Audit & Assurance (AA)

Sprintclass
September 2022
Notes
LEVEL OF ASSURANCE
REASONABLE ASSURANCE
High level of assurance
Positive report
Eg : Statutory audit
Conclusive evidence
Procedure : TOC & SP
LIMITED ASSURANCE
Low level of assurance
Negative report
Eg: Review financial statement
Persuasive evidence
Only simple substantive procedure

ELEMENTS OF ASSURANCE ENGAGEMENT

Criteria
Report
Evidence
Subject matter
Three party relationship
ETHICS & THREATS
THREATS MEANINGS
Auditor has personal
SELF-INTEREST interest in the audit of
the financial statements
Reviewing auditor’s own
SELF-REVIEW work/decision (prepare
and give opinion)
Perceived as promoting
ADVOCACY
the client/management
Close and long
FAMILIARITY
relationship
Auditors are being
INTIMIDATION
threatened by directors
Perceived as taking the
MANAGEMENT role of the
management
EXAMPLES
1. Fees attached to the level of profit
results in the financial statements
2. Lowballing
3. Auditors has shares in the client’s
company
1. Prepare the financial statements to the
client
2. Perform audit for the client (due
diligence, valuation)
1. Auditors attend the meeting with the
client : meet bankers for loan purposes
2. Represent the client in court
3. Auditor gives speech about them
during AGM
1. Family members
2. Close friends
3. Business relationship
1. Directors threaten not to pay fees
2. Outstanding fees
3. If don’t give the opinion client wants,
other services opportunity not given
1. Participate in recruitment process
2. Advise on remuneration
3. Choosing accounting software

CONFLICT OF INTEREST
• Similar client (competitor) within the same industry (Pepsi vs
CocaCola)
EXAMPLES • Auditors act for two companies which in dispute
• Auditors start a similar business like audit client : It turns out to be a
competitor then

• Breach confidentiality principle : Both clients worried that their

CONCERN
information would be leaked to their competitors

• Inform both clients and obtain consent to act : If fail to receive

consent, then choose only one
• Create information barrier between the two audit team
SAFEGUARDS
• 2 different teams with 2 different partners
• The audit teams need tos gin confidentiality agreement
• Independent partner to review the work of the audit team
LOWBALLING
Offer significant discount in fees in hoping to receive something in return
EXAMPLES
(fees : no of hour X rate)

• Self-interest threat
CONCERN
• Affect the quality of the audit : cut corners (reduce staff/hours/scope)

We can reduce fees but not too material, which may

SAFEGUARDS affect/compromise the
quality of the audit

OPINION SHOPPING (Second Opinion)

• Unhappy client who is unhappy with the opinion given by the auditors
EXAMPLES
• The client approached new audit in new of getting second opinion
• Intimidation threat : pressured to change opinion, fear of losing client,
appear as though as we are not doing a good job
CONCERN
• Cast doubt on the integrity of management
• Potential reputational risk
New auditor : Obtain permission to communicate with the current
SAFEGUARDS
auditor

LITIGATION
EXAMPLES Directors threaten to take legal action against
Intimidation threat : Auditor’s objectivity to be impaired due to fear
CONCERN
(wrong opinion)
• If the audit team member is sued, remove from the team immediately
(rotation)
SAFEGUARDS
• If the firm is used, withdraw from the engagement immediately
(resignation)

HIGH FEES DEPENDANCY

EXAMPLES Auditor received large amount of fees from one client
• Intimidation threat : Fear of losing the client
CONCERN
• Self-interest threat : Fees
• Total fees (audit + non-audit) received from a single client should not
exceed 15% of firm’s total income for the year for two years in a row
SAFEGUARDS
• If exceed, auditor must refuse the extra assignments that are offered
by the client
OVERDUE FEES
EXAMPLES Client owes substantial amount of fees to the auditor
• Self-interest threat
CONCERN • It can be perceived as a loan to the client
• Fear of not to able to retrieve the money
• Collect the fees before performing next assignment
SAFEGUARDS • Negotiate with the client on settlement
• Firm should have good credit control policy

FINANCIAL INTEREST
EXAMPLES Auditors hold shares in the audit client
• Self-interest threat
• Result of financial statements – share price – personal gain
CONCERN
• Objectivity impaired – auditor may not want to raise issues that can
give negative impact to share price
• Partner owns shares : Auditor resign from the engagement/dispose of
the shares
SAFEGUARDS • Manager owns shares : Exclude the individual from the audit team
• Partner’s spouse own shares : Auditor resign from the engagement/
dispose of the shares

FAMILY RELATIONSHIP
EXAMPLES Auditor has relationship with directors, family, friendship
• Familiarity threat
CONCERN • Objectivity impaired – auditor may not want to raise issues that will
upset the client
SAFEGUARDS Rotate the team members out of the engagement

LOANS AND GUARANTEES

EXAMPLES Loans given to client or taken from client
• Self-interest threat : “debted”
CONCERN
• Intimidation threat : Fear cannot collect money
• Auditor lends money to the client : PROHIBITED !
• Client lends money to the auditor : If client’s ordinary course of
SAFEGUARDS
business is to give out loan, the auditor can accept but the amount
must be at the market rate
GIFT AND HOSPITALITY
EXAMPLES Auditors receive presents and services from the client
• Self-interest threat + familiarity threat
CONCERN • Objectivity impaired – auditor may not want to raise issues that will
upset the client
• Apply significant test
SAFEGUARDS o If the gift is significant : Do not accept
o If the gift is not significant : Accept

SELF-REVIEW THREAT
• Choose accounting software system for the client
EXAMPLES • Requested to act as internal auditors
• Perform valuation services
• Self-review threat : Fail to criticise our colleague’s work OR rely heavily
CONCERN on colleague’s work (Mention both in answer)
• Management threat : Perceived to be taking the role of management
• 2 separate teams with 2 different partners
• Independent partner to review work
SAFEGUARDS • Separate engagement letter for every assignments
• Inform management :We cannot decide, we suggest instead
• Document all threats and consult with the ethic partners

CONFIDENTIALITY
• Information obtained in the capacity of being an auditor should not
EXAMPLES be disclosed to the third part
• Should not use for personal advantage/gain
Exceptions : Situations where by the auditor can release the information
to the third party without client’s permission

• Obligatory disclosure
o If the client perform treason, drug trafficking, terrorism or
money laundering
EXCEPTIONS
o Disclose to the right part and avoid tipping off

• Voluntary disclosure : Involve public interest

• However, need to consult with the legal team to avoid breaching of

confidentiality principle and being sued by client
UNDERSTANDING THE WHOLE AUDIT PROCESS

