Gay7e Irm Ch09

Chapter 09
Substantive tests of transactions and balances
Learning objectives
9.1 Identify and distinguish between tests of controls, substantive tests of transactions and
substantive tests of balances.
9.2 Identify and understand when the auditor will undertake substantive audit procedures in response
to specific assessed risks of material misstatement.
Explain the specific audit objectives and the common substantive audit procedures traditionally used
to address risks of material misstatement for:
9.3 cash, cash receipts and cash payments
9.4 sales, cash receipts and accounts receivable
9.5 purchases and inventories
9.6 accounts payable, payments and payroll
9.7 non-current assets
9.8 non-current liabilities and owners’ equity.
9.9 Identify the different substantive test approaches that may be used for account balances
included in the income statement.
9.10 Describe and understand the use of audit software techniques, including advanced data
analytics, in substantive testing.
Instructor Resource Manual t/a Auditing and Assurance Services in Australia 7e by Gay & Simnett
© McGraw-Hill Education (Australia) 2018
Chapter 9 1
Major chapter sections
Relationship between evidence-gathering procedures
Overall responses, financial report assertions and substantive audit procedures
Cash, cash receipts and cash payments
Sales, cash receipts and accounts receivable
Purchases and inventories
Accounts payable, payments and payroll
Non-current assets
Non-current liabilities and owners’ equity
Income statement
Using audit software, including advanced data analytics, to aid the undertaking of substantive tests
Lecture plan
The aim of this lecture (or two lectures) is to ensure that students understand the concept of
substantive tests and the role they play in the audit process. The chapter explores in detail the nature
of substantive tests (both transactions and balances) as a major form of audit evidence. The auditor
undertakes substantive tests to reduce detection risk.
It is not expected that the instructor will necessarily work through the substantive tests for all the
types of account balances. Instructors usually find it beneficial to work through the slides for cash,
accounts receivable and inventory and show how these differ from accounts payable. These are major
accounts on which many exam questions are based. If the other accounts are not discussed in lectures,
students should be referred to the relevant pages, and questions for tutorials/seminars should be
chosen to widen the coverage. The chapter also describes the use of audit software techniques,
including advanced data analytics, in substantive testing.
You should outline the learning objectives for this chapter, and walk the students through how this
chapter fits into the flowchart of the response to assessed risks: substantive tests of transactions and
balances as part of a financial report audit.
[Use slides 9-1 to 9-4]
Chapter 9 2
LO 9.1: Relationship between evidence-gathering procedures
In this section, the necessity for auditors to obtain sufficient and appropriate evidence to support the
auditor’s opinion is established. An auditor generally selects the most efficient and effective
combination of audit procedures that will allow them to achieve the audit objectives.
It is important to work through the first few slides, which outline the types and the relationship
between tests of controls and substantive tests of transactions and balances. Slide 9-8 provides the
link between tests of controls, discussed in Chapter 8, and substantive tests of transactions, discussed
in this lecture.
The concept of dual-purpose tests is also introduced on slide 9-8. It is important to outline that the
sample of transactions selected in practice is commonly used to test controls and to substantively
verify the balance. An example here, such as authorisation of transaction (test of control) and
recalculation of dollar value flowing into account balance (substantive tests of transactions), also
helps reinforce the differences between tests of controls and substantive tests of transactions.
It is important that students are able to distinguish between the two types of substantive tests:
substantive tests of transaction and substantive tests of balances (slides 9-9 and 9-10).
LO 9.2: Overall responses, financial report assertions and substantive audit procedures
Students need to recognise that auditors develop specific overall audit responses to evaluate the
identified risks of material misstatement for classes of transactions and events and account balances
of financial report assertions. Therefore you should carefully work through the financial report
assertions, and in particular distinguish between the financial report assertions for transactions and
events and those for account balances.
The chapter then goes into the major account balances, highlighting the assertions of interest, links
them to major evidence-gathering techniques, and outlines in more detail specific important
techniques.
The account balances are:
LO 9.3: Cash, cash receipts and cash payments

In this section we concentrate on the main substantive tests of account balances in this area,
bank confirmations and tests of client’s bank reconciliations. It also provides the linkage
between assertions, objectives and procedures for cash.
LO 9.4: Sales, cash receipts and accounts receivable

