C

op
yr
ig
ht
 ht
ig
Substantive
Procedures,

yr
Balance Sheet
Accounts
op
C
ACCT30004
Auditing and Assurance Services
 At the end of this topic you should be able to:
• Describe the relationship between detection
Topic Objectives risk and audit strategy

ht
• Explain the purpose of substantive procedures
and discuss the nature of these procedures

ig
• Explain the different types of substantive
procedures available to the auditor

yr
• Apply the relevant concepts to practical

op situations
C
3
 ht
ig
Balance Sheet
Accounts

yr
op
C
Textbook Ref: Chapter 11
 ht
ig
yr
Melbourne Electronics Pty Ltd

op
C
5
Balance Sheet

ht
Balance Sheet
2020 2019 2018 2020 2019
Current Assets
Accounts Receivable 96,800 60,100 48,000 61% 25%

ig
Prepayments 1,700 1,000 800 70% 25%
Inventories 265,000 221,300 160,900 20% 38%
363,500 282,400 210,400 29% 34%

yr
Investments
Woolworths (cost) 73,600 82,000 40,000 -10% 105%

Fixed Assets

op
Land and Buildings 780,000 700,000 670,000 11% 4%
Plant and Equipment 91,500 114,000 120,000 -20% -5%
871,500 814,000 790,000 7% 3%
Intangibles
Goodwill 19,600 18,900 21,600 4% -13%
C
Total Assets 1,327,200 1,197,300 1,062,000 11% 13%
Balance Sheet
Current Liabilities

ht
Accounts Payable 138,790 148,780 225,400 -7% -34%
Accruals 2,300 3,200 4,400 -28% -27%
Bank Overdraft 48,100 36,000 27,000 34% 33%

ig
Provisions - Tax Payable 16,910 10,820 - 56%
206,100 148,800 256,800 39% -42%
Non-Current Liabilities

yr
Mortgage Loans 850,000 800,000 650,000 6% 23%

Total Liabilities 1,056,100 998,800 906,800 6% 10%

Net Assets

op $271,000 $198,500 $155,200 37% 28%

C
Balance Sheet

ht
Shareholders Funds
Issued and Paid Up Capital 200,000 150,000 150,000 33% 0%

ig
Reserves 5,000 - -
Asset Revaluation Reserve 30,000 30,000 - 0%
Retained Profits 36,100 18,500 5,200 95% 256%

yr
Total Shareholders Funds $271,100 $198,500 $155,200 37% 28%

op
C
Balance Sheet Accounts

ht
ig
yr
op
C
 Virgin Australia was never going to last
Ever since Australia’s two airline policy of regulated competition was abandoned in 1990 ushering in an era of deregulation, Australian

ht
governments have prioritised airline competition over stability and reliability of services.
Just how much airlines were operating on a wing and a prayer after the end of the policy was powerfully illustrated by the failure
of Ansett in 2001.

ig
Ansett had been Australia’s second major airline.
Its owner, Air New Zealand had been sucking out cash to cover its own losses.

yr
Ansett dramatically collapsed in the face of the September 11 attacks and price-based competition from new entrant Virgin Blue.
Virgin Blue was founded in 2000 by the flamboyant British entrepreneur Richard Branson, floated on the Australian Securities Exchange

op
in 2003 and rebranded Virgin Australia in 2011 after the original owners lost control.
It was put into voluntary administration on Tuesday after a decade of near-continuous losses, owing 10,000 creditors A$6.8 billion.
Chief Executive Paul Scurrah praised the board’s decision to quickly enter administration.
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Source: https://theconversation.com/virgin-australia-was-never-going-to-last-136847

10
Audit Risk – Substantive Procedures

ht
ig
yr
op
C
 ht
ig
Accounts Receivable

yr
op
C
Textbook Ref: Chapter 11
Balance Sheet

ht
Balance Sheet
2020 2019 2018 2020 2019
Current Assets
Accounts Receivable 96,800 60,100 48,000 61% 25%

ig
Prepayments 1,700 1,000 800 70% 25%
Inventories 265,000 221,300 160,900 20% 38%

yr
363,500 282,400 210,400 29% 34%
Investments
Woolworths (cost) 73,600 82,000 40,000 -10% 105%

