I.

SUBSTANTIVE PROCEDURES - CASH

○ Test of balances
○ Actual audit work (60% of the timeline)
○ Refresher: balance sheet assertions: CVPRE
■ Completeness
■ Valuation
■ Presentation and disclosure
■ Rights and obligation
■ Existence
○ I/S assertions: COCAC
■ Cut-off
■ Occurrence
■ Completeness
■ Accuracy
■ Classification
○ Primary substantive procedures - REQUIRED, these are a must (as opposed to
secondary)
■ Bank confirmation
● Who prepares: auditors
● Addressed to client’s bank
● Dual purpose
(1) We want to verify if the client has Pxx,xxx amount of
money in your bank
(2) We want to know other relations you have with the client
(also asking for loans -> to verify if the company has
undeclared loans, but this is for another topic)
● Signed by CFO of client
● Auditor ->CFO -> Auditor -> Bank (Branch of Account)
● Ensure that the document is secured, no change was made on the
amount written, and will reach the bank safely, for that reason we
are the ones who bring it to the client
● Sending a second confirmation, communicate via email or phone
call
● SOP: send to all banks regardless of amount held within the bank
■ Bank Reconciliation
● Alternative for bank confirmation should it not be available by the
end of audit
● Who does this: client
● We reperform, check the actual
● Documents we need: passbook/original bank statement
double-checked
(1) Check disbursement list
(2) Cash receipts lists
 ●There is a conclusion phase: need to get bank confirmation for
archiving documents (30-60 days)
■ Plotting of intracompany transfers (to avoid Kiting)
● Cut-off test for cash; rights & obligations and existence test as well
● Companies have more than one account
● Clearing dates/period of cash, money transfers from one account
to another are not immediately recorded and thus, would make
money appear to be higher than it actually is
● BPI-> to BDO, 500T, BPI won’t be able to record it yet so, will still
record amount before transfer, say P1M, bt BDO may record it, so
from original of 100T, will now be 600T, making it appear as if the
company has 1.6 M when in fact, cash total is really only 1.1M
● 15 days before and 15 days after year-end, we look at the
transfers for any indication of kiting -> check if walang nadoble
■ PCF Confirmation from the Custodian
● Procedure for petty cash
■ Valuation of Cash
● For forex accts
● Assure that the rates used for forex adjustments are correct
● Use PDS (PH dealings) or if wala, BSP rates
II. Substantive Procedure - A/R
○ Deals with 3rd party: client
○ Primary substantive procedure: Confirmation
■ To have direct communication with the third party, to assure
appropriateness of evidence
■ Not 100% of clients has to be given a confirmation letter
● First: classification -> should the company send positive or
negative confirmation?
(1) Positive confirmation - companies that have fewer
customers but have a high amount per account; presents
high risk of material misstatement; customer has to answer
the confirmation
(2) Negative confirmation -> companies with many small client
accounts; if customer did not answer , the amounts stated
are correct
● Procedures:
(1) Auditors will draft the confirmation.
(2) Give it to the CFO (or accountant) of client for signature.
(3) Return to Auditors, who will verify if it was signed, and if
the numbers are still as previously stated. Auditors will seal
it, and send it to the client
○ Second: sampling
○ SL/GL (Ledger) Reconciliation
■ Usually follow SL if unbalanced
 ○ Aging
■ For valuation of A/R
■ To verify that the judgement made by the client is correct
■ Why is the aging like that? Ensure if the policies are correct
■ Then recomputation
○ Banking TIPS:
■ The moment receivable is recorded, there is immediately a 1% allowance
allotted for non-collectibles in banking as per BSP rules, in IFRS, no
■ In IFRS, we follow historical trends for paying clients, even beyond 6
months, but in BSP, we immediately record 100% uncollectible
■ Reconciliation of the allowance of the receivables
III. SUBSTANTIVE PROCEDURES: INVENTORY
○ Primary SP: Count
■ Verifies completeness and existence of inventory
■ For valuation: inventory is recorded at lower of cost or net realizable value
(LCNRV)
■ Auditors are not obliged to do the inventory count. They only have to
witness it.
■ Clients have their own count procedures:
● Pre-count
(1) Communicate with client before inventory count. Schedule
for inv. Count.
(2) Ask them for a pre-count
(a) Inventory tags - those that have it were counted
already. They’ll come up with an inventory list
(3) We choose the inventories that we have to verify during
the count itself
(4) Auditors will create 2 lists: list to floor (chosen from the list,
during actual inventory count, you have to see them on the
floor) and floor to list (ano po ba yan, can we count this?
Random choice from what is seen in the floor and match it
with the list given) - completely different items in the 2 lists
(a) List to floor - verifies records to the actual inventory
- existence
(b) Floor to list - actual inventory to records -
completeness
(5) In the event that the items do not match the list:
(a) INVESTIGATE (SUPPORTING DOCUMENTS):
dates are different, so inventory will move,
evidence by papers (by requisition or by delivery
etc.)
(b) Flag these differences
(c) If all the items are different, you have the right to
stop the count and ask them for a precount first
 ● Verify the valuation of the inventory (should be @ LCNRV)
(1) Simple table:
(a) Raw mats, WIP, FInished Goods
(b)
Cost NRV