Sales, cash receipts and accounts receivable goes into detail on the main substantive tests of
account balances in this area, positive debtors’ confirmation processes and subsequent cash
receipts testing.
Chapter 9 3
LO 9.5: Purchases and inventory
Chapter 9 4
Major substantive procedures covered here are inventory stocktake and tests associated with
inventory pricing and summarisation.
LO 9.6: Accounts payable, payments and payroll

An important point to highlight here is that the key assertion of interest is different from that
for the asset accounts considered to date. The major problem is understatement, so the auditor
pays much more attention to completeness. Ensure students understand why. The section also
goes into evidence-gathering procedures in the search for unrecorded liabilities.
LO 9.7: Non-current assets

The major point to highlight here is that with very few transactions occurring in a year, the
auditor, satisfied with the prior-year balance, will verify the major transactions for the year.
In these cases there is very little difference between tests of transactions and tests of balances,
as the auditor will verify the account balances by verifying the transactions.
LO 9.8: Non-current liabilities and owners’ equity

Non-current liabilities and owners’ equity accounts also have very few transactions occurring
in a year and, therefore, the auditor, satisfied with the prior-year balance, will substantively
verify the major transactions for the year. It is worth pointing out that the auditor is most
interested in ensuring the completeness of these equity account balances.
[Use slides 9-53 and 9-54]
LO 9.9: Income statement accounts
Chapter 9 5
This section explains the relationship between specific audit objectives for income statement account
balances and those for statement of financial position accounts.
Students should be made aware of the double-entry accounting system, for which when one side of a
transaction is tested the other side is tested automatically.
The slides will show that the income statement is generally tested by:
 substantiation by simultaneous tests
 substantiation directly in conjunction with statement of financial position accounts
 substantiation directly by analytical procedures
 substantiation directly by separate direct tests.
[Use slides 9-55 and 9-56]
LO 9.10: Using audit software, including advanced data analytics, to aid in the undertaking of
substantive tests
The major teaching aim for this section is to ensure that students understand the differences between
auditing using computer techniques that predominantly test controls in clients’ programs (discussed
in Chapter 8), and auditing using computer techniques that use audit software to read clients’ files.
The major objectives of auditing with the computer are to aid audit efficiency and to direct auditors’
attention to areas of risk and materiality. The section also outlines the potential advantages of
advanced data analytics including analysing complete files, and discovering and analysing patterns,
deviations and inconsistencies in the data.
Summary
We provide a summary slide of the main learning takeaways in this chapter.
[Use slide 9-65]
Chapter 9 6
SOLUTIONS
Chapter 9 7
9.1 The best way to explain the differences between substantive tests and tests of controls is to consider the
objectives of the different types of testing.
The auditor’s main objective in undertaking tests of controls is to support their initial assessment of
control risk. Tests of controls provide evidence that controls are functioning effectively throughout the
period of the auditor’s intended reliance.
In undertaking substantive tests, the auditor wants to substantially verify the dollar value of the
transactions or balances (that is, identify whether monetary errors have occurred). The auditor
undertakes substantive testing to reduce their detection risk.
Implicit in the above discussion is that when undertaking tests of controls the auditor is not interested
in dollars, just whether the control of interest has operated as expected. When undertaking substantive
tests, the auditor is interested in the dollar amount of the transaction or balance.
9.2 The difference between substantive tests of transactions and substantive tests of balances is explained
in Global Example 9.1 of the text. For example, the accounts receivable balance at the end of the year
comprises a number of transactions, sales and cash receipts from the perspective of the audit client. If
the auditor undertakes testing of the balance, which is the aggregate of a number of transactions (such
as by a debtor’s confirmation), then they are undertaking substantive testing of balances. If they test the
dollar value of the individual transactions that make up the balance, such as by vouching each
individual transaction to supporting documentation, or vouching a sample of those transactions, then
they are undertaking substantive testing of transactions.
9.3 The objective of cut-off tests is to obtain reasonable assurance that transactions around balance date
have been recorded in the proper accounting period. Cut-off is usually tested for sales, purchases, cash
receipts and cash disbursements, transactions which have a continuous flow and which need to be
ascribed to an accounting period. For example, for sales, the auditor would determine when the final
sale was made for the accounting period of audit interest. They would then determine that the sales
before this date were recorded in the current accounting period, and the sales after this date were
recorded in the next accounting period.
9.4 Evidence obtained directly from the bank is more reliable than a copy of the bank statement obtained
from the client, as the client has had the opportunity to manipulate the bank statement. Also, the bank
confirmation will provide other information besides the balance, such as other accounts held at the
bank, securities held by the bank and financial instruments.
9.5 In deciding whether the negative or positive confirmation method should be used, the auditor
considers:
 the size and number of individual account balances
 the assessed level of the risk of material misstatement (combined inherent and control risk)
 whether there might be many accounts in dispute or containing inaccuracies or irregularities