Tendering for client

Sign engagement letter

Client acceptance procedure (CAP)

Test of control (ONLY IS INTERNAL CONTROL SEEMS TO

BE EFFECTIVE)

Substantive procedure

Audit Review
• Communication of misstatements with client
• Going concern review
• Subsequent event review
• Written representation letter
• Perform analytical procedures (AP)

Issuance of Audit Report

Giving audit opinion
CLIENT ACCEPTANCE PROCEDURE (CAP)
 AUDIT STRATEGY AND AUDIT PLAN

AUDIT STRATEGY AUDIT

PLANNING

ABOUT : • Determine the detailed nature,

• High level view about the client
• Focus on the overall scope, timing,
and director of audit engagement
• Give overview understanding
about the client, both internally
and externally
CONTENTS :
• Clients business nature
• Group structure of the client
• Stakeholder of the client
• Locations
• Relevant accounting framework
and compliance of laws and
regulations
• Their operation method
extend and timing of the audit
• Determine all the respective audit
risks
• Identify the appropriate audit
procedures that are to be performed
• Allocation of resources and their work
scope
• Select sampling size
• Deadlines of every audit task
allocated to team members
• Form a view on the audit conclusion
whether the FS is true and fair

By getting the above information,

we can already identify the AUDIT
RISK available.

