letter.
provided a standard authority for the bank to respond to a bank letter each year. 5. Trace all of the outstanding lodgments to the pre year-end cash book, post year-
In this case separate authority would not be required.) end bank statement and also to paying-in-book per year end.
6. Trace all un-presented cheques through to a pre year-end cash book and post year-
Ideally the letter should be sent before the end of the accounting period to enable the bank end statement. For any unusual amounts or significant delays obtain explanations
to complete it on a timely basis e.g. at the year-end. from management.
7. Examine any old un-presented cheques to assess if they need to be written back
3. The bank will complete the letter and send it back directly to the auditor. into the purchase ledger as they are no longer valid to be presented.

Contents of a bank letter Completeness 10.

The following matters should be confirme reconciliations or the trial balance to ensure completeness of bank balances.
1. Titles and account numbers of all bank accounts held in the name, joint name or trade 11. Examine the bank confirmation letter for details of any security provided by client
name of client at the year end as this may require disclosure.
2. Confirmation of balances held in those accounts at the year end
3. Full details of interest charged or received on accounts held during the year if not
specified on bank statements.
4. Details of overdrafts and loans repayable on demand together with details of other
loans and facilities.
5. Details of any assets of client which are held as security by the bank.
6. Details of any other assets held by the bank, for example share certificates, documents
of title or deed boxes.
7. Accounts with nil balance
8. Details of accounts closed in the last 12 months
9. A list of branches of the bank, or other banks, or associated companies where it is
known that a relationship has been established with the client.

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Cash Substantive testing: Trade Payables- Key risk: understatement

Generally cash balance is immaterial to the financial statements. However, cash is an area which is prone to
fraud, especially if the internal controls are not efficient. That is why cash verification is an important audit
procedure for internal auditors.
Completeness 1. Reconcile payables ledger to the general ledger.
Physical verification of cash
Cash balances include the hard cash, unbanked cheques, credit card slips and IOUs. That is why all cash balances 2. Check reconciliation of supplier account statements to trade payable ledger
need to be counted at the same time. balances, prepared by client. Enquire into any abnormalities and carry out further
The audit working papers relating to the cash count will include the date of the count, time of the count, name reconciliations as required.
and signature of staff conducting the count
3. Obtain year-end supplier statements:
Agree the balance on the statement to
Audit procedures for cash payables ledger.
The main audit work involved in verifying cash balances is a physical count. Where necessary, reconcile the balances taking into account cash and
Audit procedures include the following: invoices in transit.
The auditor should count cash at all locations simultaneously and in the presence of a company official.
4. Compare trade payables individually and in total to prior, investigate any significant
(Simultaneous counting is necessary, to prevent the client from moving cash that has been counted at one
difference, in particular any decrease for this year.
location to another location ready for the next count.)
After the count the auditor should obtain a signed receipt for the amount of cash returned to the official, 5. Calculate the trade payable days and compare to prior years, investigate any
The auditor should check the cash balance obtained from the count against the client's cash records and significant difference.
cash balance in the draft financial statements.
Where appropriate, the auditor should also investigate the treatment of any money advances to employees 6.
suppliers missing this year
(for example, against wages or salary).
7. Select population from purchase invoices received after the year-end. Trace to
evidence of goods receipt and where goods received prior year-end, ensure invoice
amount included in purchase accrual

8. Post year end payments reviewed. If they relate to purchases made before the year
Attempt questions to check your understanding: end, ensure they were recorded as a liability at the year end!

March/June Hybrid 2016-Q2

June 2015-Q6bii 9. Verify the Audit trail from source document to records (Take a sample of GRNs prior
to the end of the year and trace to purchase invoice. Ensure a liability has been
June 2013-Q1d
recorded)

Accuracy, 1. Supplier circularization(rare in practice)

Valuation,
Allocation 2. Verify supporting documentation ( Purchase order Goods Received Note, Invoice)

3. Supplier statements reconciled to individual supplier accounts ( as above)

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Cut-off 1. Select a sample of GRNs before the year end and after the year end and follow Substantive testing: Accruals
(purchases) through to inclusion -
off. 1. Obtain or prepare a listing of accruals as at the end of the reporting period.

