DPA50153 Audit 2

CHAPTER 1 – AUDIT ON FINANCIAL STATEMENT

1.1 PREPARE THE AUDITING PROCEDURES ON REVENUES

1.1.1 Nature Of Revenues

● Revenue is income that results from the ordinary or normal activities of an entity.
● Ordinary or normal activities refer to the main business activities of an entity. For
example, the ordinary activities of a car manufacturer is assembling cars and then
selling the cars.
● However, if a car manufacturer sells off its old furniture (disposal of a non-current
asset), this activity is not one of its ordinary business activities and thus will be recorded
as other income.
● There are different types of income (revenue) which include sales, fees, interest,
dividends and royalties.
● Accounting standard related to revenue is MFRS 15 – Revenue from Contracts with
customers.
● Auditors should understand the process of revenue recognition when they audit the
revenue. The revenue recognition process is included in the revenue cycle.
● The information flows in the cycle through numerous accounts such as:
(a) Sales;
(b) Cash receipts;
(c) Accounts receivables; and
(d) Sales returns and allowances

1.1.2 Audit Assertions and Accounting Treatments on Revenues

The audit assertions for revenue are included in the table below:

Audit assertions for revenue

Revenues that have been recorded actually occurred and are

Occurrence
related to the client.

All revenues that should have been recorded have actually been
Completeness
recorded.

Accuracy All revenue transactions have been recorded correctly.

Cut-off All revenues have been recorded in the correct accounting period.

All revenue transactions have been properly classified in

Classification
accordance with applicable accounting standards.

Sufficient and proper disclosure related to sale revenues have

Presentation
been made.

In the audit of revenue, the occurrence assertion may be one of the most relevant audit
assertions here. This is especially true if the client has incentives to overstate revenues.

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1.1.3 Accounting System and Control Activities for Revenues

● Implementing adequate controls activities is crucial for sales and receivable accounts
because they affect the business as whole.
● It is importance to understand three main components of the revenue cycle, which are
sales, cash receipts and sales adjustments.

Sales and receivable functions

1.1.3.1 Customers’ Orders

● A sales order is the first transaction trail of documentary evidence.

● The authenticity of the order needs to be checked so that there are no fictitious
transactions created or to ensure the occurrence of sales transactions.
● Other than description of customers, the sales order forms are pre-numbered
to prevent missing order forms. They also contain information of the goods,
the quantity ordered, price, delivery dates and the terms and conditions of the
orders.

1.1.3.2 Credit Approval

● Credit approval is entrusted to an independent department from the sales

department to avoid making credit sales to customers with poor credit risks.
● A company implements management’s credit policies that are used for new or
existing customers.
● The credit limit approval process is important to prevent uncollectable amount
due from customers and to ensure that the sales are recorded at the realizable
value. In addition, allowance for doubtful accounts can be estimated reliably.

1.1.3.3 Issuing Goods

● The approved sales orders will be sent to the warehouse where stocks are
maintained by a storekeeper.
● The storekeeper processes the approved sales order by preparing stocks for
shipment.
● The shipment of goods is enclosed with a shipping document such as a bill of
lading.
● Controls over inventories such as segregation of duties between the custody
of stocks and the maintenance of stock record are important to reduce the risk
of unauthorized shipment of goods which in turn leads to shortages of stocks.

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1.1.3.4 Invoicing Customers

● A sales invoice will be prepared and sent by the accounting or finance

department after the customer has received the goods.
● A customer-signed copy of bill of lading provides evidence that the customer
received the goods and is a basis for preparing the sales invoice.
● Control should be established to ensure that:
i. All shipments to customers are properly invoiced and sent (audit objective:
completeness)
ii. No fictitious sales transactions or duplicate invoice are issued and recorded
(audit objective: occurrence), and
iii. Invoice amounts are accurately calculated at an authorized price (audit
objective: accuracy)
iv. Segregation of duties (for example, the function of issuing sales invoice is
segregated from the function of sales recording)
v. Independent inspections of information in the bill of lading and approved
sales order prior to issuing the sales invoice
vi. Using an authorized price list to determine an accurate sales value
vii. Independent checks on the accuracy of the calculated price in the sales
invoice
viii. Independent checks on the quantity of sales in the bill of lading and
comparison with the corresponding sales invoice

1.1.3.5 Recording the Sales

● Controls should be established in recording sales to ensure that all sales

transaction transactions are recorded (audit objective: completeness) and no
overstatement of or fictitious sales (audit objective: occurrence).
● In addition, the amounts of sales should be recorded accurately (audit
objective: accuracy) and in the proper period (audit objective: cut-off)

1.1.3.6 Collection of Cash Sales and Receivables

● The process of cash receipt from sales and receivables involves the following
functions:
a. Receiving cash
b. Depositing cash in bank and
c. Recording the receipts

1.1.3.7 Adjustments to Sales and Receivables

● Controls over adjustments to sales and receivables for discounts, sales returns
and allowances, and write-offs of accounts receivable are important to ensure
the validity of transaction (audit objective: occurrence)
● All adjustments made for sales and receivables should be supported with
documents approved by authorized personnel.
● The authorized personnel should have no responsibilities towards cash
handling and customers’ ledger maintenance.
● Any returns of goods from customers should be checked before allowing the
sales returns.
● The documents enclosed with the sales return should correspond with the sales
invoice.