(exception rates)
Chapter 9 8
 whether there are circumstances that would cause recipients of negative confirmation requests to
disregard such requests.
The auditor usually has a strong preference towards using a positive confirmation, as the audit evidence
gained from a positive confirmation method is much stronger than that gained from a negative
procedure. In practice, many people question the point of undertaking a negative confirmation
procedure. When individual account balances are relatively large or when there might be many
accounts in dispute or containing errors or irregularities, the positive method is preferable.
The auditor might decide to use neither method in situations where they believe that the likelihood of
response is small or that testing subsequent receipts may be more cost effective.
9.6 The auditor should attend the physical inventory counting, unless impracticable, to:
 evaluate management’s instructions and procedures for recording and controlling the results of
the entity’s physical inventory counting
 observe the performance of management’s count procedures
 identify inventory that looks obsolete (e.g. dust on packaging) or damaged while undertaking a
general walkaround of the inventory holding area
 perform test counts from recorded amount to inventory on shelves (existence)
 inspect the condition of the inventory when test counting.
9.7 The auditor’s primary concern in tests of balances for liabilities is normally the completeness assertion.
The auditor is most concerned about the possibility of unrecorded liabilities, because there is usually a
greater risk of understatement of liabilities than of overstatement. Understatement of liabilities is
associated with an understatement of related expenses, and therefore an overstatement of profit and
owner’s equity. The most common way of understating liabilities is not including them, leading to
completeness being the major assertion at risk.
9.8 The major risks in the payroll cycle relate to the possibility of padded payroll (fictitious employees)
and overpayment for work performed. Generally, employees can be relied on to detect errors of
understatement (resulting in their being underpaid). The misstatements in payroll, therefore, are
primarily overstatements. The assertions related to each risk identified are listed below.
Risk Assertion
Padded payroll (fictitious employees) Occurrence
Overpayment for work performed Accuracy
Occurrence
Chapter 9 9
9.9 In accordance with ASA 540 (ISA 540), the auditor would need to:
 evaluate the accuracy, completeness and relevance of the data on which the estimate is made by
management
 test management’s significant assumptions, the model used to value the asset, and the
underlying data
 test the calculation procedures used by management
 compare accounting estimates made in prior periods with actual results to try to obtain evidence
about the reliability of the entity’s estimating procedures and methods
 make or obtain an independent estimate to compare with the appropriateness of management’s