2. Review after date payments; if they relate to the year under audit, then follow 2. If the list is prepared by the client company, check the calculations and additions far arithmetical
through to the purchase ledger listing to ensure they are recorded in the correct accuracy. Check the amounts in the listing against the balances in the relevant main ledger expense
period
accounts and ensure that the amounts are the same.
Existence 1. Supplier circularization(rare in practice)
3. Sample check computations of accruals by comparing to earlier relevant invoices and payment
2. Verify the Audit trail from records to source documents ( individual ledger to records.
purchase invoice and Goods Received Note)
4. Review the bank statement for post year end payments that may relate to services used before the
year end. Trace these items to the accruals listing.

5. Compare the list of accruals to those for the previous period to obtain assurance as to the
Substantive procedures for supplier statement reconciliations
completeness of the accruals.
1. Select a representative sample of year-end supplier statements and agree the balance to the purchase
ledger. If the balance agrees, then no further work is required. 6. Review the list of accruals for completeness, based on the auditor's knowledge of the business. The
2. Where differences occur due to invoices in transit, confirm from goods received notes (GRN) whether auditor will review expense categories included in the income statement to identify areas of
the receipt of goods was pre year end, if so confirm that this receipt is included in year-end accruals. possible accruals and check to list of accruals for inclusion.
3. Where differences occur due to cash in transit from client to the supplier, confirm from the cashbook
and bank statements that the cash was sent pre year end.
7. Relate items on the list of accruals to other audit areas, such as the bank confirmation letter (which
4. Discuss any further adjusting items with the purchase ledger supervisor to understand the nature of the
reconciling item, and whether it has been correctly accounted for. might provide details of unpaid/accrued bank charges).

8. Test transactions around the accounting period end to determine whether amounts have been
recognised in the correct period.
Why supplier circularization is rare in practice

Third party evidence is a good source of audit evidence and a large proportion of the documentation available
invoices, statements and Attempt questions to check your understanding:
correspondence.
June 2015-Q6bi

A trade payables circularisation may however be deemed appropriate where:

supplier statements are, for whatever reason, unavailable.

only faxed or photocopied supplier statements are available and there is some doubt as to their
authenticity.
the auditor or the company, suspect that fraudulent manipulation with regard to supplier payments is
taking place within the company.

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Substantive testing: Payroll

Substantive testing: Corporation tax

Substantive Analytical procedures 1. Agree the year end tax liability back to the year end tax computation.
2. Agree the year end tax liability to the post year end payment to the tax authorities.
1. Compare the total payroll expense to the prior year and investigate any significant differences. 3. Agree the corporation tax liability to the amount owed as per correspondence from the tax authorities.

2. Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management for any significant variances.
Attempt questions to check your understanding:
3. Perform a proof in total of total wages and salaries, incorporating joiners and leavers and the annual
pay increase. Compare this to the actual wages and salaries in the financial statements and investigate
any significant differences. Sept/Dec Hybrid 2015-Q5c
Dec 2014-Q1
Other procedures June 2014-Q1c,d

1. Cast a sample of payroll records to confirm completeness and accuracy of the payroll expense.
Substantive testing: Long term loans
2. For a sample of employees, recalculate the gross and net pay and agree to the payroll records to
confirm accuracy. 1. agree the opening balance of the bank loan
to the prior year audit file and financial statements.
3. Re-perform the calculation of statutory deductions to confirm whether correct deductions for this year 2. For any loan payments made during the year, agree the cash outflow to the cash book and bank
have been made in the payroll. statements.
3.
4. Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation,
recalculate that their first/last pay packet was accurately calculated and recorded. 4. Agree loan balances back to the loan statement from the bank.

5. Agree the total net pay per the payroll records to the bank transfer listing of payments and to the 5. Inspect the bank confirmation letter for details of loans and overdrafts and trace these amounts to the
cashbook. balance sheet to ensure they have been recorded.

6. Agree the individual wages and salaries per the payroll to the personnel records for a sample to confirm 6. Review Board minutes for evidence of new loans being taken out in the year and ensure they have been
bona fide employees. recorded.

7. Select a sample of weekly overtime sheets and trace to overtime payment in payroll records to confirm 7. Inspect the bank statements for the year for evidence of a significant deposit, which may be proceeds of
completeness of overtime paid. a loan.