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1.1.4 Audit Procedures for Revenue
1.1.4.1 Test of Control
● Test of controls are designed to obtain sufficient evidence to determine
whether controls over sales and receivables (revenue) are functioning
effectively.
Control Risk Assessments for Revenue
Function Potential Misstatements
Customer’s order ● Sales are made to
unauthorized customers.
Credit approval ● Credit sales are made to
customers with poor credit
rating.
Issuing goods ● Goods are issued for
unauthorized orders.
● The quantity and goods
issued are different from
the sales order.
Invoicing ● Fictitious or duplicate
customers invoices are created.
● Shipments are not
invoiced.
● Prices are incorrectly
stated in the invoices.
Recording the ● Fictitious sales are
sales recorded.
● Invoices are not recorded.
● Invoices are recorded to
the wrong customer
account.
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Control Procedures
● List of approved customers is
reviewed and updated.
● Each sales order should be
authorized.
● Credit check is made for all new
customers.
● Credit limit is checked prior to
approval of credit sales.
● All goods issued are checked
against approved sales orders in
terms of quantity and types of
goods by independent
personnel.
● Segregation of duties for issuing
and shipping goods.
● Pre-numbered bill of lading is
prepared for each shipment.
● Bill of lading is matched with
approved sales order for each
invoice.
● Pre-numbered bill of lading is
matched with pre-numbered
sales invoice.
● Independent check on quantity
and price of invoice.
● All sales invoices are enclosed
with matching bills of lading and
approved sales orders.
● Total of invoices is checked
against total amount of sales
accounts.
● Periodic accounting for all sales
invoices.
● Independent check on journal
and sales accounts.
● Monthly statements is prepared
and sent to customers.
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Collection of cash ● Cash sales and receipts
sales and are not properly recorded.
receivables ● Receipts are posted to the
wrong customer account.
● Cash may not be
deposited daily.
● Use cash registers or point of
sales devices.
● Independent check on
agreement of amounts
journalized and daily cash
summary.
● Periodic preparation of bank
reconciliations.

Adjustments to ● Unauthorized adjustments ● All adjustments are supported

sales and are made to sales and with relevant and appropriate
receivables receivables. documents.

1.1.4.2 Substantive Procedures

a. Analytical Procedures for Revenue

Analytical procedures are used to confirm expectation and performed in three

stages:

● Review the understanding of an entity as to whether any changes to sales and

receivables balances are to be expected.
● Determine any fluctuations in the amount of sales and receivables balance
between current year and previous year.
● Determine ratios and trends for gross profit and average collection period. An
unusual change in gross profit margin compare with previous year’s figure
signifies possibilities of misstatement in recording sales. An increase in
average collection period shows more allowance is required because the client
is facing problems in collecting receivables.

It is useful to note that in the audit of revenue, it is unlikely that the audit evidence obtained
from substantive analytical procedures alone will be sufficient; hence the test of details will
usually be required, more or less.

b. Test of details of transactions

Test of details are used to corroborate test of details of balances.

Document inspections:

1. Vouching
● Auditors vouch recorded account receivables to supporting documents.
● Selected sample of debits in customer’s account are couched to sales
invoices to obtain appropriate audit evidence on the existence, rights
and obligations and accuracy of sales and receivables.
● A selected sample of credits is also vouched to remittance advices and
sales adjustment authorizations to ensure the completeness of
accounts receivables and that the reduction on account receivable is
properly made and legitimate.

2. Sales cut-off test

● To ensure that current year sales and receivables are recorded in the
current period and the changers in current year sales and receivable

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are reflected in the records of inventories and cost of sales for the
current year.
● To ensure that sales return are recorded in the appropriate period and
to avoid overstatement of sales and receivables.
● Check the date of receiving report for sales return and determine the
last receiving report for the year.
● Continuously review and investigate an unusually heavy volume of
sales return immediately after the year-end as it could signal that
fictitious sales in the current year-end were made to inflate recorded
sales.

3. Cash receipt cut-off test

● To provide evidence as to whether cash receipts are recorded in an
appropriate period. A proper cut-off is important to ensure the correct
presentation of cash and receivables.
● Selected cash receipts before the last number of the final receipts for
the current year will be inspected in terms of date and traced to the
receipts journals.
● Reviewed a daily cash summary and validated cash slips before the
year-end to ensure that the cash receipts are properly recorded.
● Observe that all collections received for the day are included in the cash
on hand record and are credited to account receivables.

c. Test of Details of Balances

● Test of details of balances are concerned with obtaining evidence about account
receivable balances at the end of the period and also focus on the adequacy of the
allowance for doubtful debts.

i. Confirmation of balance

● Sent a written confirmation to individual customers to confirm the amount

outstanding and payable from customer.
● Getting a complete and accurate list of debtors.
● Ascertaining that the amount, name and address are accurate when
preparing the confirmation.
● Ensuring that the confirmation are sent to debtors, and to the auditors’ office.
● List the selected debtors for confirmation and the result obtained in the audit
working paper.
● Investigate all exceptions resulting from debtors’ confirmation (i.e. there is
an agreement with the amount in the confirmation) responses.
● There are two forms of confirmation:

Positive ● Requires debtors to confirm whether the balance shown is

Confirmation correct or incorrect.
● Used when the detection risk is Iow.
● Generally produces statistically valid evidence.

Negative ● Requires debtors to respond only when the amount stated in

Confirmation the confirmation is incorrect.
● Used when the detection risk is moderate or high.

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● Generally produces statistically invalid evidence because a lack

of response may not signify that the debtor agree with the
amount.

ii. Alternative procedures

● Examine subsequent collections – the receipt of payment from customers is

the best evidence for existence and collectability of the debtors’ amount.
The remittance advice that accompanies the cash receipt should be
matched with the unpaid invoice and the outstanding balance.
● Vouch unpaid invoice and supporting documents constituting debtor
balances.

d. Procedures to Ascertain Adequacy of the Allowance for Bad Debts

● Review and test the process used by management to estimate the allowance for
bad debts.
● There two methods:
⮚ General allowance – the percentage of balances overdue or the percentage
of sales are used to estimate the allowance.
⮚ Specific allowance – obtain an independent review or information specific to
the debtors to ensure the reasonableness of bad debt estimate.

