TOPIC 5: AUDIT OF FINANCIAL STATEMENTS: Verification of Balance Sheet Items

TOPIC 5: AUDIT OF FINANCIAL STATEMENTS: Verification of Balance Sheet
Items
This involves proving the assertions (COVER MP&D) underlying the figures of these assets
in the financial statements.
The assertions embodied in the financial statements and their respective substantive
procedures are listed and discussed below:
Completeness - all transactions, balances etc, which ought to be included in the financial
information are so included and that there are no unrecorded assets, liabilities or transaction
e.g The balance of accounts payable stated in the balance sheet implies an assertion by
management that all obligations of the entity regarding accounts payable have been included.
The substantive procedures to verify for completeness include:
• Vouching transactions from source documents to accounting records
• Reconciliation of control accounts
• Confirmation of balances, Banks, debtors, creditors.
Occurrence –This assertion implies that transactions or events took places, which pertain to
the entity during the relevant period. E.g. Purchases shown in the financial statements imply
an assertion by the management that they pertain to the entity and were made during the
period covered by the financial information.
The substantive procedures to verify this assertion include:
• Vouching transactions from source documents to accounting records
• Inspection of items bought
• Confirmation from directors any other knowledgeable person in the organization.
Valuation - assets and liabilities are recorded at appropriate carrying values,

• Recalculations
• Comparing values developed by third parties and those calculated by the auditor
himself.
• Physical inspections to check on the condition of the assets in relation to the values
attached.
• Review of post balance sheet payments and invoices so as to get evidence.
Existence - Asset or liability included in the financial exists at a given date e.g cash balance
included in the balance sheet represents an assertion by management that the entity actually
held the cash balance to that extent on the balance sheet date.
• Physical inspections e.g inspecting property, Plant and equipment
• Inspection of documents related to assets and liabilities e.g share certificates, log
books , land titles,
• Third party confirmations
Auditing for B.Com, Robert A Kakande, Msc. Accounting and Finance, FCCA, CPA, B.Com, HDM,
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Dept. of Accounting, MUBS
• Cut off testing
Rights and Obligations- This implies that the entity has a legal title or similar rights of
ownership in relation to its assets. Similarly, it is asserted that the liabilities included in the
balance sheet represent obligations of the entity at a given date.
• Obtain evidence of setting up the asset / liability e.g invoices, agreements
• Inspection of documents related ownership of assets and liabilities e.g share
certificates, log books , land titles,
• Cut off testing
Measurement - transactions or events are recorded at the proper amounts and revenues and
expenses are allocated to the proper period.
• Comparison of the figures calculated by experts and those by auditors
• Analytical reviews which involves getting trends of some outstanding transactions
• Recalculation of amounts
Presentation &Disclosure - transactions and balances are properly disclosed, classified and
described in accordance with recognised accounting policies and practices and relevant
statutory requirements.

• Checking for compliance with reporting framework e.g IAS, IFRS, compliance with
Companies Act etc
• Checking whether the financial statements have been prepared and based on amounts
extracted from accounting records.
• Checking whether the financial statements show a true and fair view.
Question: Your firm has been appointed as auditors of XYZ Ltd. Describe the audit
work to be carried in verification of land and building.
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5.1 AUDIT OF TANGIBLE NON CURRENT ASSETS
These are physical assets held for continuing use in the business.
Key assertions and audit objectives of Non Current Assets
Within the overall objective of determining whether the accounts show a true and fair view,
the audit objectives regarding fixed assets are to establish:
i. That the fixed assets exist
ii. They are fairly stated, namely:
a. Additions and disposals are correctly recorded
b. Appropriate adjustments are made for fixed assets not in use and for the
“impaired ones”. IAS 36 – Impairment of fixed assets
c. All fixed assets are included in the accounts and are correctly classified
d. Appropriate rates of depreciation (and amortization) are applied consistently.
iii. That fixed assets are beneficially owned by the client

iv. That the accounts are in agreement with the records
v. That adequate disclosure is made of capital commitments and leasing arrangements
Audit procedure:
Completeness
i. Prepare or obtain a lead schedule showing opening balances and movements on each
category and reconcile to last year’s schedule.
Check casts and cross casts
Check whether opening balances agree to the previous years accounts, and
Agree the totals to the trial balance and accounts
Reconcile the list of assets in the general ledger with those in the fixed assets register.
Test some physical assets to ensure that they are recorded.
ii. Prepare or obtain lists of additions/disposals
Check additions to invoices/architect’s certificates etc and ensure that items
have been properly capitalized.
Review general ledger accounts for repairs and renewals to identify items that
should have been capitalized.
Check whether purchases properly allocated to fixed asset accounts and
authorized by correct person and that all additions have been recorded in the
general ledger and the fixed assets register.
Verify disposals to sales documentation (invoice) and check calculation of
profit/loss on disposal is correct.
Check that disposals are authorized and proceeds are reasonable and actually
received by the company.
Ensure that asset is no longer used as security.
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Existence
i. Confirm that the company physically inspects all assets in the fixed assets register
annually.
ii. Physically inspect a sample of fixed assets ( do they exist ? What’s their condition ?
Are they in Use ?)
iii. Reconcile opening and closing assets by number as well as by value.
Valuation
i. Compute/agree the depreciation charge for the year and check
That the basis and rate used is reasonable and calculated in accordance with
the accounting policy and consistent with the prior year. Ensure that the policy
and rates are disclosed in the accounts.
Confirm that no asset has been depreciated by more than its original cost ie
ensure that depreciation is not charged
on fully depreciated assets.
ii. Consider if there is any assets that need to be revalued. For any revaluations during
the year obtain :
Obtain a copy of the valuation report
Confirm valuation has been properly reflected in the accounts and that
depreciation has been provided, where appropriate on the revalued amount.
Assess the qualifications of the valuer and the basis of the valuation used and
consider the need for additional evidence(going concern basis, breakup/mkt
value basis etc)
iii. Consider whether there are any indicators of impairment (e.g obsolescence, physical
damage, regulatory changes, market changes (– see IAS 36 impairment of fixed
assets) which may adversary affect the value of fixed assets. Ensure that such
impaired assets are dealt with in accordance with IAS 36. (milk containers impaired)
iv. Review insurance policies in place in force for all assets to ensure cover is sufficient
and check expiry dates.
Rights and obligations/ Ownership

i. Examine/inspect title deeds, vehicle registration books and any other evidence for title
of ownership. Confirm they are free of any encumbrances. Confirm that all assets are
used on the business of the company.
ii. Obtain certificate from people holding company titles/deeds of ownership, to confirm
why they are holding them.
iii. Review statutory books for evidence of charges/encumbrances.
iv. Identify any assets held under finance lease or hire purchase agreements and ensure
properly highlighted in the accounts.
v. Examine post year end invoices and any Board minutes for evidence of any capital
commitment
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Audit Programme
Tangible Fixed Assets
Client BUSINESS STUDIES LTD Period End E 1.1
Audit test Objective WP Done Results