estimate
 if an independent expert has been involved in the valuation, verify their skill, competence and
objectivity.
9.10 As companies have a requirement to maintain a share register, the Share Registrar would be the
appropriate recipient. A negative confirmation may be appropriate, as the issue of ordinary shares has a
low risk of material misstatement and the Share Registrar is highly unlikely to disregard a confirmation
request if there is a disagreement. However, if you believe that the Share Registrar is likely to respond
to your request then the formality of a positive confirmation procedure may be appropriate, as there
will be little additional cost associated with issuing a positive confirmation over a negative
confirmation, as there is only one confirmation request required in either case.
9.11 When designing substantive analytical procedures to test income statement items the auditor will
consider whether:
 the volume of transactions is sufficiently large for the procedure to be valid
 the transactions are sufficiently predictable over time for the procedure to be valid
 substantive analytical procedures on their own will be sufficient to reduce audit risk to an
acceptably low level.
9.12 The functions of generalised audit software that are useful for audit tests include:
 selecting sample items
 exception reporting
 undertaking calculations
 comparing information on different files
 summarising the information on a file in a way that aids the auditor
 report writing.
Chapter 9 10
9.13 Advanced data analytics allow auditors to carry out substantive procedures on large populations by
discovering and analysing patterns, deviations and inconsistencies, and extracting other useful
information in the data through analysis, modelling and visualisation as a form of substantive audit
evidence. Whereas under the traditional risk-based audit methodology substantive testing of classes of
transactions and account balances is reduced when reliance is placed on controls, with advanced data
analytics auditors are able to analyse 100% of the transactions in a particular area of the audit, so
consideration needs to be given as to whether the traditional approach is still appropriate in these
circumstances.
DISCUSSION PROBLEMS AND CASE STUDIES
9.14 (Easy)
As per ASA 330 (ISA 330), the auditor’s general approach can be either to adopt an emphasis on
substantive procedures (substantive approach) or to use tests of controls as well as substantive
procedures (combined approach).
The background information provided suggests that a substantive approach would be the most
appropriate. It appears likely that there are very few control activities relevant to the audit assertions,
and that it is unlikely that any control activities would be effective due to the lack of segregation of
duties and the lack of owner involvement in controls in the small business. Due to the lack of controls,
these substantive tests will primarily be tests of detail, as limited reliance can be placed on substantive
analytical procedures when controls are not reliable.
9.15 (Medium)
(i) The nature, timing and extent of substantive procedures for occupancy revenue for Elder Care
will be affected as follows:
• Nature: The substantive procedures performed are likely to be analytical in nature (rather
than testing of transactions and balances), given the reliability of controls, the fact that room
rates are set by legislation and the high level and stability of occupancy rates.
• Timing: Ideally, substantive procedures are performed at or close to year-end, and there is
nothing to indicate this cannot be done for Elder Care.
• Extent: Given that controls are considered reliable, substantive testing would be limited.
(ii) The nature, timing and extent of substantive procedures for purchases of Cheap Stores will be
affected as follows:
• Nature: Given the apparent lack of controls and unpredictability of purchases, it would
appear that substantive analytical procedures are not appropriate in this case. Audit evidence
therefore needs to be obtained from substantive tests of detail (transactions and balances).
• Timing: Ideally, substantive tests of details are performed at or close to year-end and there is
nothing to indicate this cannot be done for Cheap Stores.
Chapter 9 11
• Extent: Given the lack of controls (high control risk) and the materiality of purchases, it is
likely that a significant level of substantive tests of detail will need to be performed; that is, a
relatively large sample size of purchases will need to be selected in order to achieve a low
detection risk.
9.16 (Medium)
The following is a list of possible substantive audit procedures for each assertion.
Accuracy
 Trace a sample of sales to the receipt book to ensure that details, in particular dollar amount, are
recorded correctly.
Completeness
 Undertake analytical procedures based on the average number of billable hours (this might
detect non-recording of revenue).
 Test a sample of receipts from the receipt book and ensure that all have been recorded (this will
not detect monies that Leeanne does not provide a receipt for).
 Check that all pre-numbered sales receipts are accounted for.
Occurrence
 Obtain written confirmation of services performed (as recorded in the receipt book and customer
accounts).
 Undertake analytical procedures based on average number of billable hours (this might detect
over-recording).
 Trace sales recorded in the accounts to the receipt book (however, this will not detect instances
where Leeanne has also completed a false receipt).
9.17 (Medium)
(a) High-risk assertions
 Rights and obligations: Owing to the transfer arrangement there might be some concern
as to who has ownership of the funds within the bank accounts of Digital Solutions and
its subsidiaries.
 Existence: It is not uncommon in complex transfer arrangements for cash to be accounted