Raw mats @ purchase estimate

price

WIP Cost estimate

accounting
estimate

FG Cost acctng easy

estimate
(c) Client prepares this and auditors verify the
accuracy (sometimes we do this)
IV. PPE
○ Primary SP: Lapsing Schedule
○
Office Machinery Building Total
Equipment and
Equipment

Beginning

Additions

Disposals

Depreciation

Ending
■ Part of the Notes to FS
■ Clients keep this
■ Verify the mathematical accuracy and the soundness of the assumptions
○ Verify the parts
■ Beginning
● @ carrying value
■ Additions
● Verify through vouching - looking for the supporting documents
(1) Quotations
(2) Official receipts of payments
● Physical check
■ Disposals
● Vouching
 (1) Permission to dispose the asset
(2) If through a sale, check the official receipt as well
(3) If tinapon, check necessary docs related to disposal
(a) Approval from mgt
(b) From the warehouse
■ Depreciation
● Computation to check the mathematical accuracy
● Verify the reasonableness of the estimates
(1) Dep. method (is it allowed)
(2) Useful life (especially those with contracts)
(3) Salvage value
V. ACCOUNTS PAYABLE (AP)
○ Focus more on verifying completeness instead of existence as opposed to assets
○ Primary SP: Confirmation to Suppliers
○ SL/GL reconciliation
○ Subsequent Disbursements
■ Check disbursements after year-end
■ Steps:
● Ask for the list of the sub. Disb.
● Check the amounts and determine what expenses they pertain to
(because the sub disbursements may pertain to early 2020
expenses or late 2019 expenses)
● If these amounts pertain to 2019 expenses, they should be
included in the AP for 2019
● ADJUSTING ENTRY
(1) Check the SOA
(2) Billing statements
(3) Check when the item arrived (FOB shipping point)
VI. SALES (COCAC)
○ Analytical Procedures
■ Trends and ratios to see if there are red flags in I/S accounts (used in
planning phase and SP and Conclusion phase)
■ Trend analysis
● YEAR ON YEAR ANALYSIS
● MONTH ON MONTH ANALYSIS
(1) Plot level of sales
■ Check for peak periods and or downward fluctuations
■ Ask for explanations
■ Activity last year vs this year
○ Test of Details
■ Vouching - get info from supporting docs (po number etc.)
● Sampling
(1) Verify the occurrence and existence of sales and expenses
 ■ Check from records to the supporting documents and vice versa to verify
the completeness of the records
VII. EXPENSES
○ Most important: C-classification, check whether expenses are classified in the
correct account
○ Primary SP: Analytical Procedures
○ SPECIFIC EXPENSES AND THEIR AUDITING PROCEDURES
■ Rent Expense
● Analytical procedures should follow the contractual price, straight
line only. If it iss based on sales, should look like the trend line for
sales
● Ask for the contract of lease to recheck
■ Salaries Expense
● Ask for the plantillia (??)
(1) Document containing the list of employees and all the
relevant information about them and their payroll (i.e.
monthly pay, benefits, start of employment)
● Verify that they withhold taxes and fringe benefit taxes
● Auditors should verify that the amount of expense recognized is
correct and to ensure that the client is tax compliant
■ Representation Expense
● Should only be limited to 0.5% of your sales for seller of goods
(a) Seller of services: 1% of sales
● Excess shall not be added to deductible income tax (BIR)
● In the computation of income tax, its a permanent difference
● Can be included in the computation of accounting or financial
income
■ Repairs and Maintenance and PPE
● Ensure that disbursements are indeed expenses and not
capitalizable to PPE and vice versa
● Analytical Procedures
● Vouching