Ref. by:
COMPLETENESS 2,4
1. Prepare or obtain a lead schedule showing opening
balances and movements on each category and:
a) Check casts and cross casts;
b) Reconcile the list of assets in the General ledger
with those in the “Fixed Assets Register”
c) Obtain explanations for missing assets
d) Tests some physical assets to ensure they are
recorded
e) Check the opening balances agree to the previous
period's accounts; and
f) Agree the totals to the trial balance and accounts.
COMPLETENESS / OCCURRENCE / 2,4
MEASUREMENT
2. Prepare or obtain lists of additions/disposals and:
a) Check additions to Invoices/Architect’s
Certificates
b) Cheek casts and calculations;
c) Check the totals agree to the lead schedule.
d) For disposals vouch sale proceeds to supporting
documentation
e) Compute/agree the calculation of any
profit/loss on disposal and ensure appropriately
described in the profit and loss account
f) Check that disposals are authorised and
proceeds are reasonable.
COMPLETENESS / OCCURRENCE 2,3

3. Vouch a sample of additions to supporting
documentation and ensure items have been
properly capitalised and authorised.
4. Review nominal ledger accounts for repairs and
renewals, sundries, and similar categories to
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identify items that should have been capitalised.
VALUATION / MEASUREMENT 2
• Verify asset revaluations to ‘valuation certificates’
and check any ‘revaluation surplus’ has been
correctly calculated, disclosed appropriately
• Where assets were revalued assess the
qualifications of the valuer and the basis of 2
valuation used and consider the need for additional
evidence of value.
• Compute/agree the depreciation charge for the
year and cheek:
a The basis and rate is reasonable and calculated
in accordance with the accounting policy and
prior year,
b No asset has been depreciated by more than its
original cost.
• Physically examine a sample of fixed assets and

consider whether there are any indicators of
impairment (e.g. obsolescence, physical
damage, regulatory changes, market changes -
see IAS 36), which may adversely affect the value
of fixed assets. Ensure that these are dealt with
in accordance with IAS 36 (Impairment of Assets).
• Insurance – review insurance policies in force for
all assets to ensure cover is sufficient and check
expiry dates.
EXISTENCE 3
• Confirm that the entity physically inspects all
assets in the Fixed assets register annually.
• Inspect assets (do they exist? What’s their
condition? Are they in Use?)
• Examine vehicle registration documents, title deeds
or any other appropriate evidence of title for
material items.
RIGHTS AND OBLIGATIONS 2
• Review statutory records for evidence of charges
(assets pledged as security for loans etc), examine
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post year end invoices and Board minutes for
evidence any capital commitments
• Verify title to land by checking title deeds / leases
• Obtain certificates from people holding deeds to
confirm why they are held.
• Inspect registration documents for vehicles, and
confirm they are used for the business.
• Examine documents of title for other assets.
Audit test Objectiv WP Done Results

e Ref. by:
PRESENTATION AND DISCLOSURE 4,5
• Examine the financial statements and confirm that
non-current assets are properly presented and
disclosed in the Balance sheet in accordance with
IAS 1.
GENERAL
7. Perform an analytical review and confirm that all
significant variances have been explained and
adequate audit evidence documented.
8. Transfer all errors and outstanding matters to review
Section and note on C1, 'Points for Partner'.
9. Design and complete any additional tests required
specifically for this client.
CONCLUSIONS
Write conclusions covering any errors or weaknesses discovered during the
above tests and noting any possible management letter points.
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Final Audit Summary- Tangible Non- Current Assets
Client BUSINESS STUDIES LTD Period End 31 DEC
200X REF: E
Audit objectives 1. the fixed assets exist.

Within the overall objective of 2. they are fairly stated, namely:
determining whether the accounts (a) additions and disposals are correctly recorded.
show a true and fair view, the (b) appropriate adjustments are made for fixed assets not in
objectives regarding fixed assets use.
are to establish that: (c) all fixed assets are included in the accounts and are
• Land & Buildings correctly classified.
• Motor Vehicles (d) appropriate rates of depreciation (and amortisation) are
• Furniture and applied consistently.
Fittings 3. the fixed assets are beneficially owned by the client.
• Office Equipments 4. the accounts are in agreement with the records.
• Machinery 5. adequate disclosure is made of capital commitments and
(IAS 16 – Property, leasing arrangements.
Plant & Equipment-
Refers)
Significant or abnormal aspects
Identify any significant or
abnormal aspects of this section:
Conclusion
It is my opinion that adequate audit work has been carried out to achieve the audit objectives
for this section and that, accordingly, fixed assets are fairly stated and on a basis consistent
with the previous period, SUBJECT TO THE FOLLOWING MATTERS
WP ref.
Prepared by Date
Manager review Date
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Partner review Date
5.2 AUDIT OF ACCOUNTS RECIEVABLE

5.2.1 AUDIT OBJECTIVES FOR TESTING ACCOUNTS RECEIVABLE
Completeness / Occurrence - all transactions relating to receivables are recorded and
represent transactions that took place.
Valuation – debtors are properly valued
Existence – that Receivable are valid and do exist
Rights and Obligations /Ownership- receivables actually owned by the client
Measurement / Cutoff / Accuracy– all and only receivables for the period are included in
the accounts, and stated accurately.
Presentation and Disclosure – debtors are properly classified and disclosed in the fin.
Statements
5.2.2 Audit Programme for Receivables
1. Completeness / Cut off- to test completeness the following work should be done:
1. Check Balances from sales ledger to list of balances and vice versa.
2. Check the Total of the list of balances to the sales ledger control account
3. Add up the list of balances to ensure it is correct
4. Confirm whether the list reconciles to the sales ledger control account.
5. Ensure that the accounting cut-off at the year-end was correctly treated by testing
sales/dispatches/stock/debtors cut-off.
2. Existence and Rights and obligations
Verification of trade receivables by direct circularization is the normal method of getting

audit evidence to check the existence and rights and obligations of trade receivables.
Types Of Circularization.
Positive Circularization- Customer is requested to confirm the accuracy of the balance
shown or state in what respect he is in disagreement. ( This is the most preferable method)
Negative Circularization – Debtor is asked only to reply if the amount is disputed.
The circularization letter is generally prepared by the client, but clients are asked to reply
direct to the Auditor..
Selecting Sample For Circularization:

Special attention should be paid to the following:
Old unpaid accounts
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Accounts written off in the period
Accounts with credit balances
Accounts settled by round sum payments.
Nil balance accounts should also not be over looked.
Accounts paid by the time of the audit.
Evaluation of confirmation:
Auditor has to follow up and investigate where :
• Customer disagree with the balance – reasons for disagreements include :
disputes, cut-off problems, receipts send before year end but received
afterwards, misposting, customer netting off credits and debits, teeming and
lading frauds
• Customers do not respond - where no response is received, second or third
requests should be sent to the customer; involve client debt section to follow
up and also try other tests like ‘examining payments received after year end.
And test the entity’s controls over bad debts.
After the completion of the confirmation it will form a key part of the evidence in relation to
receivable figure.
The auditor will need to evaluate the results in terms of :