1.2 PREPARE THE AUDITING PROCEDURES ON EXPENSES

1.2.1 Nature Of Expenses

● Expenses is the element which is reported tin the statement of profit or loss and other
comprehensive income.
● Expenses are decreases in assets, or increase in liabilities, that result in decreases in
equity, other than those relating to distributions to holders of equity claim under
Revised Conceptual Framework, para 4.69. (MASB,2018)
● A few fundamental elements on expenses are highlighted according to MFRS 101 –
Presentation of Financial Statements.
● They are two types of expenses:

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Revenue Expenditure

Capital Expenditure

* Revenue expenditure is
charged to profit or loss
accounts (e.g. utilities expense,
salaries expense, and
depreciation expense).
* The benefits are charged to
the current accounting period.
* Capital expenditure is charged to
property, plant and equipment, or
intangible assets (e.g. patents,
trademarks and goodwill).
* The benefit are charged to several
accounting periods.

1.2.2 Audit Assertions and Accounting Treatments on Expenses

Audit assertions for expenses

All expenses that should have been recorded have actually been
Completeness
recorded.

Cut-off All expenses have been recorded in the correct accounting period.

Accuracy All expenses transactions have been recorded correctly.

All expenses that have been recorded actually occurred and are
Occurrence
related to the client.

Classification All expenses have been properly classified.

1.2.3 Accounting System and Control Activities for Expenses

● To discuss about accounting system and control activities for expenses, we focus on
payroll transactions.
● Payroll transactions include salaries, wages, commissions, bonuses and other
employee benefits, such as paid leave and sick leave.
● The related accounts for payroll are:
(a) Payroll
(b) Payments

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(c) Accrued payroll and

(d) Deduction accounts such as employee provident fund (EPF) and taxes
● Implementing adequate control activities are crucial for payroll accounts because
payroll is a significant expense to an entity.
● There are six main functions in payroll transactions which are:

Payroll function

1.2.3.1 Hiring Employees

● Hiring and dismissing employees is managed by Human Resource (HR).

● HR is mainly responsible for documenting employee details in personnel
authorization forms and then keeping the data in a personnel master file.
● Data will be kept confidential and can only be accessed or updated by
authorized personnel in HR.
● Separate functions for creating and updating personnel records for payroll
payments prevent the risk of payments made to fictitious employees (audit
objectives: occurrence, right and obligations).

1.2.3.2 Authorizing Payroll Changes

● Changes on job specification and salary scale for an employee can only be
made by authorized personnel in HR.
● The control over changes in employee data is in place to ensure accuracy of
the payroll (audit objectives: accuracy, right and obligations).
● In case of termination, HR should immediately forward a termination notice to
the payroll department.
● This is to ensure there are no continued payments to the employee (audit
objective: occurrence)

1.2.3.3 Preparing Attendance and Timekeeping Data

● Most entities practice electronic or computerize systems for maintaining

attendance and timekeeping.
● Each employee will have a security identification card to be used for recording
entries into the office.
● Thus, attendance and total hours for each employee are properly recorded and
kept (audit objective: occurrence, rights and obligations).
● This data is useful to the payroll department for calculating salaries and wages.

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1.2.3.4 Preparing the Payroll

● A payroll system is used to calculate the payroll of an entity.

● The payroll department prepares a payroll register and an independent check
will be performed to ensure reasonableness of the amounts based on the hours
worked.

1.2.3.5 Recording the Payroll

● Controls for recording the payroll should be established to ensure all

transactions are recorded (audit objective: completeness) and the are no
unrecorded payroll liabilities (audit objective: occurrence).
● The amount of payroll needs to be recorded accurately (audit objective:
accuracy) and in the proper period (audit objective: cut-off)
● The amount calculated by the payroll system are entered in the payroll journal.
The payroll register will be the supporting document for the payroll journals.
● The related deductions are also journalized in the accounts base on the payroll
register.
● Payslips are issued to accompany the payroll cheques or electronic direct bank
transfer.
● An independent check on payroll details by appropriate personnel will be
performed to prevent misstatements (audit objectives: occurrence,
completeness, accuracy)

1.2.4 Audit Procedures for Payroll

1.2.4.1 Test of Control

● Test of controls are designed to obtain sufficient evidence to determine whether

control over payroll are functioning effectively.

Control Risk Assessments

Function Potential Misstatements Control Procedures

Hiring and dismissing ● The payroll may include ● Hiring a new employee
employee fictitious employees. and firing an employee
must be authorized by
appropriate personnel in
the HR Department.

Authorizing payroll changes ● Unauthorized changes in ● Only authorized

salary rate may occur. personnel can change
● Terminated employee the data in the payroll
may remain in the payroll system.
register. ● The HR Department
should notify the payroll
department of all
terminations immediately.

Preparing attendance and ● Payroll overpaid for ● Use proper electronic

timekeeping data hours not worked. system to capture hours

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worked and approved by

authorized personnel.

Preparing the payroll ● Loss data during ● Use of computerized

submission to payroll payroll system with
department. appropriate application
● Invalid data may be controls.
included in the payroll ● Independent check on
data. the payroll data and only
authorized personnel can
change the data.

Recording the payroll ● Errors occur in ● Exception and control

processing and report to be investigated
recording the payroll. by authorized personnel.
● Unauthorized changes ● Control total for payroll
were made to the register are checked
payroll data. against total amount of
payroll journals

Pay-outs ● Cheques issued for ● Identification of

unauthorized employees on distribution
employees. of cheques.

1.2.4.2 Substantive Procedures

While payroll is subjected to high levels of inherent risk associated to completeness and
accuracy assertions, most entities have a proper control system over payroll in place.
The control is usually effective and the control risk is low.

(a) Analytical Procedures

● Perform in three stages:

⮚ To review the understanding of the entity and the likelihood of changes to
payroll amount.
⮚ To determine any fluctuations in payroll amounts between this year and the
previous year
⮚ To determine the ratio for average wages per employee – some changes may
be due to a rise in wage rates for the current year.
Analytical procedures for payroll is important to achieve the desired level of risk
detection in payroll amounts.

(b) Test of details of transactions

The test of controls for payroll transaction can be constated as test of transaction.

(c) Test of details of balances

Involving obtaining evidence about accrued payroll balances including:

● Recalculating payroll liabilities
1. Recalculate the accrued payroll and check all authorized deductions.
2. Checked on the consistency of payroll calculations and payroll accruals.