From here, we can gauge on

expectation in terms of the NET in
preparing the AUDIT PLAN
 B. Audit Risks and Responses
ISSUES AUDIT RISK
New System Impact to FS
Co. introduces new There is risk that transferring errors will
inventory/accounting occur from the old system to the new
system during the year. system.
Thus, inventory figures maybe
materially misstated. / Thus, the
Financial statements figures maybe
materially misstated.
Co. upgrading its website There is risk that, company wrongly
for a cost of $1.1m. classified the expenses as capital
expenditure or revenue expenditure.
Thus, NCA or expenses may be
materially misstated.
As co. has upgrading its This means that, the system is new to
website. company and due to infamiliarity, it may
contain errors. The system may not
capture data reliably and accurately and
so increase risk of completeness and
accuracy of data.
Warehouse
Co. has many There is risk that, EA unable to attend
warehouses in which all inventory counts and hence unable
inventory counts are to obtain SAAE regarding inventory.
done.
Thus, inventory may be materially
misstated.
Co. has 4 warehouses. 3 There is risk that, company recognises
of them are owned by the all 4 WH as their NCA.
company and another
one is rented. Thus, the NCA may be overstated and
rental expenses is understated.
Co. has entered into a There is risk that, co incorrectly include
transaction to purchase a the PPE as their NCA even it has not
new warehouse for $3.2 yet completed by the year end.
million and it is
anticipated that the legal Hence, PPE may be overstated.
process will be
completed by the year
end.
Inventory
Co includes both As per IAS 2, only production
production and general overheads can be recognised as cost to
overheads in the the inventory.
valuation of inventory. Failure to do so, inventory may be
overstated.
Co introduced perpetual There is risk that, some inventories are
inventory count where all left out during the inventory count and
inventory must be so inventory values maybe understated.
counted at least once OR
during the year. Under this system, all inventories
should be counted at least once a year.
Failure to do so, inventory value maybe
over or understated.
Co holds too many old These inventories need to be removed
inventories in the or recognised as slow moving
warehouse. inventories.
Failure to do so, will results in inventory
being overstated.
AUDITORS RESPONSE
Discuss with management to confirm
how they are monitoring the
transferring process from the old to the
new system.
Perform extensive substantive
procedures on the opening balance
and agree to prior year closing balance
to identify any misstatements.
Obtain a breakdown of the costs and
agree to invoices to ascertain the
nature of costs and
if capital, inspect NCA register it has
been included or not.
EA should document the new system
and undertake testing over
completeness and accuracy by
performing testing over application
control.
Discuss with management whether
there is training provided for the staffs
and ensure their competency.
EA should select sample of warehouse
to attend based on value of the
inventories and WH located at remote
area/WH have issue in previous year.
For WH not attend, obtain stock count
sheets from all the warehouse belong
to the company and inspect the
inventory listing to see if has been
updated accordingly.
Obtain the breakdown of NCA and
rental expense and identify whether
the warehouse cost is correctly
recorded as NCA and rental expenses.
Inspect SnP Agreement for the owned
WH to confirm ownership.
Discuss with management on the
status of the warehouse.
If complete by the year end,
Inspect SnP Agreement to ascertain
the ownership and the date. Ensure
the date is prior to xx and are in the
company name.
Obtain the breakdown of the cost of
inventory and assess whether general
overheads have been included.
Request management to remove them
if have been included.
Discuss with management to find out
how they ensure all inventories were
counted/Observe or review the control
perform during inventory count
and inspect stock count sheets to
confirm that all inventories were
included inside.
Inspect the Inventory Aging Report to
identify slow moving stocks and
obsolete stocks and ensure that it has
been accounted for in inventory
accounts.
In August 20X7,
management account
contains $2.1m of
completed finished goods
compared to $1.4m in
September 20X6.
(increase in number)
Co. sold inventories at
huge discounts during
the year.
Co. has halted further
sales of its new product.
Co. uses standard cost to
value inventory.
WIP is valued using
percentage of
completion.
FD would like to value
the WIP.
At the year end, it is
anticipated that there will
be significant level of
work-in-progress.
Co. hold precious
gemstones/jewelleries as
their inventories.
Co’s inventory was
damaged in flood or
natural disaster.
At the year end, there will
be inventory count
undertaken at all 11 of
the warehouses.
Co decides to undertake
full year-end inventory
count after year end and
then adjust for any
movements from the year
end.
During inventory count,
there will be movements
of goods in and out.
The increase in the inventory figures
may means that co is struggling to sell
the inventories and hence, the inventory
may need to be valued at NRV.
Failure to do so, inventory is overstated.
If goods were sold at huge discounts, it
means that, the sales price might be
below costs.
As per IAS 2, inventories should be
value at lower of cost and net realisable
value.
Thus, there is risk that, the costs
recognised in FS were wrongly valued.
Inventories value maybe overstated.
This means that, there is issue with the
quality of the product and hence,
inventory might need to be value
downward using NRV.
There is risk that, the inventory is still
valued at cost, and thus inventory
overstated.
There is risk that, the standard cost is
not the same as actual cost and so
inventory value maybe over or
understated.
This increase inherent risk.
There is risk that, managements
over-estimate the stage of completion
and overvalued the WIP and so the
inventories.
There is risk that, FD has no experience
in valuing the WIP and so may valued it
wrongly thus, inventories are over or
understated.
There is risk that, due to nature of the
production process, audit team did not
sufficiently qualified to assess the
quantity and value of WIP thus leading
to misstatement of WIP. (detection risk)
There is risk that, due to nature of the
inventory, management wrongly valued
the inventory and so lead to over or
understatement of inventories.
The damaged inventories need to be
valued at its net realisable value or
disposed off.
Failure to do so, inventories maybe
overstated.
It is unlikely that the auditor will be able
to attend all 11 inventory counts and
thus increase detection risk. EA may
unable to obtain SAAE regarding
warehouses not visited and thus
inventory may be materially misstated.
There is risk that, errors in counting
may occur and adjustments are not
done accurately.
Hence, inventory figures may be over or
understated.
There is risk that, goods can be omitted
from counting or counted twice.
Hence, inventory figures may be over or
understated.
Obtain breakdown of cost and NRV of
the inventory and recalculate to
confirm valuation and accuracy.
Obtain aging report to assess whether
these inventories need to be written
down.
Inspect sample of sales invoices
issued and compare the sales price
with the cost recognised in the
inventory accounts to confirm that the
cost is lower than NRV.
Recalculate to confirm accuracy.
Discuss with management whether any
write downs have been made.
Auditor should perform extensive
testing on the cost and NRV of each
inventories to confirm that the goods
are valued correctly and accurately.
Compare the standard cost and actual
cost to ascertain the differences.
Ensure that the costs follow the
standard requirement.
Discuss with mgt on the basis used
and assess the reasonableness.
Obtain breakdown of WIP and
recalculate the WIP balances based on
the percentage of completion to
confirm accuracy.
EA should discuss with mgt to consider
hiring an independent expert to value
the WIP to confirm its completeness
and accuracy.
EA should discuss with mgt to consider
hiring an independent expert to value
the WIP to confirm its completeness
and accuracy.
Have an independent expert to value
the inventories with first ask consent
from management.
Obtain breakdown of the damaged
inventories and perform detailed NRV
testing to confirm correct valuation./
confirm that the inventories has been
disposed off and not appear in the acc.
EA should choose a sample of
warehouse to attend the inventory
count with most material value of
inventory or have historical issues
before.
For those not visited, EA need to
assess the level of exception arises by
agreeing the Inventory Count Sheets to
inventory listing and inventory system.
Discuss any issues arises.
EA should attend the inventory count
after year end.
Note details on the goods received and
despatch post year end and agree
them to the inventory adjustments
schedule.
Auditors should obtain the GRN and
GDN during the inventory count day
and agree the details and movement to
inventory listing and records to confirm
completeness and accuracy.
Receivables
Co. have a lot of old
trade receivables, which
pay slowly.
Co has agreed to revised
credit period of a
customer because of
their financial difficulties.
Co. decided to release
entire allowance of bad
debt provision.
The receivables days
increases from xx to xx.
Payables
Payable turnover days
decrease from 87 to 56
days.
Audit Dateline
Client inform that they
want the audit to finish
fast.
New Client
Xx is a new client for the
audit firm.
Plan to get listing
Co plan to undertake a
stock exchange listing in
the next 12 months.
There is risk that, the receivables
unable to pay and so increase the risk
of bad debt.
If management did not provide
provision for doubtful debt, the
receivables value maybe overstated.
There is risk that, the receivables
unable to pay and so increase the risk
of bad debt.
If management did not provide
provision for doubtful debt, the
receivables value maybe overstated.
There is risk that, the receivables
unable to pay and so increase the risk
of bad debt. If management did not
provide provision for doubtful debt, the
receivables value maybe overstated.
There is risk that, the receivables
unable to pay and so increase the risk
of bad debt. If management did not
provide provision for doubtful debt, the
receivables value maybe overstated.
It shows that, draft sales and profit
increase from last year and it is unusual
for trade payables to have decreased.
There is risk that, errors of recording in
trade payables and so trade payables
may be understated.
This increases the detection risk. The
audit team need to finish the work fast
and this put pressure in the audit team
members.
Thus, they may not be able to detect
material misstatements in the FS.
The firm do not have prior period
knowledge of the client, and so difficult
for them to identify audit issues and
may missed out some risk of material
misstatements from the FS. This
increases the Detection Risk.
There is risk that, there is high tendency
for co to manipulate figures in the FS
due to the need to show good
performance to be granted the listing
status.
Hence, profit and assets may be
overstated and expenses and liabilities
may be understated.
Inspect Trade Receivables Aging
Report to identify slow paying debtors
and confirm the need for provision for
doubtful debt.
Inspect FS to confirm whether it has
been provided for.
Request management to provide if
have not done so.
Discuss with management the reasons
why they revised the credit period and
assess the reasonableness.
Inspect cash book to confirm whether
any payment has been received after
date from the customers.
Discuss with mgt whether they intend
to provide for provision or not.
Discuss with mgt to understand the
reason of releasing the allowance and
request them to provide for the
provision.
Inspect post year end cash receipts
testing to confirm that customers are
paying the balances owed.
Inspect Trade Receivables Aging
Report to identify slow paying debtors
and confirm the need for provision for
doubtful debt.
Request management to provide for
allowance if they have not done so.
EA should perform extensive testing on
trade payables specifically on the
completeness issue.
EA may send supplier confirmation
letter to confirm the amount and
completeness.
Split the audit into interim and final
audit and Have more senior team
members in the audit team provided
that the audit firm has enough
resources, so that the datelines can be
met.
Auditors to obtain greater
understanding of the client business
and environment and ensure that audit
team is made up of more audit seniors
so that audit issues can be found.
OR
EA should be more sceptical and
increase substantive procedures on
high key areas such as sales and
areas involving judgement to detect
mm.
Auditors should ensure that the team
are alert and apply professional
scepticism to key areas such as assets
and profits and areas that involve
judgements.
Adequate time should be allocated to
understand the co and have more
senior team members in order to
detect more mm in the FS.
Financing
Co. issues shares at a The share’s value need to be split
premium. properly between share capital and
share premium.
There is risk that, the whole amount of
shares are included in the share capital
account and so share capital overstated
and share premium understated.
Co. has taken long term The loan need to be split into current
loan from the bank. liabilities for amount repayable within
one year and non-current liabilities for
amount repayable more than one year.
There is risk that, mgt include all loan
amount as NCL.
Thus, the NCL may be overstated and
CL understated.
Co has taken a material This increase inherent risk.
overdraft which has a There is risk that, management may
minimum profit and net manipulate the profit and net assets to
assets covenants ensure that the covenants are met.
attached to it. If the And hence, profit and net asset figures
covenant breached and may be materially misstated.
the amount of overdraft is
repayable immediately.
Covenant breached and There is risk that, the long term loan is
the amount of long term not reclassified into current liabilities.
loan is repayable And so, CL is understated and NCL is
immediately. overstated.
Covenant breached and There is risk that, the reclassification
the amount of long term into CL results in the company in a net
loan is repayable current liability position.
immediately. If the company has insufficient cash
flow to meet the loan repayment within
one year, this could be one of the
reason for going concern implications.
Co. has issued $5m This should be classified as equity
irredeemable preference rather than NCL.
shares. There is risk that, co included it as NCL
and so NCL is overstated and equity is
understated.
The loan carried interest There is risk that, the interest rate is not
rate of 5% per annum. accrued for and so liability and interest
expense will be understated.
The loan carried interest There is risk that, full interest expenses
rate of 5% per annum. are charged in the FS rather than taking
into account the period of the loan
taken.
Thus, the interest expenses will be
overstated.
Co. obtain equity and The loan finance need to be split
loan finance. correctly between equity and liability.
There is risk that, the entire finance is
recognised as liability and so liability
may be overstated and equity
understated.
PPE
Co. had done revaluation The risk is that, the valuation has not
of property at year end. been done as per IAS where not all
assets were revalued or it was not
revalued nearing the year end and so
PPE figures maybe materially
misstated.
Co. made revaluation of As per IAS, the gain on revaluation
property and recognise should be recognised under Other
the gain under other Comprehensive Income (OCI).
income.
Inspect the share issuance document,
calculate the amount for share capital
and premium.
Agree to the breakdown of share
capital and share premium to confirm
that they have been correctly
recognised in the correct account.
Inspect disclosure in the FS to confirm
it is as per standard.
Inspect the loan agreement to confirm
how much is payable within one year
and for the long term.
Recalculate and
Inspect the FS to confirm that the
amount has been recorded correctly.
Obtain covenant calculation
breakdown from management and
recalculate to confirm accuracy.
Assess whether any covenant has
been breached.
EA should maintain professional
scepticism and alert to any
non-compliance.
Inspect the FS to confirm that the loan
had been re-classified correctly as
Current Liability and determine the
effect on the company.
Review the covenants calculation
prepared by the co to identify whether
any defaults have occurred.
If so, determine the effect on the
company.
Inspect share issue documentation to
confirm that it is irredeemable.
Inspect FS to confirm that it has been
included as equity in the FS and
adequate disclosure has been made
as per standard.
Obtain loan agreement to confirm the
interest rate.
Auditors should recalculate the interest
expense and ensure it has been
accrued in the FS by agreeing to cash
book and bank statement.
Obtain loan agreement to confirm the
interest rate.
Auditors should recalculate the interest
expense and ensure it has been
accurately recorded.
Obtain the breakdown of equity and
liabilities.
Inspect the FS to confirm that the loan
finance has been split correctly as
capital and liability.
Inspect the valuers report to ascertain
if all property has been revalued and
confirm the dates in which valuation
was undertaken.
Discuss with management their reason
of recognising the gain as other
income and request them to
recognised it under OCI.