- Percentage response
- Number of disagreements
- Outcome of follow-up of disagreements
- The materiality of the amounts involved.
The evaluation will require the application of the auditor’s judgment to the information
NB : Where the auditor is not satisfied with the status of the entity’s records and
receives no responses to the circularization, he should consider qualifying the opinion in
that respect.
3. Rights and Obligations / Ownership of Receivables
Ordinarily there will be little or no question about the client’s ownership or legal standing
with respect to recorded receivables, in as much as they will have resulted from the of the
client’s products or services.
The auditor should however be alert to the following issues:

• Any indications that accounts receivable have been factored, discounted, sold or
pledged as collateral.- The effect of such transactions must be properly reflected in the
financial statements.
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• Substantial blocks of cash receipts should be carefully reviewed to determine whether
they represent the proceeds of any of the above types of transactions.
4. Valuation and disclosure of debtors:

Current assets should be shown at purchase price or production cost except where the net
realizable value is lower than the purchase price or production cost, in which case the amount
to be included should be the net realizable value. For debtors it is important that they are
disclosed in the accounts after the appropriate provision for bad and doubt ful debts.
Valuation of debtors is about considering their collectibility.
5. Audit procedures to establish the appropriate PBDD – Provision for Bad & Doubtful
Debts
- The company’s previous bad debts experiences
- Evidence from confirmation of accounts receivable
- Aged analysis of receivables – in relation to the credit policy of the company.
- Post-balance sheet events
In light of this information the auditor will have to consider whether the PBDD made by
management in the accounts is adequate.
Confirm adequacy of the provision for bad and doubtful debts. You can suggest an
appropriate level if management disagrees with you (because they fear it will hit the
P/L) give a qualified report to that effect.
Both specific and general allowances may be made. Specific allowance is made for those
debts which are known to be bad or doubtful. General allowances ( Usually a percentage of
total receivables) is based on past experience.
Amounts shown, as debtors in the balance should distinguish between amounts due with
12months of the balance sheet date and those due in more than 12 months. Current and Long
term receivable should be disclosed separately.
TIMING OF AUDIT WORK ON DEBTORS

Interim – some of the work could be done before the year end if the internal control system
is found to be satisfactory eg aging of debtors
Year-end – where internal controls are not satisfactory then more work like confirmation
of balances will be done after the year-end.
Analytical Procedures - Accounts Receivable, Allowance For Uncollectible Accounts

And Bad Debt Expense
Comparison of receivables turnover and days outstanding in accounts receivable to
previous years’ and/or industry data.
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Comparison of aging categories on aged trial balance of accounts receivable to previous
years’.
Comparison of bad-debt expense as a percentage of revenue to previous years’ and/or
industry data.
Comparison of the allowance for uncollectible accounts as a percentage of accounts
receivable or credit sales to previous years’ and/or industry data.
Examination of large customer accounts individually and comparison to previous year.
Analytical Procedures – Sales Returns, Allowances, And Commissions

Comparison of sales returns as a percentage of revenue to previous years’ and/or industry
data.
Comparison of sales discounts as a percentage of revenue to previous years’ and/or
industry data.
Estimation of sales commission expense by multiplying net revenue by average
commission rate and comparison of recorded sales commission expense.
Auditing Other Receivables

Receivables from officers and employees- check authority for the advance and loans,
check to see that they are recovered regularly on agreed installments.Check security for
the loans, pay attention to the unsecured loans to staff.
Receivables from related parties.- confirm balances/circularise
Called up share capital not yet paid.- confirm balances
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AUDITING PREPAID EXPENSES
Prepaid expenses are assets that provide economic benefit for less than a year.
Deferred charges or intangible assets are assets that provide economic benefit for longer
than a year.
EXAMPLES OF PREPAID EXPENSES

AND OTHER ASSETS
Prepaid insurance
Prepaid rent
Prepaid interest
EXAMPLES OF DEFERRED CHARGES AND INTANGIBLE ASSETS
Organization costs
Patents
Copyrights
Trademarks
Trade names
Licenses
Franchises
Goodwill
Debt issuance costs
Computer software development costs
INHERENT RISK ASSESSMENT-

Inherent risk for prepaid expenses such as prepaid insurance would generally be assessed
as being low, since these accounts do not involve any complex or contentious accounting
issues.
Deferred charges and intangible assets may present serious inherent risk considerations
because the valuation and estimated lives for patents, franchises, and goodwill involve
considerable judgment and may lead to potential disagreements between the auditor and
client.
CONTROL RISK ASSESSMENT - PREPAID INSURANCE

( Prepaid insurance is discussed below as a representative of all the above debtors ! The
common feature is that they are normally immaterial figures in relation to the total assets in
the financial statements)
The auditor's assessment of control risk for prepaid expenses, such as prepaid insurance, is
based on the effectiveness of control procedures in the purchasing process.
Additional control procedures for prepaid insurance may include the use of an insurance
register which contains a separate record of all insurance policies in force.
The entity should also maintain controls that provide for the systematic allocation of
prepaid insurance to insurance expense.
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SUBSTANTIVE TESTING - PREPAID INSURANCE
The auditor is generally able to gather sufficient, competent evidence on prepaid
insurance by performing analytical procedures.
Substantive tests of transactions, if performed at all, are conducted as part of testing
the purchasing process.
Substantive tests of the prepaid insurance balance are generally necessary only when
misstatements are expected.
ANALYTICAL PROCEDURES - PREPAID INSURANCE

Comparing the current year balance in prepaid insurance and insurance expense with the
prior year's balances after considering any changes in operations.
Computing the ratio of insurance expense to assets or sales and comparing it with the prior
year's ratio.
SUBSTANTIVE TESTING -
PREPAID INSURANCE
Substantive tests of balances for prepaid insurance and insurance expense may be
necessary when the auditor suspects misstatements based on prior years' audits or when
analytical procedures indicate that the account balance may be misstated.
The auditor begins testing of the prepaid insurance account balance by obtaining a
schedule from the client that contains a detailed analysis of the policies included in the
prepaid insurance account.
The auditor's work then focuses on testing the validity, completeness, ownership,
valuation, and classification audit objectives.
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5.3 AUDIT OF FINANCIAL STATEMENTS – STOCK AND WORK IN PROGRESS:
Composition of stock
IAS 2 – Inventories are assets :
i. Held for sale in the ordinary course of business;
ii. In the process of production for such sale (WIP)
iii. In the form of materials or supplies to be consumed in the production process (raw
materials, components)
iv. Finished goods
• In practice, stock is a very important audit area. For manufacturing businesses, it is

often the largest item on the balance sheet, and is usually material.
• Stock is often a difficult /complex and time consuming area to audit for a number of
reasons:
- It is a major item on the balance sheet.
- It may be located in various locations, which makes physical control and
counting very difficult.
- It may include very many different types of items of different nature –
chemicals, electronic parts etc. There could even be difficulties of identifying
the individual types of stock.
- Valuation of stock may also be difficult due to such factors as obsolescence.
- The existence different and acceptable methods of stock valuation. FIFO,
LIFO,WAP,STANDARD each leading to a different valuation of closing
stock
Key assertions and audit objectives of stock and Work-in-progress:

- Existence/occurence – that stock included in the balance sheet physically exists in
a saleable vale. Cost of goods sold represents the cost of goods sold during the
period. Main audit procedure is the Stock take, confirmations from third parties
holding the company’s goods/those with a claim on the stock at hand.
- Valuation/Measurement - cost is identifiable and has been used in the valuation
process where appropriate (Lower of cost and Net realizable value). That
quantities at hand have been properly determined and appropriately valued.
Allowance is made for obsolete items. Appropriate and acceptable valuation
methods have been used.
- Cut off/ Completeness – That all inventories owned as at the balance sheet date are
included and that stock at hand was properly acquired.
- Ownership – That there are no external claims on the stock included in the balance
sheet, stemming from the existence of ‘reservation of title’ clauses in purchase
contracts (the company has current legal title) or from claims arising from financing
activities.
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- Disclosure/presentation – That inventories are properly classified and valuation
basis disclosed in the financial statements.
AUDITING PROGRAMMES FOR INVENTORY:
1 . EXISTENCE
- It is the responsibility of management to ensure that the stock figure in the financial
statements represents stock that exists/is owned, and to keep stock take records. The
auditors’ responsibility is to obtain sufficient audit evidence about stock, and attend
stock take if stock is material. It is not the auditor’s responsibility to count stock it
is the client’s responsibility- the auditor will only observe and test the count on a
sample basis.
Physical Inventory Counts (Stock Take)
A key audit procedure to ensure the existence of stocks is the stock taking exercise
(Physical inventory counts). There are various methods of stock take that can be used
by the client:
- Stock takes at the year end (periodical) – most favorite to the auditor.
- Stock taking prior to/after the year end (periodical)
- Continuous stock taking over the whole year (Perpetual)
Under perpetual inventory control system, stock records (bin card are stores ledger)
are up dated on a continuous basis throughout the year. Whenever there is stock receipt/
issues balances are updated automatically. Physical inspection of stock on hand would
occasionally be undertaken, discrepancies noted and investigated and records updated.
Observation Procedures
Planning Inventory count - Before the stock take the auditor has to plan as follows:
- Gain knowledge by reviewing prior year’s working papers, familiarize
yourself with the nature, volume and location of inventories.
- Assess Key Factors (such as, nature of inventories, high value items,
accounting, location, controls)
- Identify the internal controls over stock and decide whether you can rely on
the work done on stock by internal auditors.
- Plan Procedures (time / location of attendance, high value items, any
specialist help, third party confirmations required?)
- Arrange third party confirmation of inventories held by third parties.
- If nature of inventories is specialized then arrange expert help or review the
client’s own arrangements
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- Examine the clients counting instructions: if found to be inadequate, the
matter should be discussed with client with a view to improving them prior to
the stock count.
- Perform analytical procedures on inventory, these will include aging of
inventories using standard ratios:
Inventory turnover = Cost of sales ( -Times/the higher the better)

Average inventory
Inventory days = (average inventory/cost of sales) x 365 -the lower the better.
During the count
Ensure that no production is scheduled.

Ensure that there is no movement of goods during the inventory count.
Make sure that the client's count teams are following the inventory count instructions.
Ensure that inventory tags are issued sequentially to individual departments.
Perform test counts and record a sample of counts in the working papers.
Obtain tag control information for testing the client's inventory compilation.
Obtain cut off procedures : Examine the link between purchases records and inventories,
and between sales and inventories to ensure that there is complete accord between
inventory and the financial records of purchases and sales ( these are known as cut-off
procedures) Tests to ensure proper cut-off was followed:
• During inventory counts note the serial numbers of the last sales
invoices,delivery notes and goods received note generated before the stock
count.
• After the inventory count, check the year end dispatch notes to sales invoices
and sales day book and vice versa to ensure that dispatches and related invoice
bath fall before the year end.
• Similarly for purchases, ensure year-end goods received notes and related
purchase invoices are correctly treated in the current period.
• Take a sample of goods received and goods dispatched just after the year end
and ensure that inventory was not included in the count in the case of goods
received, and that it was included, in the case of goods dispatched.
Observe the condition of the inventory for items that may be obsolete, slow moving, or
in excess quantities.
Inquiry about goods held on consignment for others or held on a "bill and hold" basis.
Reach a conclusion as to whether or not the counting was satisfactory, and hence
provides reliable evidence supporting the final inventory figure.
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After The Count
Trace test count items to final stock sheet – are all count records included in the final
total?
Confirm cut-off using final goods in and out records
Check replies from third parties
Confirm valuation
VALUATION
Confirm that the method used to value stocks is allowed under law and IAS 2.
( IAS and Income tax Act – they allow FIFO and WAP)
That the method has been consistently used and correctly calculated.
Ensure that stock is valued at the lower of cost and NRV. (IAS 2)
Actual costs of goods can be checked by referring to suppliers’s invoices.
Consider the “age” of stock when considering cost.
For WIP and Finished goods cost will be cost of purchase of inputs + plus the
cost of conversion
- Materials cost – check the invoices and price lists
- Labour – check the wage records/time summaries
- Overheads – check allocation and absorption rates
Auditor should compare cost and NRV. NRV is likely to be lower than

cost where:
- Costs are increasing
- Stocks deteriorated
- Stock obsolete
- Marketing strategy dictates
- Errors are made
Where this happens stocks should be written down to their NRV .
DISCLOSURE/PRESENTATION
Financial statements should disclose inventories as current assets under the

following categories
- Raw materials and consumables
- Work-in-progress
- Finished goods and goods for resale
- Payments on account (for construction contracts)
The valuation methods for stocks.
The inventories at NRV.The circumstances that led to the write-down to NRV
The value of inventories pledged as security for liabilities.
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5.4 AUDIT OF FINANCIAL STATEMENTS – BANK & CASH
Audit of cash is of great importance to the auditor even when cash levels at hand on the
balance sheet date are low for a couple of reasons:
1. Cash is very vulnerable to misappropriation
2. The large volume of cash transactions that may have taken place, there is a possibility
of them leading to errors and miss-statement.
Key assertions and audit objectives of Cash and Bank
Within the overall objective of determining whether the accounts show a true and fair
view, the audit objectives regarding cash and bank are to establish:
1. All bank and Cash balances exist (Existence / occurrence)
2. They are fairly stated, namely
a. All account movements are correctly recorded – proper cutoff has been
applied in recording cash transactions demonstrated by adequate
reconciliations.
b. All bank and cash balances are indeed in the accounts and are correctly
classified and can be realized.
3. Special Terms and conditions are identified and properly disclosed, including:
(Disclosure/Presentation)
a. Any security given for bank borrowings and overdrafts
b. Charges over cash at bank including offset arrangements.
4. The accounts are in agreement with the records
AUDITING BANK BALANCES