for twice (i.e. once in the transferee account as an outstanding deposit, and once in the
transferor account, not shown as withdrawn until the next day, as money that they have
custody of). This can lead to an overstatement of the bank balance through this practice,
which is known as kiting.
 Cut-off: Owing to movement of funds around year-end, cut-off is likely to be of concern.
(b) Procedures to test whether these risks will result in a material misstatement
Chapter 9 12
 Rights and obligations: Review the terms of the transfer arrangement to determine at
which point the funds are considered to be ‘owned’ by the transferee/transferor.
 Existence: Review the bank reconciliation and ensure all outstanding deposits are
received within a reasonable period after year-end.
 Cut-off: Review the transfer schedule, together with bank statements and bank
reconciliations, to ensure that all transfers between bank accounts are accounted for in
the same period for the transferor and the transferee.
9.18 (Easy)
(a) In order to test that accounts receivables are genuine obligations owed by customers at the
balance date (i.e. that accounts receivable exist), the auditor could:
 confirm accounts receivable from customers in writing
 verify whether the amount in outstanding receivables is subsequently received, and/or
 test from subsidiary ledger to supporting documentation of sale (i.e. invoice or signed
delivery note).
(b) The answer to (a) above would be unlikely to change if the existence of accounts receivable is
still at risk. What may change is that the auditor may identify controls that would help to reduce
the risk of material misstatement for these assertions. The auditor may then test those controls
and reduce the extent of the substantive testing procedures outlined, if this is then determined to
be a more effective and efficient way of gathering audit evidence to reduce the risk of material
misstatement to an acceptable level.
9.19 (Medium)
The risk highlighted by the result and the details of the additional testing required for each of the items
1, 2, 3 and 4 is as follows.
1 The evidence suggests that the accounts receivable exists, but provides no proof of accuracy of
the amount recorded (accuracy). To follow up on this area, the assistant could:
 send a second letter, requesting specific confirmation of the details
 agree the debt to supporting documentation (sales invoice and signed delivery docket) or
payments received after year end
 verbally confirm the accounts receivable balance.
2 The accounts receivable might not exist (existence) or might be uncollectible (accuracy,
valuation and allocation) if the business has ceased trading. The assistant should discuss the
responses with the accounts receivable clerk to ascertain whether the address might have
changed. If this is the case, consider sending another confirmation letter to a correct address.
Otherwise subsequent receipts testing could be used to confirm existence and recovery of the
debt.
Chapter 9 13
3 Accounts receivable might be overstated if credit notes are not recorded in the correct period
(cut-off). Follow-up procedures could include:
 discussion with the accounts receivable clerk to determine the normal time of processing
of credit notes; this might indicate whether it is an isolated occurrence or could affect
numerous debtors and thus be material
 trace details from credit notes issued around year end to ensure that they all have been
recorded.
4 The accounts receivable might not exist. Relevant procedures include:
 a second request letter
 subsequent receipts testing
 oral confirmation of the debt
 agreement to sales documentation.

9.20 (Medium)
The following sets out the key audit assertions for accounts payable and purchases, followed by an
audit procedure that could be used to address the assertion.
Completeness:
• Examine any unmatched receiving reports and ensure appropriate accruals have been made.
• Examine cash payments after balance date and unpaid invoice files to ensure there are no
unrecorded liabilities in relation to accounts payable.
Accuracy, valuation and allocation/accuracy:
• Examine reconciliation of accounts payable statements, ensuring any reconciling items are
appropriately accounted for. Ensure any claims for credit due to the returns are appropriately
supported and that all such claims have been included.
9.21 (Medium)
Potential misstatement (a) Substantive test of detail (b) Assertion at risk
Obsolete and damaged Select a sample from inventory records Accuracy, valuation and
furniture fittings may be and match to physical inventory, looking allocation
overlooked in the for obsolete or damaged furniture
warehouse components
Chapter 9 14
Some empty containers Select a sample from the inventory Existence
may have been included records and match to physical inventory,
in the inventory count, looking for empty containers in the
due to poor labelling sample count
procedures
The lower of cost or net Check subsequent sales prices and Accuracy, valuation and
realisable value may have compare with cost to ascertain whether allocation
been incorrectly applied the correct valuation method has been
applied
Chapter 9 15
9.22 (Easy)
The conclusion that accounts payable balance should be accepted is inappropriate.
In the first place, the procedure performed by the audit assistant is concerned with the existence
assertion for accounts payable (selecting from the list of accounts payable), whereas the major
assertion at risk for accounts payable is completeness. The auditor should undertake tests of
completeness, which would include selecting from any unmatched goods received notes before year-
end to see whether the liability in accounts payable has been accrued for goods that were received.
Another possible test is to search for unrecorded liabilities by examining payments made after year-end
that relate to amounts due at year-end and see whether these are included on the list of accounts
payable.
The second reason that the conclusion may be inappropriate is that it is not clear that there are no
material errors. The audit assistant has identified three errors in the 20 accounts payable substantively
tested. Although these errors may not be individually material, the auditor will need to assess their
materiality in aggregate. If the auditor used sampling techniques to select the 20 accounts payable, then
the error rate should be extrapolated to the population (as explained in Chapter 10). Also, the cause of
any errors should be followed up to determine whether there is a risk of misstatement occurring as a
result of other errors of a similar type.
9.23 (Medium)
Procedure Related assertion
Checked the hours worked to authorised timesheets Occurrence