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3. Checked on subsequent payroll payments to ensure the

reasonableness of the payroll accrual recorded at the end of the current
period.
● Verifying directors’ and executive officers’ remuneration
Inspect documents such as the minutes of the meeting to approve the
remuneration for directors and executive officers. This is to ensure there is no
overpayment of bonuses.

1.3 PREPARE THE AUDITING PROCEDURES ON CURRENT ASSETS

Auditing on current assets will discuss the item of:

(a) Cash
(b) Account Receivables/Trade Receivables

1.3.1 Auditing Procedures on Cash

1.3.1.1 Nature of Cash

● Cash balance includes cash in hand, petty cash and bank balances.
● Accounting standard related to cash is MFRS 107 – Statement of Cash Flows

1.3.1.2 Audit Assertions and Accounting Treatments on Cash

Transaction Objectives

Occurrence Recorded receipt and payment transactions represent cash

inflows and outflows during the period.

Completeness All cash inflows and outflows made during the period have
been recorded
Accuracy Payments and receipts are properly (accurately) recorded

Cut-off Year-end transfers of cash between bans are recorded in the

proper period

Classification Payments and receipts are recorded in the correct accounts

Balance Objectives
Existence Recorded cash balances exist at the end of the reporting
period

Rights and obligation The entity has legal title to all cash balances shown at the end
of the reporting period

Completeness Recorded cash balances include the effects of all cash

transactions that have occurred
Valuation and allocation Recorded cash balances are realizable at the amounts stated
on the balance sheet and agree with supporting schedules

Presentation and Disclosure Objectives

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Occurrence and rights Lines of credit, loan guarantees and other restriction on cash
and obligation balance sheet

completeness Cash balances are properly identified and classified in the

balance sheet

Classification and Cash balances are appropriately presented and information

understandability disclosed is clearly expressed

Accuracy and valuation Cash balances are disclosed accurately and at appropriate
amounts

1.3.1.3 Audit Procedures for Cash

1.3.1.3.1 Test of Control

Relevant control objectives and procedures

Control Objectives Control Procedures

Recording of receipts by post

● All monies received are
recorded in the account
● All monies received are
banked into the company’s
bank accounts
● Cash and cheques are
safeguarded against loss or
theft
● Safeguards to prevent interception of mail between
receipt and opening.
● Appointment of a supervisor to supervise the receipt by
post.
● Amount received through the mail are listed when post-
opened.

Recording of cash sales and
collections
● Only the cashiers or other appointed official can receive
the cash.
● Evidence of receipt of cash by issuing serially pre-
numbered receipt forms.
● Agreement of cash received with receipts or bank in
slips

General controls over ● Prompt update of cash book and ledger accounts.
recording ● The blanked pre-numbered receipts book must
safeguarded.

Banking ● Daily banking of all receipts of cash and cheques.

● Control over disbursements made out of the cash
received must be made.

Safeguarding of cash and ● Opening of new bank accounts will required

bank accounts authorization from senior official.
● Limitations on cash floats held by the cashier.
● Controls over payments made from cash to avoid risk
of fraud.
● Independent checks on cash floats.

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● Preparation of monthly bank reconciliations by an

independent person.
● Safeguards over cheques issued.

Cheque payments
● All payments are
authorized and made to the
correct payees and
accurately recorded
● Payments are not made
twice for the same liquidity
Cash payments
● Cheque requisitions must be supported by invoices and
bills or other documents and must be authorize by a
senior official.
● Authority, custody and recording must be done by
different persons.
● Prompt dispatch of signed cheques by payees.
● Every cash expenditure must be authorized by a senior
official.
● Limit should be set for cash advancements and
disbursements.

1.3.1.3.2 Substantive Procedures

(a) Confirming bank balances and other arrangements

● Identify all banks that the client deals with and send bank confirmation letters.
● Agree the account balances identified with balances in the general ledger and financial
statements.
● Check bank balances from the general ledger to bank reconciliations, bank statement
and bank confirmation letters.
● Review bank reconciliations and check subsequent clearance of unpresented cheques
and uncredited lodgements.
● Agree any unpresented lodgements with bank statement after the end of the year.
● Examine whether the cash and bank balances have been recorded and classified
properly.

(b) Verifying bank reconciliations

● Check the mathematical accuracy and compare with the general ledger.
● Verify the bank balance per the bank confirmation with the bank balance per the
reconciliation.
● Trace unpresented cheques on the bank reconciliation to the subsequent period’s
bank statement.
● Trace deposits in transit on the bank reconciliation to the subsequent period’s bank
statement.
● Verify any bank charges or errors on the reconciliation with the bank statement or other
supporting documentation.

(c) Counting cash in hand

● Control all cash and hold all negotiable instruments until all funds have been counted.
● Insist that the custodian of the cash is present throughout the count.
● Obtain a signed receipt from the custodian on return of the funds.
● Ascertain that all undeposited cheques are payable to the order of the entity, either
directly or through endorsement.

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1.3.2 Audit Procedures Account Receivable/Trade Receivable

1.3.2.1 Nature of Account Receivable/Trade Receivable

● Trade receivables are claims to future cash, or other assets, by an entity to its
customers from the sale of goods or rendering of services.
● Accounting standard related to account receivable is MFRS 132 - Financial
Instruments: Presentation

1.3.2.2 Audit Assertions and Accounting Treatments on Account

Receivable/Trade Receivable

Audit assertions for accounts receivable

The accounts receivable that are shown on the balance sheet at the
Existence
reporting date really exist.

The amount of receivables recorded in the client’s account is

Valuation mathematically correct and their balances reflect the actual
economic value.

All accounts receivable transactions that should have been recorded

Completeness
have been recorded.

Right and The client has the right of controls on the accounts receivable
obligation included in the financial statements.