The audit of bank balance will need to cover Completeness, existence, rights and
obligation (Ownership), and valuation.
The following procedures will lead to acceptable audit of the above assertions:
i. Prepare or obtain a lead schedule and:
Check casts and cross casts.
Agree the totals to the trial balance and accounts.
ii. Prepare or Obtain a bank reconciliation for each bank account and
Check casts and cross calculations
Agree to the cash book and bank statement
Checks out standing items have cleared the bank statement within a reasonable time after
the year-end.
Obtain explanations for items in bank statement and not in the cashbook and vice versa.
iii. Prepare, or obtain and check, a summary of receipts and payments for the year and test
check casts and cross casts on both payments and receipts side of the cash book.
iv. Review the Cashbook for unusual items during the year and immediately after year end
and investigate.
v. Obtain Bank confirmation letters (s) and :
Check the balances to the bank reconciliation
19
Check the overdraft limits have not been exceeded
NB : A bank letter is a key audit procedure for bank balance audit. The bank will however
require that the client has given express written authority for it to disclose the bank account
details to the auditors (Client mandate). When writing to the Bank the auditor has to refer to
the authority from the client.
-The letter should request the bank to provide among others details of client bank accounts,
client’s assets held as security or otherwise, contingent liabilities etc.
vi. The auditor, should be aware of window dressing, that is, recognizing cash receipts
actually received after balance sheet date, and not sending out cheques until after year-
end.(Window dressing occurs where by the client keeps the cash-book open for some
time after year end so that money received is included in the closing cash-book
balance. At the same time cheques paid are entered before year end but not sent to
creditors until later. This practice distorts current and quick ratios.
vii. Identify whether any accounts are secured on the assets of the company.
viii. Consider whether there is a legal right of set-off of overdrafts against positive bank
balances.
ix. Auditor should be on guard for the fraud of teeming and lading – ie a situation where the
cashier misappropriates cash and cheques received from customers and conceals the theft
by substituting amounts from next days receipts to fill the gap left by earlier
misappropriation. This fraud is possible where :
1. The same person has access to debtors records and handles cash receipts
from debtors.
2. The same person issues credit notes. In this case he can even writeoff
debtors balances, to over avoid having to replace the misappropriated
amount at a future date
3. The same person is the cashier, Cashbook keeper, does the banking and
also prepares reconciliation statements.
To prevent the fraud: segregation of duties, strengthen internal controls, follow
proper procedures for bank reconciliations etc
AUDITING CASH BALANCES

If cash balances at the client are material, then the auditor should attend a cash count at the
year-end and count cash at hand and all cash floats and ensure that they agree with the
balances in the books. Cash in this context may include interalia – unbanked cheques
received, IOUs, notes and coins.
The conduct of the count falls in three phases:- planning, during cash count and after cash
count:
Planning for the cash count
Planning is vital as it is important that all cash holdings are counted at the same time.
Planning decisions will have to be recorded on the current audit file including:
20
i. The precise time of the count (s) and Location (s).
ii. The names of the audit staff conducting the count; and
iii. The names of the client staff intending to be present at each location during the count.
iv. Ensure that the cashbooks are written up to date and in ink!
v. Where a location is not visited, obtain a letter from the client confirming the balance-
preferably endorsed by the internal auditor.
During the cash count

Count cash balances held in front of official responsible (the auditor should
never be left alone with cash)
All balances of and all negotiable instruments eg cheques received and at
hand, must be counted at the same time
All cash and securites counted must be recorded on working papers
subsequently filed on the current audit file.
Reconciliations should be prepared where applicable eg petty cash
reconcilations.
Inquire into any IOUs
After the cash count

Ensure that certificates of cash in hand are obtained as appropriate especially for areas not
visted.
Ensure that unbanked cheques/ cash receipts have subsequently been paid in and agree to
the bank reconciliation.
Ensure that IOUs and cheques cashed for employees have been reimbursed
Ensure that IOUs/cashed cheques outstanding for long have been provided for
Ensure that all balances counted are reflected in the accounts (subject to any agreed
amendments because of shortages and so on).
DISCLOSURE ITEMS FOR CASH & BANK

Cash and Bank are current assets; therefore they should be disclosed and presented under
current assets on the balance sheet.
Policy for defining cash and cash equivalents – should be disclosed in the accounts.
Any restrictions on cash such as a sinking fund requirement for funds allocated by the
entity's board of directors for special purposes.
Contractual obligations to maintain compensating balances.
Cash balances restricted by foreign exchange controls.
Letters of credit.
21
5.5 AUDIT OF FINANCIAL STATEMENTS – CURRENT LIABILITIES AND
ACCRUALS – Amounts falling due within one year.
The auditor should be aware of the possibility of understatement of creditors.
Key assertions and audit objectives Creditors and accruals (Amounts falling due within
one year)
Within the overall objective of determining whether the accounts show a true and fair
view, the audit objectives regarding creditors and accruals are to establish:
1. That they are fairly stated, namely:
a. All purchases, creditors, accruals and other liabilities are correctly
recorded and creditors represent bona fide amounts due by the company.
b. All expense items of accounting period have been accrued
c. All creditors, other liabilities and provisions are included in the accounts
and are correctly classified.
2. That the accounts are in agreement with the records
3. That material contingent liabilities are identified and properly disclosed.
AUDITING PROCEDURES FOR CREDITORS
i. Obtain a schedule of creditors with appropriate age analysis, and check this with the
control account and the purchases ledger to ensure that the list has been extracted
correctly from the purchase ledger.
ii. Check that the list of balances adds up.
iii. Separate debit and credit balances, debit balances being included in receivables (this
is known as grossing up)
iv. Review the individual accounts with the most transactions throughout the year
v. Review the year end cut-off procedures for purchases (to test completeness)
Check from the last goods received note to the ledger or list of accruals
Review schedule of accruals to check that goods received after the year end
are not included
Review invoices and credit notes after year end to ensure that those relating to
prior year are included
Reconcile batch postings around the year end, to ensure that invoices are
posted in the correct period.
vi. To test completeness, rights and obligations and existence obtain copies of the
suppliers’ statements from suppliers and compare them with the purchase ledger
balances.
vii. Also consider circularization/confirmations of creditors especially where:
Supplier statements are unavailable/incomplete
Internal controls are weak and material misstatement of liabilities is feared as a
consequence.
22
Suspicion exists that the client is understating the liabilities deliberately.
For circularization the auditor should focus on large balance accounts, regular suppliers
with small or zero balances, and a sample of other accounts.
When confirming accounts payable, auditors generally use a form of positive
confirmation.
viii. Perform analytical procedures on payables, comparing age analysis with previous
periods and payables days :
Payables x 365
Cost of sales
Compare payables turnover and days outstanding in accounts payable to previous years’
and industry data.
Compare the current-year balances in accounts payable and accruals with prior years'
balances.
Compare amounts owed to individual suppliers in the current year's accounts payable
listing to amounts owed in prior years.
Compare purchase returns and allowances as a percentage of revenue or cost of sales to
prior years’ and industry data.
AUDITING PROCEDURES FOR ACCRUALS