Fixed Assets
Land and Buildings
Plant and Equipment op 780,000
91,500
871,500
700,000
114,000
814,000
670,000
120,000
790,000
11%
-20%
7%
4%
-5%
3%
C
Intangibles
Goodwill 19,600 18,900 21,600 4% -13%

Total Assets 1,327,200 1,197,300 1,062,000 11% 13%

 Accounts Receivables
Existence:

ht
• Usually addressed by debtors’ confirmation (ASA 505; ISA 505).
– Positive confirmation - auditor requests reply in all circumstances.

ig
– Negative confirmation - auditor requests reply only if debtor disagrees with balance shown.

yr
Valuation and allocation:
• Use subsequent receipts test.

op
• Analytical procedures based on ageing.

Classification:
C
• Assertion can also be important because of disclosures, such as related parties and financial instruments.
 Substantive testing of trade receivables
Rights and obligations:

ht
• Can also be important because of restrictions on trade terms.

ig
Completeness:
• Can be addressed through cut-off testing.

yr
op
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Accounts Receivable

ht
ig
yr
op
C
 ht
ig
Inventory

yr
op
C
Textbook Ref: Chapter 11

17
Balance Sheet

ht
Balance Sheet
2020 2019 2018 2020 2019
Current Assets
Accounts Receivable 96,800 60,100 48,000 61% 25%

ig
Prepayments 1,700 1,000 800 70% 25%
Inventories 265,000 221,300 160,900 20% 38%

yr
363,500 282,400 210,400 29% 34%
Investments
Woolworths (cost) 73,600 82,000 40,000 -10% 105%

Fixed Assets
Land and Buildings
Plant and Equipment op 780,000
91,500
871,500
700,000
114,000
814,000
670,000
120,000
790,000
11%
-20%
7%
4%
-5%
3%
C
Intangibles
Goodwill 19,600 18,900 21,600 4% -13%

Total Assets 1,327,200 1,197,300 1,062,000 11% 13%

 Substantive testing of inventory
Existence

ht
• Usually addressed by testing client’s annual or cyclical stock take (ASA 501; ISA 501).

ig
Valuation and allocation:
• Lower of cost and NRV - AASB 102 (IAS 2).

yr
– Sighting inventory at stock take allows auditor to assess slow-moving, damaged, obsolete, impaired,
excess stock which should be written down.
• Typical techniques:

op
– vouching to invoices to verify initial cost
– vouching to sales details to verify cost of sales
C
– test provision for impairment calculations.
 Substantive testing of inventory
Completeness:

ht
• not usually a major issue
• risk of understatement can be issue where goods sold on consignment.

ig
Rights and obligations:

yr
• Relevant for some clients due to consignment sales, complex purchasing contracts.

Classification:
op
• usually addressed by testing stock listing, allowing verification of disclosures
C
Inventory

ht
ig
yr
op
C
Inventory

ht
ig
yr
op
C
 ht
ig
Property, Plant and
Equipment

yr
op
C
Textbook Ref: Chapter 11
Balance Sheet

ht
Balance Sheet
2020 2019 2018 2020 2019
Current Assets
Accounts Receivable 96,800 60,100 48,000 61% 25%

ig
Prepayments 1,700 1,000 800 70% 25%
Inventories 265,000 221,300 160,900 20% 38%

yr
363,500 282,400 210,400 29% 34%
Investments
Woolworths (cost) 73,600 82,000 40,000 -10% 105%

Fixed Assets
Land and Buildings
Plant and Equipment op 780,000
91,500
871,500
700,000
114,000
814,000
670,000
120,000
790,000
11%
-20%
7%
4%
-5%
3%
C
Intangibles
Goodwill 19,600 18,900 21,600 4% -13%

Total Assets 1,327,200 1,197,300 1,062,000 11% 13%

 Substantive testing of property, plant and
equipment
Existence:

ht
• Verify items recorded in client’s fixed asset register.
• Physically sight assets listed in first audit and periodically.

ig
• Focus on additions and disposals in later years.

yr
Valuation and allocation:
• Evidence about condition gathered when sighting physical assets.

op
• Consider cost and fair value and asset impairment.
• Change in client operations could impact fair values.
• Vouch initial cost to invoices and contracts.
C
• Vouch disposals to sales contracts, receipts.
• Test depreciation through reasonableness testing of charge based on useful lives.
 Substantive testing of property, plant and
equipment
Completeness:

ht
• not usually major issue

ig
Rights and obligations:
• Initial test then periodically.

yr
• Registered titles, registration papers.
• Consider leased items.