1.3.2.3 Accounting System and Control Activities for Account Receivable/Trade

Receivable

● Refer to 1.1.3 (Accounting System and Control Activities for Revenue)

1.3.2.4 Audit Procedures for Account Receivable/Trade Receivable

● Refer to 1.1.4 (Audit Procedures for Revenue)

1.4 PREPARE THE AUDITING PROCEDURES ON NON-CURRENT

ASSETS/PROPERTY, PLANT AND EQUIPMENT (PPE)

1.4.1 The Nature of PPE

● PPE refers to tangible items that (a) are held for use in the production or supply
of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
● There are various classes of PPE, but all are non-current assets which are held
for use by the entity or to be rented out to other.
● These are included:
i. Land and buildings – which may be freehold or leasehold

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ii. Plant and equipment – machinery, vehicles, furniture and equipment

and also items held under finance leases.
● Accounting standard related to PPE is MFRS 116 – Property, Plant and
Equipment.

1.4.2 Audit Assertions and Accounting Treatments on PPE

Transaction Objective

Occurrence ● Recorded additions represent PPE acquired during the

period under audit.
● Recorded disposals represent PPE sold or scrapped
during the period under audit.

Completeness ● All additions that occurred during the period have been
recorded.
● All disposals that occurred during the period have been
recorded.

Accuracy ● Additions are correctly journalized and posted.

● Disposals are correctly journalized and posted.
Cut-off ● Additions and disposals of PPE before the period end are
recorded in the current period and those after the period
and are included in the next accounting period.

Classification ● Additions and disposals of PPE are recorded in the correct

accounts.

Balance Objectives
Existence ● Recorded PPE represent productive assets that are in use
at the end of the reporting period.

Rights and obligation ● The entity owns or has rights to all recorded PPE at the
end of the reporting period.
Completeness ● PPE balances include all applicable assets used in
operations at the end of reporting period.

Valuation and allocation ● PPE are stated at cost or valuation less accumulated
depreciation.

Presentation and Disclosure Objectives

Occurrence and rights ● Disclosed PPE transaction have occurred and pertained to
and obligation the equity.

Completeness ● Disclosure as to:

i. Cost or valuation
ii. Depreciation methods and useful lives of each major
class
iii. The pledging as collateral

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iv. The major terms of finance lease contracts or PPE

assets are adequate

Classification and ● The details of additions and disposals of PPE support their
understandability classification and disclosure in the financial statements.

Accuracy and valuation ● PPE transactions are disclosed accurately and at

appropriate amounts.

1.4.3 Audit Procedures for PPE

1.4.3.1 Test of Control

The common tests of controls on PPE usually cover three aspects,

including tagging, segregation of duties, and procurement procedures.

i. Tagging

Tagging the assets helps the client to keep tabs on all its tagged items and
assist in adjusting the balance sheet for addition and disposal. Moreover, it
also helps to prevent the misappropriated use of assets for personal gain.

Auditor usually perform test of control by checking and verifying whether the
PPE list containing the tag number is matched with the tag number on the
PPE.

ii. Segregation of Duties over Assets

In the test of control here auditor need to make sure that segregation of
duties over the PPE exists and is working properly.

Examples of segregation of duties are:

• The client’s staff that request for the PPE is not the same person who
approves for it
• The person who maintains PPE records is not the one who records
the items in the general ledger or remove from it
• The person who maintains custody of PPE is not the one in the
accounting function.

iii. Procurement Procedures

The control procedure here is to make sure that each purchase or

disposal of the assets has been reviewed, authorized and approved
by different levels of authorized persons.

The test of control performs to evaluate whether authorizations over

acquisitions of PPE exist and effective while each disposal of the assets
is approved by the appropriate level of authorized personnel and the
proceeds are accounted for.

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1.4.3.2 Substantive Procedures

Possible substantive procedures for PPE balances and the specific account balance audit
objectives to which the tests relate are described as follows:

Objective/Assertion Substantive Procedure

Completeness ● Select a sample PPE from observation and trace to the

PPE register.
● Check PPE additions to sales and purchase agreements
for purchases of land and supplier’s invoices for purchase
of office equipment.
● Check PPE additions and disposals to minutes of meetings
with board of directors for confirmation on authorization.

Existence ● Select a sample PPE from the PPE register and perform a
physical inspection.

Rights and obligation ● Depending on the type of PPE:

⮚ If freehold land and buildings – inspect title deed
⮚ If leasehold land and buildings – inspect lease
agreement
⮚ If motor vehicles – inspect vehicle registration
document
⮚ Other PPE – inspect purchase invoice

Valuation ● PPE need to be properly valued at lower of cost or market

value
⮚ For additions – check cost to purchase invoices and
purchase documentation
⮚ Review depreciation – check that it is calculated
correctly
⮚ Check profit or loss on PPE disposal
⮚ If PPE has been revalued, check the valuer’s
valuation, experience, and independence.

Presentation and ● Determine that PPE assets and related expenses, gains
disclosure and losses are properly identified and classified in the
financial statements.
● Determine the appropriateness of disclosures pertaining to
cost, value, depreciation method and useful life of major
classes of assets, the pledging of assets as collateral, and
the terms of lease contracts.
● Inspect accounting policies including depreciation methods
and rates.
● Inspect details of movements of cost and accumulated
depreciation during the year.

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1.5 PREPARE THE AUDITING PROCEDURE ON CURRENT LIABILITIES (ACCOUNT

PAYABLES/TRADE PAYABLES)

1.5.1 Nature of Account Payables/Trade Payables

● Trade payables are cash owed by an entity to the suppliers of goods and services.
● It is further defined in MFRS 132 – Financial Instruments: Presentation, as financial
liabilities that give rise to a contractual obligation to pay cash or other assets, to the
suppliers of goods or services that has a contractual right to receive cash.

1.5.2 Audit Assertions and Accounting Treatments on Account Payables/Trade

Payables

Audit assertions for accounts payable

Accounts payable balances reported on the balance sheet

Completeness include all payable transactions that have occurred during the
accounting period.