Accruals refer to items where expenditure has been incurred in the current period but
payments are not yet effected. Accruals are often immaterial and reliance can be placed
on analytical procedures. However at the year-end there is a possibility that they could
be understated. The following audit procedures should be used:
General accruals (Completeness and Valuation)

i. Check calculations of accruals and trace back to supporting documentation.
ii. Review ledger accounts to ensure all accruals have been included
iii. Scrutinize post year end payments to see if any should have been accrued
iv. Consider basis for round sum accruals (are they comparable to last year ?)
v. Are audit fees properly accrued in the accounts?
Accrued PAYE/VAT/NSSF (Completeness and Valuation)

i. PAYE /NSSF : They are likely to be one month’s deductions. Check amount
paid to the Revenue authority and NSSF, in the period following the closure of
the year.
ii. VAT : Check reasonableness to next return. Verify amount paid in year to
cash book.
Accrued Wages And Salaries (Completeness And Valuation)

23
i. Check remuneration per payroll to personnel records
ii. Confirm existence of employees by meeting them
iii. Check calculations on the payroll
iv. Check validity of deductions to supporting documentation
v. Confirm net pay to bank account.
NB : Auditing of short-term liabilities/ Overdrafts is similar to bank balance audit procedures.
5.6 AUDIT OF FINANCIAL STATEMENTS – LONG-TERM LIABILITIES
LONG-TERM LIABILITIES:
Long-term liabilities are those due after more than one year. Usually they are Corporate
Bonds and Bank Loans, mortgages etc.
The key assertions and audit objectives are:
Completeness: Whether all long term liabilities have been included in the accounts
Measurement: Whether interest payable has been calculated correctly and included in
the right period
Disclosure: Whether long-term loans are properly disclosed.
Loan agreements often include conditions, which the client is expected to comply with
eg restrictions on use assets, adherence to specific borrowing ratios etc. The auditor is
expected to assess whether or not the client is adhering to the restrictions.
Audit procedures: Basically they are substantive procedures
i. Obtain/prepare a schedule of loans outstanding at the balance sheet date showing, for
each loan : name of lender, date of loan, maturity date, interest date, interest rate,
balance at the end of the period and security.
a. Compare opening balances to previous year’s papers
b. Test the clerical accuracy of the analysis
c. Compare balances to the General ledger.
d. Check name of lender etc, to register of lenders (eg bond holders, debenture
holders)
e. Trace additions and repayments to entries in the cash book
f. Confirm repayment conforms to agreement
g. Verify that borrowing limits imposed either by the company’s articles and
memorandum of association or by other agreements are not exceeded
h. Examine signed Board minutes relating to new borrowings/repayments.
ii. Obtain direct confirmation from lenders of the amounts outstanding and what security
they hold
24
iii. Verify interest charged for the period and the adequacy of accrued interest
iv. Review restrictive loan agreement clauses relating to default.
5.7 AUDIT OF SHARE CAPITAL

Share Capital is the capital acquired from the issue of shares. The steps involved in the
verification of share capital include the following:-
1. For existing share capital, the auditor should verify this with reference to the
previous closing balance, which should be equal to the current year’s balance
unless there are any additions.
2. In case share issues were made the auditor should verify this with reference to
company prospectus to determine ascertain number of shares issued and their
value.
3. The auditor should obtain authorization of issue with reference to the AGM
minutes to ensure that the issue was properly authorized.
4. He should obtain Articles of Association and Memorandum of Association and
check for;
The company’s’ authorized share capital.
The type of shares the company can issue.
All these should agree with contents of the prospectus.
5. The auditor should verify any share capital raised with advertisements made to
check number of shares sold.
6. Auditor should obtain letters of allotment and compute the amount received in
respect of these shares and ensure that the allotment is approved by the board.
7. He should obtain share ledgers and registers and determine numbers of shares in
the registers and cross check this allotment in the allotment letters.
8. He should agree dividends proposed unpaid to the Board minutes and ensure that
the payments agree with total share capital issued.
9. The auditor should ensure that the brokers who participated in sale of shares sign a
report regarding;
Number of shares sold.
Value of shares sold.
Preliminary issuing expenses.
10. The auditor should verify transfer shares with reference to
The correspondence between buyers and sellers.
Completed and stamped transfer forms.
Genuine share certificates
25
AUDIT SAMPLING
“Audit sampling is the application of compliance or substantive procedures to less than 100%
of items within an account balance or class of transactions to enable the auditor obtain and
evaluate the evidence of some characteristic of the balance or class of items to assist him/her
form conclusions concerning those characteristic Internal Control Systems.”ISA 530 gives
guidance in this area.
The reasons for Audit Sampling.
i. It is cheap to audit few items as compared to 100% check.

ii. Less time consuming.
iii. Psychological reason. I.e. a complete check would bore the audit staff and hence
becoming ineffective and material errors would be missed.
There are two approaches to audit sampling.

a. Judgement Sampling
b. Statistical Sampling
Judgement Sampling
This means selecting a sample of an appropriate size on the basis of the auditor’s judgement
of what is desirable i.e. it is a method where the auditor uses his own experience and
knowledge of the client’s circumstances to select a sample without using any mathematical or
statistical tools.
The method is ideal under the following conditions:-
i. In deciding which tests to apply.