Co. has ordered large
number of NCA but has
yet to received them.
Co has entered into a
transaction to purchase a
new warehouse but the
process is anticipated to
complete at year end.
Co. holds a lot of old
PPE.
As the mgt has recognised the gain as
Other Income, the other income is
overstated and the OCI is understated.
There is risk that, co recognised the
NCA before it is received. Thus, the
NCA will be overstated.
Only assets physically exists at year
end should be included in PPE. If the
transaction has not been completed by
the year end, there is risk that, NCA
overstated if co has recognised in the
FS.
As the PPE are old, they may need to
be written off if there is no value
keeping them.
Failure to do so, the PPE balances may
be overstated.
Ensure the existence of all assets by
inspecting the NCA register to the
physical assets on the floor.
Enquire and confirm with mgt on the
status of the purchases of WH.
Inspect SnP Agreement or title deeds
and confirm that the date is prior to
year-end and of company’s name.
Inspect the physical assets to confirm
their condition and ensure it has been
removed from the NCA register.

Co. hold an old asset
which was refurbished
recently.
There is risk that, there is wrong
classification of refurbishment expenses
between capital expenditure and
revenue expenditure. So NCA figures
maybe materially misstated.
Obtain the breakdown of refurbishment
expenses and identify whether the
expenses are capital or revenue in
nature. Ensure that they have been
recorded correctly in the FS.

Co. has disposed of NCA
recently and gain some
profit.
Co. has disposed of NCA
recently and gain some
profit.
There is risk that, the gain on profit is
calculated wrongly and so profits may
be materially misstated.
There is risk that, the assets have not
been removed from the NCA register
and so PPE figures in the FS may be
overstated.
Auditors should recalculate the profit
on disposal to ensure accuracy and
ensure that they have been recorded
correctly by agreeing it to other income
account.
Inspect the NCA register to confirm
that it has been removed and ensure it
is not exists in the company anymore
by performing physical inspection.

Some of co’s PPE was
damaged in flood and
natural disaster.
As per IAS, these assets need to be
impaired.
Failure to do so, the NCA may be
overstated and impairment expenses
understated.
Physically inspect the assets that were
damaged and ensure that they have
been impaired for in the FS.

Some of co’s machines
are not working and if it
worked, it unable to
produce high number of
output.
As per IAS, these assets need to be
impaired.
Failure to do so, the NCA may be
overstated and impairment expenses
understated.
Physically inspect the assets to confirm
their condition and ensure that they
have been impaired for in the FS.

The FD has extended the
UL of fixtures and fittings
from 3-4 years, resulting
in reducing depreciation
charge.
As per IAS 16, useful life should be Discuss with FD directors the reason
reviewed regularly and if assets UL why he increase the UL.
have genuinely increased, then this is Compare the UL with how often the
reasonable. replacement assets took place to
There is risk that, the increase of UL is ascertain the UL of assets.
just to reduce expenses and boost
profits figures.
Thus, fixtures and fittings is overvalued
and profit overstated.