Accounts payable balances reported on the balance sheet

Existence
actually exist at the reporting date.

Accounts payable have been recorded in the correct amount

Valuation
and their balances reflect the actual economic value.

The company actually owes a liability for accounts payable as

Rights and obligation
at reporting date.

Presentation and Accounts payable are properly classified on the balance sheet
disclosure and disclosed in the notes to the financial statements.

1.5.3 Accounting System and Control Activities for Account Payable/Trade Payable

● To discuss about accounting system and control activities for account payables, we
refer to purchase cycle.

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● There are five main functions in the purchase cycle which are:

1.5.3.1 Purchase Requisitions

● A purchase requisition form from a department in the entity to request goods or

services to be purchased is the first transaction trail of documentary evidence.
● The authenticity of the request needs to be checked to ensure that there are no
fictitious transactions created and to ensure the occurrence of the purchase
transaction (audit objective: occurrence)
● A pre-numbered purchase requisition is a form of control to ensure that the goods
requested are appropriately ordered and received.
● Besides the suppliers’ descriptions, purchase requisition forms also describe the
goods, quantity ordered, prices and item codes.

1.5.3.2 Preparing Purchase Orders

● The preparation of purchase orders is entrusted to an independent department from

the warehouse to avoid fraudulent requisition of goods for personal use.
● It is prepared by the purchase department upon receiving an authorized requisition
form from departments or the warehouse.
● Similar to a purchase requisition form, a purchase order describes precisely the goods
or services required, quantities, price, delivery mode and the supplier’s details such as
its name and address.
● Purchase order are used as audit evidence on the occurrence of purchase
transactions.
● In order to ensure the completeness of purchase transactions, an independent review
is performed by the purchasing officer to determine that the goods ordered are
received and recorded.

1.5.3.3 Receiving and Storing the Goods for Inventory

● Approved purchase orders will be sent to the warehouse where the goods will be
received by a storekeeper from supplier.
● For each delivery, the storekeeper prepares a pre-numbered goods received note
(GRN) to describe the goods, quantity and condition of the goods.
● The GRN will be sent to the accounts department and serves as an important evidence
to support the occurrence of the purchase transaction.

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● To ensure the completeness of purchase transaction records, an independent check

on the sequence number of pre-numbered GRN is made by the accounting personnel.

1.5.3.4 Approving Supplier’s Invoice

● A supplier’s invoice will be sent by the supplier to the accounting department after the
storekeeper receives the goods.
● Controls should be established by the entity to ensure that:
(a) All supplier’s invoices are recorded by providing serial numbers for all invoices
received (audit objective: completeness).
(b) All supplier’s invoices relate to a valid purchase transaction by checking the
invoice and matching against the GRN and purchase order (audit objective:
occurrence).
(c) All supplier’s invoice amounts are accurately calculated at an agreed price (audit
objective: accuracy)
(d) All supplier’s invoices are correctly recorded to appropriate accounts such as
expenses or assets, by providing a code to each invoice (audit objectives:
accuracy, classification)
(e) Payments are made to a valid supplier. The supplier’s invoice is approved before
the invoice is paid and recorded (audit objective: occurrence)
(f) There is no delay of payment or unpaid supplier’s invoices by preparing a prelist
of suppliers approved for payment (audit objectives: occurrence, completeness,
accuracy)

1.5.3.5 Recording the Purchases and Liabilities

● Several steps are involved in recording the sales, as follows:

(a) The supplier’s invoices are entered in a purchase journal in numerical sequence
to avoid any missing invoice.
(b) The supplier’s journal is posted to the accounts payable subsidiary ledger. The
general ledger and accounts payable balances are periodically compared to
ensure the agreement of both balances.
(c) The purchase journals are posted to general ledger.
(d) A monthly supplier’s statement is reconciled against the accounts payable
balance. Any differences between the balance recorded by the customer and the
company can be rectified immediately.

1.5.3.6 Payment Transactions

● The process of cash payment for purchase and payables involves the following:
(a) Paying the liability, and
(b) Recording the payment
● Cash payments for payables are then updated in the accounts payable records to
reduce the amount of payables.
● A list of payable balances due for payment is prepared periodically to provide the
payment department information concerning the current status of account
payables.
● The recording of payments should be properly made to ensure completeness of
the record.
● The payment transactions will be updated in the payment journal and general
ledger once the payments are authorized and the cheques are issued to the
suppliers.

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1.5.4 Audit Procedures for Account Payable/Trade Payable
1.5.4.1 Test of Controls
● Test of controls are designed to obtain sufficient evidence to determine whether
controls over purchases and payables function effectively.
Control Risk Assessments for Account Payable/Trade Payable
Function Potential Misstatements
Requisitions of ● Requests are made for
goods or services unauthorized purposes.
Preparing ● Purchases are made for
purchase order unauthorized purposes.
Receiving and ● Unordered goods are
storing goods received.
● The quantity and goods
received are not in
agreement with the
purchase order.
● Damaged goods are
received.
Approving the ● Invoices include
supplier’s invoice unordered goods.
Recording the ● Supplier’s invoices are not
supplier’s invoice recorded.
● Invoices are recorded to
the wrong supplier’s
account.
Payment of cash ● Cheque issued for
purchase and unauthorized purchases.
payables ● Double payments for a
supplier’s invoices.
● Cheques are altered after
being signed.
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Control Procedures
● Requisitions are checked prior to
approval of the goods or services
requested.
● Each purchase requisition should
be approved.
● All goods received are checked
against approved purchase
orders in terms of quantity and
types of goods by independent
personnel.
● Pre-numbered GRN are prepared
for each goods received.
● GRN are matched with the
approved purchase order for each
invoice.
● All purchase invoices are
enclosed with matching GRN and
approved purchase orders.
● Total of all supplier’s invoices are
checked against total amount of
purchase journals.
● Periodic accounting for all
supplier’s invoices, GRN and
purchase orders.
● Independent check on journal and
purchase accounts.
● Monthly reconciliation is prepared
and any differences are followed
up.
● All supporting documents for the
payments are reviewed before
cheques are signed.
● All paid suppliers’ invoices should
be stamped “paid”
● Cheques should be mailed by the
cheque signers.
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Recording the ● Payments are incorrect or ● Use of or accounting for pre-

payments not recorded. numbered cheques
● Payments are posted to ● Independent check of agreement
the wrong supplier of amounts journalized and
account. posted with cheque summary.
● Payments may not be ● Periodic preparation of bank
recorded promptly. reconciliations.