8. Recalculate expected interest

Substantive testing: Accrual for income tax payable on employment income 9. Verify the amount of the loan outstanding at the balance sheet date and ensure that this is accurately
ng should
1. Agree the year-end income tax payable accrual to the payroll records to confirm accuracy. be disclosed as repayable within 12 months and repayable after 12 months from the balance sheet date.

2. Re-perform the calculation of the accrual to confirm accuracy.

10. Examine the loan agreement to verify the amount of the loan, the rate of interest chargeable, the
security provided and the repayment terms.
3. Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.

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11. Review the loan agreement for details of covenants and recalculate to identify any breaches in these. General procedures

1. Recalculate to ensure accuracy

12. Agree closing balance of the loan to the trial balance and draft financial statements.
2. Review process used by the management and controls over how the estimate was made.
13. Review that the F/S disclosures are adequate, including any security provided and that the disclosure is
in accordance with accounting standards and local legislation. 3. Enquire of management how the accounting estimate is made and the data on which it is based-the
data used should be accurate, complete and assumptions reasonable.

4. Review the method of measurement used and assess the reasonableness of assumptions made. Review
the judgments and decisions made by management in the making of accounting estimates to identify
whether there are indicators of possible management bias.
Substantive testing: Accounting estimates
5. Test the operating effectiveness of the controls over how management made the accounting estimate.

Accounting estimates are approximations. Approximations are often made in conditions of uncertainty 6.
regarding the outcome of events. estimate.

When transactions involve precise amounts and are supported by specific documents, verification is relatively 7. Obtain written representations from management and, where appropriate, those charged with
easier. However, this comfort is not available in the case of accounting estimates. There is greater risk of governance whether they believe significant assumptions used in making accounting estimates are
material misstatement. Therefore greater care is needed when auditing them. reasonable.

8.
The auditor should adopt one or a combination of the following approaches in the audit of an estimate:
9. Determine whether events occurring up to the date of the auditor
review and test the process used by management to develop the estimate
use an independent estimate for comparison with that prepared by management provide audit evidence regarding the accounting estimate.
review subsequent events which confirm the estimate made.
10. To confirm the probability and amount of a provision(or the need of a contingent liability disclosure):
- Inspect pinutes of board meetings
- rrespondence with any 3 rd party
F8 focus: Provision for fines/penalties, provision for legal claims, provision for restructuring(detailed formal plan,
- Inspect Other documents (copy of claims, copy of laws etc)
valid expectation raised in those affected, implementation of plan started/public announcement, DO NOT
- Enquire from a relevant 3rd party
include retraining/relocation,marketing expenses etc), provision for warranties, provision for redundancies, Fair
Value
11. Ensure disclosures relating to accounting estimates are adequate and complete

12. If applicable, compare with last year to evaluate reasonableness of the estimate.

13.
estimate.

14.

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Examples extracted from past exams- read through them rather than rote learning them! Scenario: Customers of a hotel have filed a law suit claiming they got food poisoning- directors do not
feel a provision is needed

Scenario: Law suit filed by a former (ex) employee for unfair dismissal- decision pending 1. Review the correspondence from the customers claiming food poisoning to assess whether
client has a present obligation as a result of a past event.
Substantive procedures to confirm completeness of provisions or contingent liability: 2. Send an enquiry letter to the lawyers of client to obtain their view as to the probability of the
claim being successful.
o Discuss with management the nature of the dispute between the client and the former 3. Review board minutes to understand whether the directors believe that the claim will be
employee to ensure that a full understanding of the issue is obtained and to assess successful or not.
whether an obligation exists. 4. Review the post year-end period to assess whether any payments have been made to any of
o Review any correspondence with the former employee to assess if a reliable estimate of the claimants.
any potential payments can be made. 5. Discuss with management as to whether they propose to include a contingent liability
o Write to ex- disclosure or not, consider the reasonableness of this.
claim being successful. 6.
o Review board minutes and any company correspondence to assess whether there is any unlikely to be successful and hence no provision is required.
evidence to support the former claims of unfair dismissal. 7. Review the adequacy of any disclosures made in the financial statements.
o Obtain a written representation from the directors of client confirming their view of
chances of a successful claim.

