VA.

Cost of Sales
Substantive Procedures RELEVANT ASSERTIONS
B/S P/L
Files (Information to be obtained/evidence
Audit Procedures Ref. Description Detailed Work Steps E V C R&O P&D O M C P&D
to be gathered)

Lead Schedule
1 Obtain/prepare a VA Obtain/prepare a lead schedule of cost of 1. Obtain/prepare a lead schedule of sufficient detail to enable us to understand the nature of each account under cost of sales classification. 1) Detailed schedule of cost of sales and general ledger
sales.
lead schedule
2. Agree lead schedule to general ledger and obtain explanation from management regarding differences.

Primary Substantive Procedures

1 Cost of VA01 Comparison of cost of sales and gross 1) Detailed schedule of revenues, cost of sales and X X X X
margins with prior period gross profit (e.g. monthly, per product line, per business
sales/services segment, at disaggregated level)
1. Obtain detail of cost of sales accounts in comparison with the prior period and inquire management for changes in account classification/components. 2) Supporting documents and business rationale for the
2. Explain unusual or significant fluctuations, including the lack of expected fluctuations based from understanding of the business. Use professional signifcant or unexpected fluctuation
judgment in selecting the most appropriate threshold to identify what items to further investigate in terms of the fuctuations or lack of expected changes. 3) Cost accumulation worksheet and basis of
3. Review gross margin percentages (e.g., by product line, geographical area or segment) in comparison with the prior year and understand the changes calculation
in gross margin and obtain supporting documentation for the changes. Investigate unusual or significant changes in gross margin percentages based on 4) Sample invoices for the samples selected to test the
the established testing threshold. costing method
4. Test the appropriateness of costing method (cost accumulation procedures) used by the company to check if in compliance with the accounting 5) Assumptions used in getting the standard cost and
standard. rationale for the variance allocation.

5. Perform tests of transactions based on the combined risk assessment, when required. We use the Income Statement sampling table to identify the
number of samples that we need based from our CRA and any significant/fraud risk associated with the account.

Sample test of transactions that can be performed are the following:

1. Test of costing of inventories including standard costs and reasonableness of assumptions used in getting the standard cost; and supporting documents
for the invoices of the samples selected to prove the accuracy of the costs incurred.
2. Test of appropriateness of allocation of variance.

OSPs

READ ME FIRST: The OSPs to be performed are always a judgment call on the part of the audit team. They need to ensure that the OSP to be
performed is responsive to the risk and to obtain additional evidence to support the account balance. The list of OSPs below is not all-inclusive
but is intended only to give examples and guide audit teams on how to structure the OSPs to be performed in their audits.
1 Review large and VA02 Review the appropriateness of large and 1. Review the appropriateness of large and unusual expenses, and verify explanations obtained from management. 1) Detailed schedule of large and unusual expenses.
unusual expenses 2. Review the expense accounts in the general ledger for unusual items and investigate any such items observed. 2) Supporting
unusual expense 3. Obtain and verify corroborating evidence such as analysis, contracts, budget, etc). documents such as contracts, analysis, monthly budget.
X X
3) Inquiry of management.

2 Detailed account VA03 Review appropriate classification and a. Review important judgmental decisions (e.g., classification and allocation of costs and expenses to cost of sales). Include in our review the 1) Detailed allocation of expense to cost of sales and X X X X
allocation of expenses consistency of allocation for costs and expenses for various tax regimes (i.e. ITH, GIT and RCIT). operating expenses
analyses 2) Detailed monitoring of costs and expenses for
b. Determine that unusual, non-operating, and non-recurring costs are accounted for on an appropriate basis (for example, if one of the entity’s various tax regimes (i.e. ITH, GIT and RCIT)
operations is discontinued); 3) Agreements and contracts
c. Identify of contingent liabilities and commitments (e.g., review of the legal and professional expense accounts); 4) Legal replies
5) Schedule of transactions with related parties
d. Identify expenditures that should be capitalized (e.g., review of the repairs and maintenance expense accounts); 6) Obtain transfer pricing documentation on related
party transactions
e. Identify items that should be included in prepaid or accrued expenses (e.g., review of the royalty expense account);

f. Review if certain expenditures are being accounted for in accordance with contractual agreements (e.g., union agreements and contracts for the
purchase of raw materials);
g. Compare actual expenditures with the authorized amounts (e.g., review of senior management’s compensation); and
h. Review accounts that are likely to contain items that are of significance in the preparation of income tax returns (e.g., review of travel and
entertainment expensesfor
i. Inquire management or losses on sale
existence of related
of any securities).
party relationships or transactions. Determine whether material related party transactions were
approved by those charged with governance or appropriate management. Examine invoices, agreements, contracts and other pertinent documentation
supporting the related party transactions.

Other general procedures 1) If not significant accounts, review components of prepaid and accrual accounts for reasonableness and compare prepaid expense and accrued liability X X X X
balances with those of prior periods. Investigate significant fluctuations (or the absence of expected fluctuations).

2) Review minutes, agreements, union contracts, budgets and plans for evidence of new types of expenses that may have been incurred. Investigate
significant items noted.