1.5.4.2 Substantive Procedures

(a) Analytical Procedures

● Review the understanding of the entity as to whether any changes to payable
balances are to be expected.
● Determine any fluctuations in amount of purchases and payable balances
between this year and the previous year
● Determine ratios and trends for gross profit and average payment. An unusual
change in gross profit margin compared to previous year’s figures signifies the
possibility of misstatements in recording purchases.
● To analyse expense accounts by reviewing the ratio between each category of
purchases with the total sales and compare with the previous year’s ratios to
determine the level of activity for the current year to ensure the completeness
of the purchase records.
(b) Test of Details of Transactions

● Vouching – auditors vouch recorded purchase transactions to supporting

documents such as purchase orders, GRN and supplier’s invoices to verify the
occurrence of the transactions.
● Tracing – auditors trace from purchase orders, GRN, supplier’s invoices to
purchase journals and accounts payable to verify completeness of records.

(c) Purchase Cut-off Test

● Obtain the number of the last GRN for the final receipt of the year.
● Select sample of GRN before the last number and match with the purchase orders
date to ensure that purchases are recognized in the current year.
● Check on agreement with entries in purchase journals to ensure that they are recorded
in the current year.
● Obtain the first GRN for subsequent year.
● Select sample of GRN after the date and match with the purchase orders and supplier’s
invoices date to ensure that purchases are recognized in the subsequent year.
● Check on the agreement with entries in purchase journals to ensure that they are
recorded in the subsequent year.

(d) Payment Cut-off Test

● The payments cut-off test is designed to provide evidence that payments are recorded
in the appropriate period. The procedures are:
⮚ Inspect the payment vouches before the last number of the final payments for
current year in terms of date and traced to the payment journals.
⮚ Verification on the date of presentation of cheques unpresented as at the end of
the reporting period, which is part of the test on bank reconciliations.

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(e) Test of Details of Balances

● Review of monthly payable reconciliations – a supplier’s statement is documentary

evidence. Auditor should review the reconciliation prepared by the client and
investigate any unreconciled balance.
● Confirmation of balances – a written confirmation is sent to individual supplier to
confirm the amount outstanding and payable to the suppliers. The confirmation is
recommended to be used when the volume of transactions is substantial and the
detection risk planned to be low. The positive form, without specifying amount due,
is normally used to confirming account payables. The confirmation should be
supplied to the auditor’s office.
● Investigating for unrecorded liabilities:
⮚ Examine subsequent period’s purchase and payment transactions.
⮚ Perform analytical procedures on expenses to determine any unusual reduction
in expenses, as it signifies the presence of unrecorded liabilities.
⮚ Examine any contractual agreements or commitments that raise the existence
of liabilities not yet provided for in the accounts, such as progress payments on
long term-contracts.

1.6 PREPARE THE AUDITING PROCEDURE ON NON-CURRENT LIABILITIES

1.6.1 Nature of Non-current Liabilities/Long-Term Debt

● Common types of long-term debt financing include bonds, notes payable, and
mortgages.
● Other than bonds, notes payable and mortgages, a company may also seek other
types of borrowings such as bank loans, redeemable preference shares, etc.
● Usually, long term debt is the liability in which its repayment obligations are due more
than one year in the future.
● However, the current portion of it which is required to pay in one year will need to be
recognized as short term borrowing.
● Accounting standard related to Non-Current Liabilities/Long-Term Debt is MFRS 132
– Financial Instrument – Presentation.

1.6.2 Audit Assertions and Accounting Treatments on Non-current Liabilities/Long-

Term Debt

Audit assertions for Long-Term Debt are included in the table below:

Audit assertions for Long-Term Debt

All long-term debt obligations that should have been

Completeness
recorded have been recorded.

Long-term debt obligations reported on the balance sheet

Existence
actually exist at the reporting date.

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All long-term debt obligations have been recorded in the

Valuation correct amount and their balances reflect the actual
economic value.

Rights and The company actually owes a liability for the long- term
obligation debt obligations as at reporting date.

Long-term debt obligations are properly classified between

Presentation and current and non-current liabilities, and appropriately
disclosure disclosed in accordance with applicable accounting
standards.

1.6.3 Accounting System and Control Activities for Non-current Liabilities/Long-Term

Debt

Objective/Assertion Control Activities

Occurrence and • Adequate documentation must be developed and kept to
authorization verify that a long-term debt was properly authorized such
as a properly signed lending agreement.
• Any significant debt commitments should be approved
by the board of directors or by executives who have had
this authority delegated to him or her.

Completeness • The entity should maintain detailed records of long-term

debt transactions to ensure that all borrowings and
repayments of principal and interest are recorded.
Valuation • Note and bond transactions are recorded in the
accounting records at their face value plus or minus any
premium or discount.

Presentation and • Controls should ensure that the proper disclosures are
disclosure provided for long-term debt including related party
transactions, restrictive debt covenants and revolving
lines of credit.
• Controls should also ensure that notes and bonds are
properly classified in the financial statements.

1.6.4 Audit Procedure for Non-Current Liabilities/Long-Term Debt

1.6.4.1 Test of Control

• The typical tests of controls include:

➢ Inquiry: inquire the personnel that perform the controls.

➢ Observation: observe the controls being performed by the client’s staff.
➢ Inspection: inspect the supporting documents to ensure that the control has
really been performed by the client.
➢ Reperformance: reperform the controls that have been performed by the
client’s staff.