Scenario: sales ledger department is being made redundant and a redundancy provision has been
included in the financial statements.
Scenario: Reorganisation provision has been made
Substantive procedures to verify redundancy provision

o Discuss with the directors as to whether they have formally announced their intention to 1. Review the board minutes where the decision to reorganise the business was taken, ascertain if
make the sales ledger department redundant, to confirm that a present obligation exists this decision was made pre year end.
at the year end. 2. Review the announcement to shareholders to confirm that this was announced before the year
o If announced before the year end, review supporting documentation to verify that the end.
decision has been formally announced. 3. Obtain a breakdown of the reorganisation provision and confirm that only direct expenditure
o Review the board minutes to ascertain whether it is probable that the redundancy from restructuring is included.
payments will be paid. 4. Review the expenditure to confirm that there are no retraining costs included.
o Obtain a breakdown of the redundancy calculations by employee and cast it to ensure 5. Cast the breakdown of the reorganisation provision to ensure correctly calculated.
completeness. 6. For the costs included within the provision, agree to supporting documentation to confirm
o Recalculate the redundancy provision to confirm completeness and agree components of validity of items included.
the calculation to supporting documentation. 7. Obtain a written representation confirming management discussions in relation to the
o Review the post year-end period to identify whether any redundancy payments have announcement of the reorganisation.
been made, compare actual payments to the amounts provided to assess whether the 8. Review the adequacy of the disclosures of the reorganisation in the financial statements to
provision is reasonable. ensure they are in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
o Obtain a written representation from management to confirm the completeness of the Assets.
provision.
o Review the disclosure of the redundancy provision to ensure compliance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

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Substantive testing: Capital and Other Issues

Emoluments include compensation paid for the services provided by the directors to the company and reward
for entrepreneurial contribution.
1. Review board minutes to confirm the issue of additional share capital during the year.
The various components of emoluments include:
2. Agree the issue of shares is permitted from a review of any statutory constitution agreements in place Basic salary
(Where local law requires that companies should have an authorised share capital, the auditor should
Bonuses
check that the total authorised capital in the draft financial statements is consistent with the company's
constitution) Share options
Pension contributions
3. Inspect the cash book and bank statements for evidence of cash receipts from the share issue. Other benefits (e.g. provision of a company car, rented accommodation, health insurance etc.)

4. Recalculate the split of proceeds between the nominal value of shares and premium on issue and agree
correctly recorded within share capital and share premium account.
1. Obtain a schedule of the direc bonus paid and cast the addition of the
schedule.
5. Review the disclosure of the share issue in the draft financial statements and ensure it is in line with
relevant accounting standards and local legislation.
2. Agree the individual bonus payments to the payroll records.
6. Check that the amount reported as issued share capital agrees with the amount recorded in the register
3. Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.
of members/shareholders, if the company has such a register. (In some countries there is a legal
requirement to maintain a register of members.) 4. Review the board minutes to confirm whether any additional bonus payments relating to this year have
been agreed.

5.
Substantive procedures: reserves remuneration including the bonus.

-
6. Review any disclosures made of the bonus and assess whether these are in compliance with local
The auditor will usually carry out tire following substantive procedures on reserves: legislation
Obtain an analysis of movements on all reserves during the period.
Check the accuracy of these movements by checking supporting documentation. Other procedures:
Ensure that any specific legal requirements relating to reserves have been complied with. (For example,
check that the entity has not breached legal restrictions on use of the share premium account.) Verify the accuracy of the emoluments recorded by recalculating the amount of emoluments applicable to
Confirm that dividends have been deducted only from those reserves that are legally distributable (usually the directors with the recommendations of the remuneration committee.
the accumulated profits reserve/retained earnings).
Check the authorisation for the amount of dividends paid by reviewing board minutes. For all performance related bonus, verify the correctness of the bonus by comparing the bonus with the
Check the dividend calculations and check that the total dividends paid are consistent with the amount of achievement of the performance related targets i.e. ensure that performance related bonus is supported
issued share capital at the relevant date. with appropriate achievement of targets.

Loyalty bonuses are given when a person completes a certain number of years in a company. Verify the
accuracy of the payments made along with adherence to the conditions of the loyalty bonus.

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approvals of the remuneration committee and also confirm the correctness of the values with the rent
agreement.

approvals of the remuneration committee and also confirm the correctness of the values with the insurance
policies.

Attempt questions to check your understanding:

Sept. 2016-Q17a
March/June Hybrid 2016-Q4
June 2014-Q3c
Dec 2013-Q1d

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