Co has purchased and As per IAS 16, only purchase price and Obtain the purchased document to
installed a new directly attributable costs can be purchase the new line and confirm the
manufacturing line. It has capitalised as PPE. The maintenance amount of maintenance services for 5
been capitalised as PPE services fro 5 years must be expensed years.
and include purchase off. Request management to expensed off
price, installation costs Failure to do so, PPE is overstated and the amount and charged
and 5year servicing and expenses is understated. proportionately over 5 years.
maintenance plan.
Provision: Litigation Case
FD has threatened to sue There is risk that, it is probable for the Auditor should obtain correspondence
the company for unfair company to make lose the case and from the lawyer to confirm the status
dismissal. make payment, BUT no provision was and likelihood of payment.
recognised.
If it is possible, then a contingent Agree the results to records in the FS.
liability needs to be disclose in the
notes.
 Failure to do so, provision is
understated or notes is incomplete.
Employee took legal case Hence, a contingent liability needs to be
on company and there is disclosed. There is risk that, the
possible chance that the disclosure is not made or made
co. will lose the case. inadequately.
Employee took legal case Hence, provision needs to be
on company and there is recognised. There is risk that, provision
probable chance that the is not recognised and so provision and
co. will lose the case. expenses is understated.
Provision: Warranty
Co offers its customers a As per IAS 37, a provision need to be
warranty of five years, recognised using appropriate value.
which covers any There is risk that, inappropriate
defects. judgement was made to provide the
provision amount and so provision may
be materially misstated.
Co offers its customers a As per IAS 37, a provision need to be
warranty of 3years from recognised using appropriate value.
initial five years, which There is risk that, inappropriate
covers any defects. judgement was made to provide the
provision amount and so provision may
be materially misstated.
Provision: Redundancy
Co had close one of its A provision for redundancy needs to be
factory/ operations/ recognised if the company has made
divisions/ branch and legal or constructive obligation
made employees (announcement).
redundant. There is risk that, the provision is not
recognised and so provision and
expenses is understated.
Provision: Refund (product recalled)
A product recall has been This means that, co need to pay for
initiated for any goods refund.
sold in the last four The sale needs to be removed and
months. recognised as sales return, a provision
for refund need to be recognised and
inventory need to be updated.
Failure to do so will results in sales to
be overstated, provision and inventory
to be understated.
Contingent Assets
Co has recognised an As per IAS 37, a contingent asset can
anticipated pay out from be recognised as CA if the inflow is
liquidators handling a virtually certain.
bankruptcy of a customer Since no formal notification has been
who owed the co. as received, recognising as current assets,
current assets. However, will results in overstatement of CA.
no formal notifications
has yet to be received
from the liquidators.
Director’s salaries
Co paid huge director The remuneration needs to be disclose
remuneration to directors. in the notes to FS.
There is risk that, such disclosure is not
made or made inadequately.
Enquire the lawyer or inspect the
correspondence from the lawyer to
confirm if there is possible chance of
company losing the case.
Inspect disclosure notes in the FS to
confirm it has been disclosed correctly
.
Enquire the lawyer or inspect the
correspondence from the lawyer to
confirm the probability of company
losing the case.
Inspect provision in the FS to confirm it
has been disclosed correctly.
Discuss with management on the basis
they calculate the provision.
Recalculate and compare the amount
to prior year provision.
Discuss with management on the
reason why they reduce the level of
provision this year.
Compare actual level of claims to prior
year to assess the reasonableness of
the judgements made.
Inspect any announcement made by
the company to close down the xx and
make employees redundant to confirm
accuracy of redundancy amount.
Obtain the list of sales made prior to
the recall and agree the amount to
sales ledger that they have been
removed and include in inventory
account.
Inspect the breakdown of provision in
FS, confirm that it has been recorded if
payment of refund has not been made
pre year end.
Confirm with management whether
they have received any formal
notification or not.
If yes, inspect the document and
confirm that it is virtually certain.
If not virtually certain, request
management to remove from the CA
account and include in the disclosure
notes.
Inspect the FS to see if the disclosure
has been appropriately and completely
recorded.
Co. has paid significant There is risk that the bonus is wrongly
bonus to directors. included in the salaries and wages
expenses instead of Director’s fees
account.
Thus, salaries and wages is overstated
and director’s fees is understated.
Finance Director/Accounting Dept
FD has left the company There is risk that, no one review the FS
during the year. prepared during the vacancy period of
FD. Thus, FS may contain a lot of
material misstatements.
FD/ Director has left the There is risk that, the other finance
company during the year. team who take over the FD role is not
experienced enough and so may make
a lot of mistakes. Thus, FS may contain
a lot of material misstatements.
New FD joined a He may not have enough industry
manufacturing company, experience and may mistakes in areas
he was previously from involving judgement such as provisions.
banking/marketing Thus, FS may be materially misstated.
industry.
The accounts department This increases the risk that material
are currently overworked. misstatements occur in their work and
may also make it more difficult to obtain
answers to audit queries because
TYN's staff do not have sufficient time
to deal with them.
Bonus-related scheme
A sales-related bonus There is risk that, staffs manipulate the
scheme has been sales figures by recording fictitious
introduced in the year. sales pre year-end in order to maximise
sales and then issue credit note after
year end, so that they can obtain a
higher bonus paid.
Sales is overstated.
Reconciliations
No supplier statement This means that, company are unaware
reconciliations were if the invoice or supplier figures are
done. wrong thus, causing material
misstatements to occur in the
purchases or trade payables figures.
Client did not do bank This means that, co did not aware of
reconciliation statements. any unpresented cheque or uncredited
lodgement issues. Thus, bank balances
in the FS may be materially misstated.
Revenue Recognition
Co selling goods on As per IFRS 15, revenue can only be
credit and delivery to recognised if control has been
customer takes around transferred to the customers.
18 months. There is risk that, revenue is recognised
early, which is before the performance
obligations is satisfied and so revenue
may be overstated.
Co made some sales There is risk that, the returns relate to
returns or refund. pre year-end sales and so it cannot be
recognised in current year.
Obtain breakdown of salaries and
wages and director’s fees if the correct
amount has been recorded correctly.
Auditors should be more sceptical
during the audit.
Perform extensive substantive
procedures on the key areas such as
accounts that involve judgements to
confirm figures are appropriate.
Auditors should be more sceptical
during the audit.
Perform extensive substantive
procedures on the key areas such as
accounts that involve judgements to
confirm figures are appropriate.
Auditors should be more sceptical
during the audit, especially on areas
involving judgement issues such as
provisions and other estimates
account.
Perform extensive substantive
procedures on these key areas.
Consider whether it would be
appropriate to decrease the materiality
level for the current year audit.
Prepare a schedule of documents
required from TYN's accounts
department and provide this to them at
the earliest opportunity so that they
have sufficient time to gather the
required information.
EA should increase cut-off testing by
confirming whether the sales actually
occur and credit notes issued are
related to genuine sales transactions
recorded during the year.
Discuss with management on the
reason why they do not prepare the
reconciliation and perform extensive
substantive testing in the trade
payables and purchases balances.
Request management to prepare and
EA should undertake detailed review
over the reconciliation.
Discuss with management on the
reason why they do not prepare the
bank reconciliation statement and
perform extensive testing on the year
end bank payment and receipts.
Obtain the breakdown of revenue and
inspect year end revenues recorded to
the delivery notes to confirm that
goods have been delivered or not.
Request management to amend if
wrong recording has been made.
Inspect sample of post year end SR
and confirm if it relates to pre year end.
Obtain breakdown of sales return and
inspect the revenue account to see if
 Failure to remove from sales figures,
sales and trade receivables is
overstated. SR understated.
Co. orders goods from There is risk that, company recognise
supplier but it still in the purchases earlier before receiving
transit. the goods.
Thus, purchases and trade payables
figures will be overstated.
Customers are required The deposit should not be recorded as
to place a 5% revenue until the full services has been
non-refundable deposit undertaken and fulfilled.
prior to the completion of The deposit should be recognised as
the services. deferred income in the current liability.
Failure to do so, current liability is
understate and revenue overstated.
Classifications
Co recognises potential The fines expenses should be included
fines from government in in the other expenses account, not the
cost of sales. cost of sales as it does not relate to
operation expenses.
Thus, the cost of sales is overstated
and the other expenses is understated.
Ratio
Sales increases by 30% Increase in sales and increase in cost
but cost of sales increase of sales should be in line.
by only 5%. There is risk that, COS only increased
by 5% due to mgt intend to hide some
expenses or sales increase 20% due to
fictitious sales.
Thus, COS maybe understated and
sales may be overstated.
Accruals
Co received goods but The purchases should be accrued for
not yet received and recognise as liability.
supplier’s invoice. There is risk that, the accrual is not
recognised and thus liability is
understated.
Research and Development
Co incurred development As per IAS 38, development
expenditure to develop expenditure can only be recognised if it
new product. meets certain criteria.
There is risk that, the criteria is not met
and so wrongly capitalised. Thus, ITA is
overstated.
Co incurred research As per IAS 38, research expenses
expenditure which was should not be capitalised but expensed
capitalised. off.
Since co has capitalised it, the ITA is
overstated and expenses understated.
Patent
A patent has been As per IAS 38, the patent need to be
purchased for $1.1m and recognised as intangible assets and
co has grants exclusive amortised over 3 years.
rights for three years. As the co has fully expensed of the
Management has amount, it means that, ITA and profit is
expensed the full amount understated.
in current year SOPL.
Dividend
the sales returns have been removed
from the revenue account.
Request management to amend if
have not removed yet.
Inspect the list of all goods in transit,
and confirm that to the purchases
account that they have not been
recorded yet.
Discuss with management on how they
treat the non-refundable deposit to
ensure appropriateness.
Perform detail testing over deferred
income to confirm completeness and
accuracy.
Discuss with management the reason
why they recognised it as COS and
request them to reclassify it as Other
expenses.
Obtain the breakdown and
Inspect the breakdown of expenses to
confirm that expenses related to
production have been included in the
COS.
Obtain list of all goods that have been
received without the suppliers’ invoice
and confirm to the FS that they have
been correctly recorded as liability.
Obtain the xx breakdown, identify the
nature, assess whether the stages
meet the criteria and recalculate the
amount to be capitalised. Agree the
amount to NCA account.
OR
Inspect market survey results, cash
and bank balances to ascertain that
the development can be completed
and the co have enough resources to
develop the product.
Discuss with management on the
reason why they capitalise the
research expenses and request them
to expenses it off.
Obtain contract of purchasing the
pattern and agree the purchase price
and that the UL is 3 years.
Request management to make
adjustment and recognise ITA and
amortisation costs.
Recalculate the amortisation costs to
confirm accuracy.
Co is intending to As per IAS 10, the dividend should only
propose a final dividend be disclosed and not recognised as
once the FS are finalised. liability in the current FS as obligation
only arises once announcement has
been made.
Failure to do so, liabilities will be
overstated and equity understated.
Fraud
Before year end, it was There is risk that, the full impact to FS
discovered that a is not adequately quantified and not
significant teeming and written off is made in the FS.
lading fraud had been Hence, individual receivable balances
carried out by four may be materially misstated as receipts
members in the sales have been misallocated to other
department. receivable balances.
Outsource services
Co outsourced its sales This increase detection risk as EA
ledger processing to unable to obtain SAAE and confirm the
external service completeness of recording over sales
organisation. and receivables.
Hence, sales and receivables may be
over or understated.
Discuss with management and confirm
that, there is no announcement made
regarding the dividend prior to
year-end.
Inspect disclosure notes in the FS to
confirm that adequate disclosure has
been made.
Discuss the issue with management
and identify what is the procedures
they will undertake to quantify the
impact of losses.
Inspect sales and receivables control
account and agree the balances with
individual receivables to identify any
unusual postings.
OR Maintain prof scepticism and alert
to further fraud and errors.
Discuss with management the extend
of records the co have before pass to
the external service organisation.
Identify any controls undertaken by the
service organisation to ensure it is
effective.
Test of control
 SUBSTANTIVE PROCEDURE