Classification: op
• Generally test fixed asset register.
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 ht
ig
Appendix

yr
op
C
27
 Analytical Procedures
Income Statement

ht
Balance Sheet – Assets

ig
Balance Sheet – Liabilities

yr
Balance Sheet – Shareholders Funds

op
C
Income Statement
Income Statement
2020 2019 2018 2020 2019

ht
Sales 1,600,780 1,387,670 980,500 15% 42%
Less Cost of Goods Sold 1,184,570 1,054,630 754,980 12% 40%

ig
Gross Profit 416,210 333,040 225,520 25% 48%
Other Operating Income 4,500 3,700 4,980 22% -26%
420,710 336,740 230,500 25% 46%

yr
Less Expenses
Selling Expenses 112,000 97,000 92,000 15% 5%
Administration Expenses 117,720 90,420 43,400 30% 108%
Occupancy Expenses 42,700 41,100 10,600 4% 288%

op
Financial Expenses 108,100 84,700 78,500 28% 8%
380,520 313,220 224,500 21% 40%
Operating Profit (before tax) $40,190 $23,520 $6,000 71% 292%

Tax Expense 19,690 10,820 - 82%

C
Operating Profit 20,500 12,700 6,000 61% 112%

Income from Investment Sales 2,100 - - Analytical Procedures

Net Profit $22,600 $12,700 $6,000 78% 112%
Balance Sheet

ht
Balance Sheet
2020 2019 2018 2020 2019
Current Assets
Accounts Receivable 96,800 60,100 48,000 61% 25%

ig
Prepayments 1,700 1,000 800 70% 25%
Inventories 265,000 221,300 160,900 20% 38%
363,500 282,400 210,400 29% 34%

yr
Investments
Woolworths (cost) 73,600 82,000 40,000 -10% 105%

Fixed Assets

op
Land and Buildings 780,000 700,000 670,000 11% 4%
Plant and Equipment 91,500 114,000 120,000 -20% -5%
871,500 814,000 790,000 7% 3%
Intangibles
Goodwill 19,600 18,900 21,600 4% -13%
C
Total Assets 1,327,200 1,197,300 1,062,000 11% 13%
Analytical Procedures
Balance Sheet
Current Liabilities

ht
Accounts Payable 138,790 148,780 225,400 -7% -34%
Accruals 2,300 3,200 4,400 -28% -27%
Bank Overdraft 48,100 36,000 27,000 34% 33%

ig
Provisions - Tax Payable 16,910 10,820 - 56%
206,100 148,800 256,800 39% -42%
Non-Current Liabilities

yr
Mortgage Loans 850,000 800,000 650,000 6% 23%

Total Liabilities 1,056,100 998,800 906,800 6% 10%

Net Assets

op $271,000 $198,500 $155,200 37% 28%

C
Analytical Procedures
Balance Sheet

ht
Shareholders Funds
Issued and Paid Up Capital 200,000 150,000 150,000 33% 0%

ig
Reserves 5,000 - -
Asset Revaluation Reserve 30,000 30,000 - 0%
Retained Profits 36,100 18,500 5,200 95% 256%

yr
Total Shareholders Funds $271,100 $198,500 $155,200 37% 28%

op
C
Analytical Procedures
 At the end of this topic you should be able to:
• Describe the relationship between detection
Topic Objectives risk and audit strategy

ht
• Explain the purpose of substantive procedures
and discuss the nature of these procedures

ig
• Explain the different types of substantive
procedures available to the auditor

yr
• Apply the relevant concepts to practical

op situations
C
33
 ht
ig
Substantive
Procedures,

yr
Balance Sheet
Accounts
op
C
ACCT30004
Auditing and Assurance Services