Accuracy
Vouched the pay rates used to the related industrial Accuracy

awards
Checked the calculations of each pay Accuracy
Traced any annual, sick and other leave to authorised Occurrence

forms
Agreed the balance of the payroll listings to the general Accuracy

ledger
Chapter 9 16
9.24
(a) Reason (b) Assertion Explanation (c) Substantive test of detail

accounts payable most at risk
is at risk
A large portion of Accuracy, Foreign accounts Select a sample of overseas
accounts payable valuation and payable are required to accounts payable from the
is represented by allocation be translated at the overseas accounts payable
overseas accounts closing exchange rate ledger and check that the
payable paid in at balance date, liability in foreign currency has
foreign currency leading to the risk of been translated using the
error in using an closing exchange rate at
incorrect rate balance date
Asian Foods Completeness Asian Foods takes  Select a sample of supplier

accepts liability ownership of overseas invoices/shipping
for goods upon shipments upon their documents in respect of
the goods being being loaded onto the shipments received after
loaded onto the ship. Accordingly, balance date and
ship there is a risk that determine when the goods
shipments loaded prior were loaded. If they were
to balance date and loaded prior to balance
received thereafter date, ensure that they have
may not have been been recorded in accounts
recorded as a liability payable at balance date.
at balance date.
 Select a sample of supplier
payments made after
balance date and check
against relevant supplier
invoicing/shipping
documents. If the goods
were loaded before
balance date, ensure that
they have been recorded in
accounts payable at
balance date.
Chapter 9 17
9.25 (Medium)
Explanation of conclusion Impact on audit
The audit team member’s Further procedures will need to be performed in order to
conclusion is not correct. obtain sufficient appropriate audit evidence in relation to
Sufficient appropriate audit the accuracy, valuation and allocation assertion. These
evidence has not been obtained in procedures will need to specifically cover the value of
relation to the accuracy, valuation existing assets. An example of a further procedure is
and allocation assertion. testing for indicators of impairment.
Chapter 9 18
9.26 (Medium)
Share issue
The key assertions are completeness and presentation of the account balance. Accounting standards
require detailed disclosure of movements in share capital and the auditor must ensure that all relevant
details have been disclosed. Procedures that could be used to obtain this information include:
 confirming details and subscription rates with the share registry service
 reviewing minutes of directors’ meetings with details of the share issue
 reviewing any prospectus issued in relation to the share issue.
Dividend payment
The amount of dividend due should be equal to the dividend declared multiplied by the number of
shareholders entitled to the dividend. The auditor therefore, needs evidence of the dividend declared
and the number of shareholders.
 Evidence as to the rate of dividend can be obtained from a review of the minutes of directors’
meetings.
 Details of entitled shareholders could be obtained from the share registry service. The auditor
might also confirm entitlement to the dividend by reviewing the memorandum and articles of
incorporation.
9.27 (Easy)
Given that both inherent and control risks for these account balances have been deemed to be low as a
result of the earlier audit planning stage of the audit, the extent and nature of substantive procedures
will be very different from what would be required if there was a high risk of material misstatement
and extensive testing of controls had not been undertaken. In this case, the auditor’s judgment is likely
to be that substantive analytical procedures will provide sufficient appropriate audit evidence.
Auditors use substantive analytical procedures wherever possible, as their use often improves audit
efficiency. It is often quicker to verify a balance analytically than it is to conduct a substantive test of
details.
9.28 (Easy)
A CAAT could be used to access the billing system for the year and extract all patient billings showing
patient and accommodation rates. The CAAT could then extract approved rates from the rates database
for the same period and produce a list of any exceptions (i.e. rates charged that do not equal rates in
database and show relevant patients).
9.29 (Medium)
Possible substantive tests of inventory using CAATs would include the following.
 The inventory list could be totalled and recalculated to check the mathematical accuracy. This
will allow for checking back to the general ledger figure.
Chapter 9 19
 Samples could be obtained for testing, checking quantity at the physical stocktake. Samples
could include both items selected on a materiality basis (large dollar value) and a random basis
(existence) and for detailed valuation testing.
 Quantities on hand could be compared with quantities sold during the year and, based on certain
criteria (e.g. number of days sales held in stock), a sample could be selected that might indicate
that certain lines are overstocked and perhaps obsolete.
 Positive inventory on hand at balance date and last sales date more than X months prior to
balance date could highlight certain inventory lines as being obsolete.
 An NRV test (i.e. last sales price compared with the unit cost of the item) could be completed.
 A number of other exception reports could be generated; for example, where an item number
appears twice, where there are negative quantities or where the recorded unit costs appear
unusual.
CONTINUOUS CASE STUDY