ANALYTICAL PROCEDURES
• Comparing of data or also in the form of proof in total
• Compulsory at planning and completion
• Optional at gathering evidence stage

EXTERNAL CONFIRMATION
• Confirmation sent to third party to confirm on outstanding
balance/issues
• Debtor, legal confirmation

ENQUIRY
• Interview the management
• Can be formal or informal

INSPECTION
Examine certain records or documents

RECALCULATION
For accuracy purposes

USING THE WORK OF EXPERT

Trigger reliance on third party issue

WRITTEN REPRESENTATION LETTER

Prepared by management and give to auditors
(Usually for completeness purpose)
SUBSTANTIVE PROCEDURE IN EXAM

1. GENERAL (AS FOUND USUALLY IN FIRST QUESTION IN SECTION B)

2. SCENARIO BASED (USUALLY IN THIRD QUESTION IN SECTION B)

2.1. Must use issue/items in scenario to write a good answer

Substantive procedure answer needs to have these components:

VERB + SUBJECT + PURPOSE

Verb is action such as inspect, discuss, enquire, review, trace,

agree etc

Subject could be documents (must be specific what documents),

people, calculation, figures etc

Purpose can be anything as long as it will ensure that the figure in

FS are fairly stated.
Basic ; purpose can be your assertion (completeness, accuracy,
occurrence, classification, cut off, rights/obligations, existence,
valuation)
Also, you can design audit procedure/substantive procedure to
ensure client follow accounting standard (EG: only capitalised
capex item, only record sales when performance obligation
satisfied, only capitalised IA when meet capitalisation criteria,
depreciate according to useful life, revalue the whole asset within
the same class etc…)
 THIRD PARTY AND EXPERT

RELYING ON THEIR WORK

Always assess the following before

accepting their deliverables/reports :

1. Objectivity and independence

2. Competence
3. Experience
4. Basis of assumptions

How to confirm the above ?