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• However, in the audit of debt, the auditor most likely set the control risk as high and do
not perform the test of control in this area at all.
• Auditor tend to go directly to perform substantive audit procedures on the debt
obligations to gather audit evidence for audit opinion.
• This is due do most clients do not have many financing transactions, so going directly
to the substantive audit procedures is more efficient.

1.6.4.2 Substantive Procedures

a. Analytical Procedures

• Analytical procedures are useful in auditing interest expense because of direct

relationship between long-term debt and interest expense.
• For example, the auditor could estimate interest expense by multiplying the 12 monthly
balances for long-term debt by the average monthly interest rate.
• Comparing the estimate interest expense to the interest expense amount recorded in
general ledger to assess the reasonableness of interest expense.

b. Test of Details of Transactions

Objective/Assertion Substantive Procedure

Occurrence ● Examine copies of new long-term debt agreements.
● Examine board of directors’ minutes for approval of new
lending agreements.

Completeness ● Trace large cash receipts and payments to source

documents and general ledger.
● Review interest expense for payments to debt holders not
listed on the debt analysis schedule.
● Review notes payables paid or renewed after the
statements of financial position date to determine if there
are unrecorded liabilities at year end.
● Evaluate lease contracts to determine if leases are
properly accounted for as and operating or capital lease
(i.e. if a lease should be a capital lease, it would likely
require recognition of long-term debt.
Authorization ● Examine board minutes for evidence of proper
authorization of long-term debt.

Accuracy ● Test a sample of receipts and payments.

Classification ● Examine the due dates on long-term debt for proper
classification between current and long-term debt.

Cut-off ● Review debt activity for a few days before and after year
end to determine if the transactions are included in the
proper period.

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c. Test of details of balances

Objective/Assertion Substantive Procedure

Existence ● Confirm notes or bonds directly with creditors (in many
instances, creditors are banks, insurance companies or
trustees representing the creditors)

Rights and obligations ● Examine copies of long-term debt.

Completeness ● Obtain an analysis of notes payable, bonds payable and
accrued interest payable; foot schedule and agree totals
to the general ledger.
● Obtain a bank confirmation that requests specific
information on long-term debt payable from banks.
● Confirm long-term debt with creditors.
● Inquire of management regarding the existence of
statement of financial position activities.
● Review board meeting minutes for debt-related activity.

Valuation and ● Examine new debt agreements to ensure that they were
allocation recorded at the proper value.
● Confirm the outstanding balance for long-term debt and
the last date on which interest has been paid.
● Recompute accrued interest payable.
● Verify computation of the amortization of premium or
discount.

1.7 PREPARE THE AUDITING PROCEDURE ON EQUITIES

1.7.1 Nature of Equities

● Equity is defined in the Conceptual Framework for Financial Reporting as the residual
interest in the assets of an entity after deducting all of its liabilities.
● Equity is also known as the net asset value (assets – liabilities) of an entity.
● Equity may be subclassified into:
➢ Capital – mainly the funds contributed by shareholders or normally called share
capital.
➢ Reserves – consist mainly of retained earnings, capital reserves and revenue
reserves.
● Accounting standard related to equities is MFRS 101 Presentation of Financial
Statements and MFRS 132 Financial Instruments: Presentation.
● To discuss about auditing procedure on equities, we focus on auditing share capital.

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1.7.2 Audit Assertions and Accounting Treatments for Share Capital

Audit assertions for Share Capital

Share capital reported on the balance sheet really exists at the

Existence
reporting date.

All share capital transactions that should have been recorded

Completeness
have been recorded.

Share capital balances are valued in accordance with applicable

Valuation
accounting standards.

Presentation and Sufficient information about share capital have been properly
disclosure disclosed in accordance with applicable accounting standards.

1.7.3 Accounting System and Control Activities for Share Capital

Objective/Assertion Control Activities

Occurrence • One of the entity’s officers, such as the corporate
secretary or legal counsel, should ensure that every
share/stock or dividend transaction complies with the
corporate charter or any regulatory requirement that
affects the entity.
• This individual should also maintain the stockholders’
ledger, which contains the name of each stockholder and
the number of shares held by that shareholder.
Accuracy • Reconciliation of the stockholders’ records with the
number of shares outstanding and reconciliation of
dividends paid with the total shares outstanding on the
dividend record date.
Authorization • The board of directors or stockholders approve
share/stock and dividend transactions.
• The authorization is normally documented in the minutes
of the board of directors’ meeting.
• Examine the board of directors’ minute for proper
authorization.
Valuation • Share/stock issuances, stock repurchases and dividends
should be recorded by the treasurer’s department at an
amount in accordance with the applicable financial
reporting framework
• Recompute the recording of the stock and dividend
transactions.

1.7.4 Audit Procedures for Share Capital

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1.7.4.1 Substantive Procedures

• Auditor usually use the substantive approach in the audit procedures for share capital.
This is due to the number of transactions related to the share capital is usually small.
• Usually test of details of balances were perform the in the audit work by testing various
assertions, including existence, completeness, and valuation as well as presentation
and disclosure.

Objective/Assertion Substantive Procedure

Existence • Verification with a certificate of incorporation, articles of
association, and Memorandum of association. Matching
the balances with SEC/relevant authority filings.
Completeness • Verification of authorized and issued share capital with
supporting documents like bylaws, and others.
• Reconciliation of share capital balances with SEC and
other filings and general ledger prepared by the company.
Valuation • Matching those share capital transactions has occurred in
line with board meetings.
• Reconciliation of share capital receipts with escrow
account along with paid-up capital portion, treasury
portion, and amount of refunds share capital has been
issued in lieu of fixed asset
• For some other arrangement, ensuring that exchanged
assets are properly valued and take professional experts
to help if necessary.
Presentation and • Ensuring the following items are disclosed in the financial
disclosure statements as Classes of share capital rights related to
each class of share capital authorized share capital and
issued share capital.
• Share capital with conversion rights or options adjustment
required in comprehensive income.

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