ii. When deciding the degree of reliability to be placed on a given sample
iii. When deciding whether or not an item is material or not.
iv. In deciding whether or not to accept the results of the sample.
Advantages of Judgement sampling
i. Being a traditional method and having been used by auditors for quite some time, it is
easy to use and understand.
ii. The auditor can use his professional judgement and experience in which case it
concurs with the process of auditing which is basically an exercise of professional
judgement.
iii. No mechanical knowledge of statistics is required.
26
iv. It saves time on the part of the auditor as it avoids tedious computations, which are a
characteristic of mathematical oriented scientific statistical sampling.
Disadvantages of Judgement Sampling.
i. This method allows for personal bias in sample selection and as such may lead to
biased judgement.
ii. It is wasteful in that it may lead to selection of samples which are too large as
compared to those obtained using scientific statistical sampling.
iii. There may be no logic to the selection of the sample or its size. And as such
conclusions reached on the sample may not hold for the entire population.
iv. No quantitative results are obtained.
v. Conclusions reached on the evidence from samples are usually vague, since the
samples selected where not scientific in the first place.
NB. Despite the above limitations, it is still a preferred method because it give a chance to the
auditors to use professional judgement in auditing and minimises the use of mechanical
conclusion.
Statistical Sampling
This is a method by which an auditor selects a sample using statistical tools involving
mathematical manipulation in which a sample is tested to ascertain whether the tests (results)
of the sample hold the population. This is ideal under the following conditions:-
i. Where the population is sufficiently large.
ii. Where entries to be tested run the same risk of having error and frauds.
iii. Where the population is homogeneous in materiality, nature of items, and the time
period.
iv. Where items are coded to facilitate random selection.
v. Where entries can be stratified and in particular, where there is a definite materiality
level.
Advantages of Statistical sampling
1. The method being scientific is defensible since conclusions reached may be objective.
2. It provides precise mathematical statements about the probabilities of being correct.
3. It saves time since it leads to selection of small samples as compared to judgement
sampling.
4. It leads to uniformity of standards among different auditing firms and hence objective
sample sizes for different firms.
5. It can be used by lower grade staff who due to lack of experience and knowledge may
be unable to use judgement sampling.
27
Disadvantages of Statistical Sampling
1. As a technique, it is not always fully understood so false conclusions may be drawn

from the results.
2. The method is time consuming especially in large organisations as it involves a lot of
mathematics.
3. Being scientific it calls for trained audit assistants and as such increasing the auditors
training costs
CASES WHEN SAMPLING IS NOT APPROPRIATE
1. When the auditor is on inquiry as a result of previous information.

2. Population is too small for valid conclusions to be drawn or where constructing a sample
is time wasting.
3. All the transactions in a particular area are material.
4. Data may be sensitive items e.g. Directors emoluments which require precise disclosure
in the FS regardless of their size.
5. Audit area does not consist of items of the same kind i.e. there is a non-homogenous
population.
STEPS IN SAMPLING
The steps involved in sampling can be summarized as follows:-
♦ Sample design
♦ Selection of sample
♦ Evaluation of the sample.
i. When designing a Sample, the auditor should consider the specific audit objectives, the
population from which the auditor wishes to sample and the sample size.
In determining the sample size, the auditor should consider:-
(a) Sampling risk: This is the risk that the conclusion the auditor draws from the sample will
be different from that he would have made if he had examined the entire population.
(b) Tolerable error: The maximum error in the population that the auditor would be willing
to accept and still concluded that the result from the sample has achieved the audit
objective.
28
(c) Expected error: This is the error that the auditors expect to be in the population. A
large sample needs to be examined if it is high.
The actual error should not be greater than the tolerable error set at the planning stage.
ii. When selecting the sample
The Auditor should select sample items in such a way that the sample can be
expected to be representative of the population.
All items should have an equal or known probability of being selected. Methods of
selection include the following:-
♦ Random selection; simple random sampling is a method of selection in which every item
in the population has the same statistical probability of being selected as every other item.
♦ Value Weighted Selection
This involves using the currency unit value rather than the items in the sampling
population. Each individual currency unit (say a shilling) in the population is given an
equal chance of selection e.g. when using monetary unit sampling.
♦ Systematic selection; the auditor calculates a uniform sampling interval by dividing the
population size by the sample size. E.g. if the population = 600 items and the sample size
is 50, the sampling interval will be 12 and there after every 12th item will be selected. It
is particularly useful for non-monetary populations e.g. dispatch notes.
♦ Block selection; consists of selecting a number of adjacent transactions or items e.g. Sales
invoices in a particular week. It is suitable when data is stored in such a manner that the
selection of a block would be an appropriate test e.g. Documents in filing cabinet, drawer,
selection of vouchers for selected number of days etc.
♦ Haphazard Selection: The auditor attempts to give all items in a population a chance of
being selected by chasing items haphazardly. It is appropriate where the population is not
ordered in any numerical sequence.
iii. When Evaluating the Sample
Having carried out on each sample item, those audit procedures that are appropriate to the
particular audit objective, the auditor should;
(a) Analyze any errors detected in the sample

(b) Project the errors found in the sample to the population
29
(c) Reassess the sampling risk.
ATTRIBUTE SAMPLING
It is a method of statistical sampling, which provides results based on two possible values
(correct and not correct). It is generally used in tests of control to find out whether a control
operates or not.
Each deviation is given a weight for evaluation of results.
E.g. can be used to check whether Invoices are authorized or not.

The sample size is computed by reference to:
Confidences level
Precision limit
Usually confidence level is set at 95% and that means setting Audit risk at 5% the lower the
confidence levels the smaller the sample size.
Precision is expressed as an error rate in the population. In practice 2 errors per 100 items are
usually used. Therefore a rate of 2%.
Audit firms have devised various tables to make calculations easier to perform.
Sample size = Reliability Factor

---------------------- (R.F)
Precision
Table R. Factors and Levels of Assurance
Confidence Risk level R-Factor No .Errors R-Factor 1 error

level/assurance required anticipated anticipated
99% 1% 4.6 6.64
95% 5% 3.0 4.75
90% 10% 2.3 3.89
85% 15% 1.9 3.38
80% 20% 1.6 3.00
70% 30% 1.2 2.44
Example
Assuming a test of control on the authorization of purchase invoices is to be performed. The

auditor wishes to be 95% confident and is prepared to accept a 2% error rate.
30
If no errors are anticipated the sample size will be
3.0
----- = 150 items
0.02
If one error is anticipated in the sample the sample size will be:-
4.75
----- = 237 items
0.02
VARIABLES SAMPLING
Is concerned with sampling units, which can take a value within a continuous range of
possible values and is used to provide conclusions as to the monetary value of a population.
For instance the technique can result in a conclusion that the auditor is 95% confident that
true value of the population lies between shs 59.6m and shs.60.4m and the best estimate is $
60m.
The calculations involved with this technique of sampling are lengthy and can only be
performed easily by computer applications.
MONETARY UNIT SAMPLING
This combines both attribute and variables sampling. Items are selected for testing by
weighing the items in proportion to their value.
Each monetary unit in the population is given an equal chance of selection. For instance 1
shilling is selected out of the first 2,000/= and thereafter each 2,000TH item is selected. The
item that includes those shillings is selected for examination.
MUS is used in conjunction with Reliability Factor (R-Factor). The R. Factor is a translation
of the required level of confidence into a smaller number which can be used to compute
sampling internal.
31
Required confidence level R.Factor
39% 0.5
63% 1.0
78% 1.5
86% 2.0
95% 3.0
97% 3.5
The Sampling Interval = Precision limit

R. Factor
The precision limit is set at monetary level. For example if a value below shs 50,000 is
regarded immaterial, the precision limit may be shs 42.000/=
A 95% confidence level gives an R. Factor of 3.
Sampling Interval = 42,000