• Discussion with management to confirm the above

• Obtain permission with the management to get an

interview session with the expert

• Interview the expert and understand their basis of

assumptions used

• Discussion with the expert to confirm on their level of

competence and knowledge to perform the work

• Review working papers and report prepared by the expert

to assess the qualify of the report and can be relied upon
 Audit Review Stage

1. Subsequent event review

2. Going concern review
3. Written representation letter
4. Overall review of financial statements
4.1 Uncorrected misstatement
SUBSEQUENT EVENT REVIEW

VERY THEORY QUESTION. SELDOM ASKED BY EXAMINERS.

BUT NEED TO KNOW THE BASIC.
EXAM TECHNIQUES WHEN ANSWERING SUBSEQUENT EVENT
QUESTION :

1. Determine Adjusting events or Non-adjusting events

(Refer IAS 10 EARP)
2. What management should do in their financial
statement? Adjust? Disclose?
3. Impact to FS if adjustment/disclosure not made
(which accounts overstate or understate)
4. Calculate materiality – and conclude whether
material or immaterial.
5. Give impact to audit report if required by examiners
in exam requirement.
GOING CONCERN REVIEW
AUDIT PROCEDURE FOR GOING CONCERN REVIEW: (MEMORISE 5 PROCEDURES)

1. Obtain the company’s cash flow forecast and review the cash in and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand
if the company will have sufficient cash flows.

2. Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.

3. Evaluate management’s plans for future actions, including their contingency plans in
relation to ongoing financing and plans for generating revenue, and consider the
feasibility of these plans.

4. Review the company’s post year-end sales and order book to assess if the levels of trade
are likely to increase and if the revenue figures in the cash flow forecast are reasonable.

5. Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.

6. Review any bank correspondence to assess the likelihood of the bank renewing the
overdraft facility.

7. Review post year-end correspondence with suppliers to identify if any have threatened
legal action or any others have refused to supply goods.

8. Inspect any contracts or correspondence with suppliers to confirm supply of the

company’s specialist equipment. If no new supplier has been confirmed, discuss with
management their plans to ensure the company can continue to meet customer
demand.

9. Enquire of the lawyers of Marlin Co as to the existence of any litigation.

10. Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate.

11. Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.

12. Review post year-end management accounts to assess if in line with cash flow forecast.

13. Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.

14. Consider whether the going concern basis is appropriate for the preparation of the
financial statements.

15. Obtain a written representation confirming the directors’ view that Marlin Co is a going
concern.
GOING CONCERN INDICATOR

Significantly Decrease in Sales Revenue

Large Amount of Debt or Interest Payable Overdue
A large amount of Overdraft
Lack of Fund in Research and Development
Lost of Key Management
Cash Flow Problems
Lost of the Big Project

AND A LOT MORE! BUT YOU GET THE PICTURE RIGHT? DON’T FORGET TO ELABORATE!

For example :

Significantly Decrease in Sales Revenue >> Unable to generate income/profit/cash

>> Unable to finance operation such as factory worker, pay supplier, buy raw
materials etc
GOING CONCERN – AUDIT REPORT

FOLLOW THIS CHART WHEN ATTEMPT QUESTION FOR

AUDIT REPORT X GOING CONCERN ISSUE
UNCORRECTED MISSTATEMENT

WHAT IS THE FLOW WHEN AUDITOR FOUND MISSTATEMENT

IN FS?
 AUDIT REPORT

MATERIAL?

FINANCIAL STATEMENT CONTAIN AUDITOR UNABLE TO OBTAIN

MATERIAL MISSTATEMENT SUFFICIENT APPROPRIATE EVIDENCE
(FSCMM) (AUTOSAE)

MATERIAL MATERIAL MATERIAL MATERIAL

NOT AND NOT AND
PERVASIVE PERVASIVE PERVASIVE PERVASIVE

QUALIFIED ADVERSE QUALIFIED DISCLAIMER

‘EXCEPT FOR’ OPINION ‘EXCEPT FOR’ OF
OPINION OPINION OPINION

IMPORTANT PARAGRAPH IN AA

KEY AUDIT MATTER

EMPHASIS OF PARAGRAPH

OTHER MATTER PARAGRAPH (OM)

OTHER INFORMATION (OI)

MATERIAL UNCERTAINTY RELATED TO GOING CONCERN PARAGRAPH (MURGC)

Compilation of FREQUENTLY-ASKED THEORY
QUESTIONS

SCREENSHOT FROM PAST YEAR ANSWER

Preconditions required for an audit

Benefits of audit planning

Methods for documenting internal control systems

Auditor’s responsibilities regarding fraud

Examples of matters the external auditor may consider in determining whether a

deficiency in internal controls is significant include:

At which stage auditor can use analytical procedure

Importance of communicating with those charged with governance

Matters to be communicated to those charged with governance

Component of audit risk

Limitations of internal control

EXAMPLES OF CONTROL ACTIVITIES

Compilation of GENERAL ANSWER for substantive
procedures:
Substantive procedures on payroll expense

– Cast a sample of payroll records to confirm completeness and accuracy and

agree the total wages and salaries expense per the payroll system to the trial
balance.

– Recalculate the gross and net pay figures for a sample of employees and agree to
the payroll records.

– For a sample of wage payments, agree the total net pay per the payroll records to
the bank transfer listing and to the cash book.

– Perform a proof in total of wages and salaries, incorporating joiners and leavers
and the pay increase/bonuses. Compare this to the actual wages and salaries
expense in the financial statements and investigate any significant differences.

– Compare the total payroll figure this year to the prior year, identify any significant
differences and discuss with management.

– Review monthly payroll charges, compare this to the prior year and budgets and
discuss any significant differences with management.

– Calculate overtime costs as a percentage of total wages. Compare this to the

prior year and discuss any significant differences with management.

– Agree a sample of individual wages and salaries per the payroll to personnel
records and records of hours worked per the clocking-in system.

– Reperform the calculation of statutory deductions and agree to supporting

documentation to confirm whether correct deductions for this year have been
made in the payroll.

– Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate their first/last salary to ensure it is accurate.