3) Identify and examine items that may require separate disclosure in the financial statements, including the notes thereto (e.g., segment information).
4) Review journal vouchers on a test basis for unusual items; investigate any such items observed.
5) Review the voucher register for unusual items; investigate significant items noted.
6) Review allocation of expense to departments for reasonableness.

7) Trace a sample of sales transactions to corresponding commissions (or other sales expense).
8) If expenses are audited at an interim visit, review the roll-forward of activity from interim to period end and compare it to the activity in the
equivalent period of the prior period. Investigate any unexpected changes (or the absence of expected changes). Consider the need to test interim
transactions. Refer to guidance on rollforward procedures.
9) Perform a search for unrecorded liabilities as of the inventory date and/or period end by selecting subsequent disbursements and unmatched invoices
and receiving reports.

3 Procedures VA04 General 1) Obtain detailed analyses of selected cost and expenses accounts and trace to the source data X X X
Responsive to Risk Cash disbursements application 2) Examine the entity's bank reconciliations. Where appropriate, e.g., to determine whether receipts or disbursements are recorded on a timely basis, or
Assessment to verify the appropriateness of reconciling items, perform bank reconciliation cutoff procedures.

3) Account for the numerical sequence of checks issued during a specific period.

4) Compare paid checks and supporting documents with the cash disbursements register as to date, payee, amount, and account distribution; determine
whether supporting documents have been marked to prevent reuse.
5) Test vendor invoices to the cash disbursements register.

6) Compare goods and services ordered (purchase orders and purchase requisitions) to vendors’ invoices.
 Files (Information to be obtained/evidence
Audit Procedures Ref. Description Detailed Work Steps E V C R&O P&D O M C P&D
to be gathered)
7) Compare evidence of goods and services received to vendors’ invoices.

8) Compare entries in the cash disbursements register with the paid checks and supporting documents as to date, payee, amount, and account
distribution; determine whether supporting documents have been marked to prevent reuse.
9) Test cash disbursements journal to vendor invoices.

10) Examine vendors’ invoices, receiving reports, or other documents supporting the account balances.
X X X X
11) Compare vendors’ invoices to purchase orders and purchase requisitions, receiving documents, or evidence of receipt of services.

12) Consider the reasonableness of the quantities and the business purposes of the items purchased.

13) Compare the prices on purchase orders and vendors’ invoices with those in vendors’ catalogs.

14) Test the mathematical accuracy of invoices.

15) Test cutoff of disbursements and transfers at the balance sheet date.

16) Examine payments of expenses subsequent to the balance sheet date.

17) Test the account classifications of cash disbursements.

18) Test the mathematical accuracy of the cash disbursements register.

19) Test posting of items in the cash disbursements register to supporting documentation.

20) Test the postings of the totals in the cash disbursements register to the general ledger and subsidiary ledgers.
Purchases application 21) Confirm accounts payable.
22) Test the cutoff by inspecting the voucher register, receiving records, vendors’ invoices and other supporting documents immediately before and after
the cutoff date and determine that the transactions were recorded in the proper period; compare payables cutoff to cutoff in related areas (e.g., accounts
payable and inventories).
23) Perform a search for unrecorded liabilities as of the inventory date and/or period end by selecting subsequent disbursements and unmatched invoices
and receiving reports.
24) Compare vendors’ invoices to the initial record of entry (voucher register).

25) Examine payments of balances subsequent to the balance sheet date to verify recorded payables.
X X X
26) Compare entries in the voucher register to vendors’ invoices.

27) Test the account distributions of purchases in the voucher register by comparing the nature of the goods or services purchased with the descriptions
of the accounts.
28) Test the mathematical accuracy of the voucher register.

29) Test posting of items in the voucher register to supporting documentation.

30) Test the postings of the totals in the voucher register to the general ledger and subsidiary ledgers.
USE OF SUBSTANTIVE ANALYTICAL PROCEDURES

A. Considerations before using Substantive Analytical Procedures

B. When we decide to perform substantive analytical procedures after taking into account the considerations above, we perform the following worksteps:
1

Develop an expectation of the recorded amount, ratio or trend and evaluate whether that expectation is sufficiently precise to identify a
misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated.
2
Determine the amount of difference between the recorded amount and our expectation that is acceptable without further investigation as our
variance threshold.
3 Increase the effectiveness of substantive analytical procedures by using disaggregated data. Disaggregation can be in the form of:
- Segregating product lines or business lines
- Segmenting an account at the financial statements caption level to the underlying accounts that comprise the total
- Disaggregating data by month or quarter.

4
Evaluate the results of substantive analytical procedures by using the substantive analytical evaluation framework (SEE topic-based GAM,
"MISSTATEMENT" Appendix 1.5.1 to see the framework below)

5
Determine the level of assurance obtained from the results of "Substantive Analytical Procedures" and assess the need to perform further test of
details.

Reference: For further guidance on SAP, please refer to GAM under MISSTATEMENT topic
Smart form to use is 234GL (Optional)