----------- = 14,000/=
3
If the Audit population of say inventory sheets totals shs 900,000/=.
A sample of = 900,000
----------- = 64 items will be chosen.
14,000
A random number between 1 and 14,000 is needed to start the selection process.
If 10.109 is selected, the sample chosen may appear as follows:-
Inventory item Value of each item Cumulative total Sample

selected
1 6000 6000
2 40 6.040
3 3000 9.040
4 16.000 25.040 10.109
24.109
5 600 25.640
6 8.600 34.240
7 3.860 37.920
8 800 38.720 38.109
32
9 13.800 52.520 52.109
“ “ “ “
“ “ “ “
“ “ “ “
Say 300 Total 900.000 900.000
The items with the highest value have the greatest chance of selection.
Advantages of M.U.S.
1. Easier to use than variables sampling.
2. It can be done manually since it is based on attribute sampling.
3. MUS stratifies items by monetary value gives more weight to big items.
4. In case of no or a few errors, a smaller sample is necessary.
5. It is not affected by variability.
Disadvantages
1. Can’t handle understatement errors or negative values.
2. Can be over conservative in evaluating errors. An auditor may reject an acceptable
population.
3. Sample selection is time consuming unless computerized.
4. In case of many errors, a very big sample is necessary.
5. Extending the sample means dividing the sampling interval by a whole number.
Illustration 1;
The following is a balance sheet extract of BIDICO Ltd as at 31/12/2006;
Non Current Assets Cost Acc. Depn NBV

Motor Vehicles 250,000,000 100,000,000 150,000,000
Cash at Bank 300,000,000
During the year two additional vehicles expected to have a useful life of 5 years were bought
and paid for by cheque worth 50,000,000/=. A vehicle that had been bought at a cost of
20,000,000 was disposed off at 15,000,000 cash which was deposited into one of the bank
accounts to offset an overdue bank overdraft.
Required:
a) Assuming you are a member of the audit team assigned to verify the final accounts of
BIDICO Ltd, highlight the audit process as well as the substantive procedures
necessary to verify the balance sheet items you may identify in the above case. (15
Marks)
b) Discuss the relevance and applicability of Monetary Unit Sampling (MUS) to the
above case. (5 Marks)
33
Illustration 2;
a) Bukadef Plc. Finances its operations using various sources of finance. A piece of land
in a strategic area of Namanve industrial cite was used as security to acquire a loan
from Bonabagagawale commercial bank Ltd. This loan has been out standing for a
long time. As a result of the on going construction of the Northern bypass road the
Value of the land is likely to double. The directors are complaining that the interest is
too high, they have been financing this loan for too long yet the security on loan is
very valuable and therefore very unlikely that they will fail to complete paying back
the full principle amount because they would not risk losing such an asset. It is
however noted that the interest payment is in arrears.
Required:
With reference to the above case, advise the auditors of Bukadef Plc on the procedure
for verification of fair statement, measurement, completeness and disclosure of the
obligations to the company. (10 Marks)
b) In selecting a sample of creditors for purposes of circularization, the auditor has

decided to use his own experience and knowledge of the client’s circumstances to
select a sample without using any mathematical or statistical tools.
Required;
Identify the sampling method employed and evaluate its applicability and suitability.
(10 Marks)
Illustration 3;
“Audit of inventory should have been a complex and time consuming area to audit if it was
not for the fact that it is the responsibility of management to ensure that the stock figures in
the financial statements represents inventory that exists and is beneficially owned by the
client” said Kavuma, a student of Bachelor of Commerce.
Required;
a) Explain why the audit of stock is a risky area. (5 marks)

b) With reference to the provision in ISA 501 and IAS 2, advise Kavuma on the
responsibilities of the auditor before, during and after the stock taking exercise as part
of the audit of the stock. (15 marks)
34

TOPIC 5: AUDIT OF FINANCIAL STATEMENTS: Verification of Balance Sheet Items

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TOPIC 5: AUDIT OF FINANCIAL STATEMENTS: Verification of Balance Sheet

Valuation - assets and liabilities are recorded at appropriate carrying values,

The substantive procedures to verify this assertion include:

iii. That fixed assets are beneficially owned by the client

Rights and obligations/ Ownership

Client BUSINESS STUDIES LTD Period End E 1.1

Audit test Objective WP Done Results

COMPLETENESS / OCCURRENCE 2,3

• Physically examine a sample of fixed assets and

Audit test Objectiv WP Done Results

Audit objectives 1. the fixed assets exist.

Manager review Date

5.2 AUDIT OF ACCOUNTS RECIEVABLE

5.2.2 Audit Programme for Receivables

2. Existence and Rights and obligations

Verification of trade receivables by direct circularization is the normal method of getting

Selecting Sample For Circularization:

The auditor will need to evaluate the results in terms of :

3. Rights and Obligations / Ownership of Receivables

The auditor should however be alert to the following issues:

4. Valuation and disclosure of debtors:

TIMING OF AUDIT WORK ON DEBTORS

Analytical Procedures - Accounts Receivable, Allowance For Uncollectible Accounts

Analytical Procedures – Sales Returns, Allowances, And Commissions

Auditing Other Receivables

EXAMPLES OF PREPAID EXPENSES

INHERENT RISK ASSESSMENT-

CONTROL RISK ASSESSMENT - PREPAID INSURANCE

ANALYTICAL PROCEDURES - PREPAID INSURANCE

• In practice, stock is a very important audit area. For manufacturing businesses, it is

Key assertions and audit objectives of stock and Work-in-progress:

AUDITING PROGRAMMES FOR INVENTORY:

Inventory turnover = Cost of sales ( -Times/the higher the better)

During the count

Ensure that no production is scheduled.

Financial statements should disclose inventories as current assets under the

AUDITING BANK BALANCES

AUDITING CASH BALANCES

During the cash count

After the cash count

DISCLOSURE ITEMS FOR CASH & BANK

The auditor should be aware of the possibility of understatement of creditors.

AUDITING PROCEDURES FOR CREDITORS

AUDITING PROCEDURES FOR ACCRUALS

General accruals (Completeness and Valuation)

Accrued PAYE/VAT/NSSF (Completeness and Valuation)

Accrued Wages And Salaries (Completeness And Valuation)

NB : Auditing of short-term liabilities/ Overdrafts is similar to bank balance audit procedures.

5.6 AUDIT OF FINANCIAL STATEMENTS – LONG-TERM LIABILITIES

The key assertions and audit objectives are:

Audit procedures: Basically they are substantive procedures

5.7 AUDIT OF SHARE CAPITAL

The reasons for Audit Sampling.

i. It is cheap to audit few items as compared to 100% check.

There are two approaches to audit sampling.

The method is ideal under the following conditions:-

i. In deciding which tests to apply.

Advantages of Judgement sampling

Disadvantages of Judgement Sampling.

Advantages of Statistical sampling

1. As a technique, it is not always fully understood so false conclusions may be drawn

CASES WHEN SAMPLING IS NOT APPROPRIATE

1. When the auditor is on inquiry as a result of previous information.