– Recalculate holiday pay for a sample of employees and agree to holiday records
and daily rate applied.

– Select a sample of employees from HR records and agree salaries per HR records
to the payroll records to confirm the accuracy of the payroll expense.

– Agree the payroll control account reconciliation to accounting records and

investigate any differences.
Substantive procedures for directors’ bonuses

• Obtain a schedule of the directors’ bonus and cast the schedule to ensure its
accuracy. Agree the amount to that disclosed in the financial statements.

• Review the schedule of current liabilities and confirm the bonus accrual is included
as a year-end liability.

• Agree the individual bonus payments to the post year-end payroll records.

• Recalculate the bonus payments and agree the criteria to supporting

documentation and the percentage rates to be paid to the directors’ service
contracts.

• Confirm the amount of each bonus paid by agreeing to the post year-end cash
book and bank statements.

• Compare the profit before tax used in the bonus calculation to the final profit
before tax figure to confirm whether any adjustment is required to the bonus paid
and discuss any differences with management.

• Agree the amounts paid to each director to board minutes and contracts to
ensure the amounts included in the current year financial statements are fully
accrued and disclosed.

• Review the board minutes to identify whether any additional payments relating to
this year have been agreed for any directors.

• Obtain a written representation from management confirming the completeness

of directors’ remuneration including the bonus.

• Review the disclosures made regarding the bonus paid to directors and assess
whether these are in compliance with local legislation.
Substantive procedures for revenue

– Compare the overall level of revenue against prior years and budget for the year
and investigate any significant fluctuations.

– Perform a proof in total calculation for revenue, creating an expectation of the

average price for the main paint products multiplied by the increased sales
volumes for this year. This expectation should be compared to actual revenue
and any significant fluctuations should be investigated.

– Obtain a schedule of sales for the year broken down into the main product
categories and compare this to the prior year breakdown and for any unusual
movements, discuss with management.

– Calculate the final gross profit margin for Darjeeling Co and compare this to the
prior year and investigate any significant fluctuations.

– Select a sample of sales invoices for customers and agree the sales prices back
to the price list or customer master data information to ensure the accuracy of
invoices.

– For a sample of invoices, recalculate invoice totals including discounts and sales
tax.

– Select a sample of credit notes raised, trace through to the original invoice and
ensure the invoice has been correctly removed from sales.

– Select a sample of customer orders and agree these to the despatch notes and
sales invoices through to inclusion in the sales ledger and revenue general ledger
accounts to ensure completeness of revenue.

– Select a sample of despatch notes both pre and post year end and follow these
through to sales invoices in the correct accounting period to ensure that cut-off
has been correctly applied.

– For sales made under the price promise, compare the level of claims made to
date with the refund liability recognised and assess whether it is reasonable.

– For a sample of sales invoices issued between June and the product recall, trace
to subsequent credit notes to confirm that the sale has been removed from
revenue.
Substantive procedures for purchases and other expenses

– Calculate the operating profit and gross profit margins and compare them to last
year and budget and investigate any significant differences.
– Review monthly purchases and other expenses to identify any significant
fluctuations and discuss with management.

– Discuss with management whether there have been any changes in the key
suppliers used and compare this to the purchase ledger to assess completeness and
accuracy of purchases.

– Recalculate the accuracy of a sample of purchase invoice totals and related

taxes and ensure expense has been included in the correct nominal code.

– Recalculate the prepayments and accruals charged at the year end to ensure the
accuracy of the expense charge included in the statement of profit or loss.

– Select a sample of post year-end expense invoices and ensure that any expenses
relating to the current year have been included.

– Select a sample of payments from the cash book and trace to expense account
to ensure the expense has been included and classified correctly.

– Select a sample of goods received notes (GRNs) from throughout the year; agree
them to purchase invoices and the purchase day book to ensure the completeness
of purchases.

– Select a sample of GRNs just before and after the year end; agree to the purchase
day book to ensure the expense is recorded in the correct accounting period.
Substantive procedures for trade receivables

Substantive procedures for bank balance

Substantive procedures for INTANGIBLE ASSET

Trade payables and accruals (COMPLETENESS ASSERTION)

– Compare the total trade payables and list of accruals against prior year and
investigate any significant differences.

– Select a sample of post year-end payments from the cash book; if they relate to
the current year, follow through to the purchase ledger or accruals listing to ensure
they are recorded in the correct period.

– Obtain supplier statements and reconcile these to the purchase ledger balances,
and investigate any reconciling items.

– Select a sample of payable balances and perform a trade payables’

circularisation, follow up any non-replies and any reconciling items between the
balance confirmed and the trade payables’ balance.

– Review after date invoices and credit notes to ensure no further items need to be
accrued.

– Enquire of management their process for identifying goods received but not
invoiced or logged in the purchase ledger and ensure that it is reasonable to ensure
completeness of payables.
Substantive procedures – PPE Additions and disposals

Additions

– Obtain a breakdown of additions, cast the list and agree to the non-current asset
register to confirm completeness of plant & equipment (P&E).

– Select a sample of additions and agree cost to supplier invoice to confirm

valuation.

– Verify rights and obligations by agreeing the addition of plant and equipment to a
supplier invoice in the name of Pear.

– Review the list of additions and confirm that they relate to capital expenditure
items rather than repairs and maintenance.

– Review board minutes to ensure that significant capital expenditure purchases

have been authorised by the board.

– For a sample of additions recorded in P&E physically verify them on the factory
floor to confirm existence.

Disposals

– Obtain a breakdown of disposals, cast the list and agree all assets removed from
the non-current asset register to confirm existence.

– Select a sample of disposals and agree sale proceeds to supporting

documentation such as sundry sales invoices.

– Recalculate the profit/loss on disposal BASED ON SALES PROCEED AND NET BOOK
VALUE and agree to the income statement.
Substantive procedures – Provision for legal action/Litigation

– Review the correspondence from the customers claiming food poisoning to assess
whether Pineapple has a present obligation as a result of a past event.

– Send an enquiry letter to the lawyers of Pineapple to obtain their view as to the
probability of the claim being successful.

– Review board minutes to understand whether the directors believe that the claim
will be successful or not.

– Review the post year-end period to assess whether any payments have been
made to any of the claimants.

– Discuss with management as to whether they propose to include a contingent

liability disclosure//provision (depends on scenario) or not, consider the
reasonableness of this.

– Obtain a written management representation confirming management’s view that

the lawsuit is unlikely to be successful and hence no provision is required.

– Review the adequacy of any disclosures made in the financial statements to

ensure it is disclosed in accordance with IAS37/Relevant accounting standard.