9.30 (Easy)
Have generalised audit software produce an exception listing for any 2018 sales dated 28 to 30 June
or any dispatch dockets dated after 27 June 2018.
9.31 (Medium)
Account Assertion Substantive test of details
Deferred Completeness Select a sample of invoices and check that the correct
e-book amount of unearned revenue has been included in the
storage balance of the deferred revenue account. This would be
revenue based on the total amount of revenue attributable from
balance date to the end of the period to which the amount
of storage has been charged.
Copyright Accuracy,  Obtain an opinion of an expert in the area of medical

valuation and textbooks concerning the likelihood of MBL’s
allocation medical textbooks becoming obsolete.
 Undertake an evaluation of the future value of income

expected to be derived from the medical textbooks
and ensure that it exceeds the value attributable to its
copyright.
Chapter 9 20

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Chapter 09

Substantive tests of transactions and balances

[Use slides 9-1 to 9-4]

[Use slides 9-5 to 9-10]

[Use slides 9-11 to 9-15]

The account balances are:

LO 9.3: Cash, cash receipts and cash payments

[Use slides 9-16 to 9-21]

LO 9.4: Sales, cash receipts and accounts receivable

[Use slides 9-22 to 9-28]

[Use slides 9-29 to 9-36]

LO 9.6: Accounts payable, payments and payroll

[Use slides 9-37 to 9-43]

LO 9.7: Non-current assets

[Use slides 9-44 to 9-52]

LO 9.8: Non-current liabilities and owners’ equity

[Use slides 9-53 and 9-54]

LO 9.9: Income statement accounts

[Use slides 9-55 and 9-56]

[Use slides 9-57 to 9-64]

[Use slide 9-65]

 the size and number of individual account balances

 whether there might be many accounts in dispute or containing inaccuracies or irregularities

 observe the performance of management’s count procedures

 perform test counts from recorded amount to inventory on shelves (existence)

 inspect the condition of the inventory when test counting.

Padded payroll (fictitious employees) Occurrence

Overpayment for work performed Accuracy

 test the calculation procedures used by management

 make or obtain an independent estimate to compare with the appropriateness of management’s

 the volume of transactions is sufficiently large for the procedure to be valid

 selecting sample items

 comparing information on different files

 summarising the information on a file in a way that aids the auditor

DISCUSSION PROBLEMS AND CASE STUDIES

 Check that all pre-numbered sales receipts are accounted for.

(a) High-risk assertions

 Existence: It is not uncommon in complex transfer arrangements for cash to be accounted

 Cut-off: Owing to movement of funds around year-end, cut-off is likely to be of concern.

 confirm accounts receivable from customers in writing

 verify whether the amount in outstanding receivables is subsequently received, and/or

 send a second letter, requesting specific confirmation of the details

 verbally confirm the accounts receivable balance.

4 The accounts receivable might not exist. Relevant procedures include:

 a second request letter

 subsequent receipts testing

 oral confirmation of the debt

 agreement to sales documentation.

Accuracy, valuation and allocation/accuracy:

Potential misstatement (a) Substantive test of detail (b) Assertion at risk

The conclusion that accounts payable balance should be accepted is inappropriate.

Procedure Related assertion

Checked the hours worked to authorised timesheets Occurrence

Vouched the pay rates used to the related industrial Accuracy

Checked the calculations of each pay Accuracy

Traced any annual, sick and other leave to authorised Occurrence

Agreed the balance of the payroll listings to the general Accuracy

(a) Reason (b) Assertion Explanation (c) Substantive test of detail

Asian Foods Completeness Asian Foods takes  Select a sample of supplier

Explanation of conclusion Impact on audit

 reviewing minutes of directors’ meetings with details of the share issue

 reviewing any prospectus issued in relation to the share issue.

CONTINUOUS CASE STUDY

Account Assertion Substantive test of details