10: Audit Procedures

Question 1

What are other words for procedures?

Answer 1

Evidence/Testing

Question 2

What does all Audit evidence need to be?

Answer 2

• Sufficient

- Appropriate

Question 3

What is directional testing?

Answer 3

Starting with source documents and agreeing them to the financial statements. Or vice versa

Question 4

What are you testing for with Directional testing from the source documents to the financial statements?

Answer 4

Understatement / Completeness

Question 5

What are you testing for with Directional testing from the financial statements to the source documents?

Answer 5

Overstatements / existence

Question 6

When writing test/audit procedure what do we need to talk about?

Answer 6

Action——>Source——-> Objective

Ie. Take items on NCA register + Physically inspect them to confirm their existence.

Question 7

What are the four areas we have procedures for, for non-current assets.?

Answer 7

Valuation
Existence
Completeness
Rights and obligations

Question 8

What are the four things we test for in NCA valuation?

Answer 8

Additions
Depreciation
Disposals
Revaluations

Question 9

What are the two tests for Additions in valuation of NCA?

Answer 9

• Compare costs to invoice

- Review capital expenditure budget to check for plans to replace

Question 10

What are the four tests for Depreciation in valuation of NCA?

Answer 10

• Review depreciation policies for reasonableness by comparing to prior years and industry norms
• For sample recalculate depreciation charge to see if agrees with asset register
• Perform a proof in total calculation of depreciation,
• Review disclosure of depreciation charges and policies in draft FS

Question 11

What are the three tests for Disposals in valuation of NCA?

Answer 11

• Agree sales proceeds to invoice and bank statement
• Recaluate profit or loss on disposal and compare
• Review capital expenditure budget and see if disposal matched plan and why if not.

Question 12

What are the three tests for Revaluations in valuation of NCA?

Answer 12

• Assess reasonableness of valuer. Assumptions used.
• Agree revalued amounts to valuation report(revaluation reserve)
• Physically inspect assets for impairment

Question 13

How do we test existence of NCA’s?

Answer 13

Select a sample and physically inspect

Question 14

What are the four tests for Completeness of NCA?

Answer 14

• Reconcile PPE schedule with general ledger
• Select a sample of assets at premises and inspect asset register for match
• Rec the non-current asset register to general ledger and investigate differences
• Review maintenance expense account for items of capital nature

Question 15

What are the four tests for Rights and obligations of NCA?

Answer 15

• Verify ownership via deeds
• Agree purchase invoices to additions made relating to entity
• Review any lease agreements to ensure they are correctly treated as finance or operating lease
• Inspect vehicle registration documents to confirm owenership.

Question 16

What are the three stages for the audit of inventory?

Answer 16

Prior to count
Inventory count (At y/e date)
Final audit

Question 17

What are the 7 procedures prior to attending inventory count?

Answer 17

▪ Review prior year working papers
▪ Contact client to obtain stocktaking instructions
▪ Book audit staff to attend the inventory counts
▪ Obtain copy of inventory count instructions from the client
▪ Ascertain whether any inventory is held by third parties
▪ Obtain last year’s inventory count memo
▪ Prepare audit programme for the count

Question 18

What are the 4 procedures to confirm inventory held at third party locations?

Answer 18

▪ Send a letter requesting direct confirmation of inventory balances

▪ Attend the inventory count (if one is to be performed)

▪ Inspect report on warehouse controls adequacy

▪ Inspect any documentation in respect of third party inventory

Question 19

What are the 4 procedures to confirm inventory held at third party locations?

Answer 19

▪ Send a letter requesting direct confirmation of inventory balances

▪ Attend the inventory count (if one is to be performed)

▪ Inspect report on warehouse controls adequacy

▪ Inspect any documentation in respect of third party inventory

Question 20

What are the two factors we are focussing on at the inventory count?

Answer 20

Existence & Completeness

Valuation

Question 21

What are the 6 tests for existence and completeness during the inventory count?

Answer 21

• Observe counting teams are following procedure
• Select a sample and perform test counts from inventory sheets to warehouse isle
• Observe procedures for moving inventory during the count
• Identify last GRN and GDN to perform cut off procedures
• Record any inventory held for third parties

Question 22

What are the 3 tests for valuation during the inventory count?

Answer 22

▪ Discuss with the warehouse manager how he has estimated the raw materials quantities.

▪ Confirm the procedures for identifying and segregating damaged goods are operating correctly.

▪ Select a sample of damaged items and confirm whether the level of damage is correctly noted.

Question 23

What are the two factors we are focussing on at the final audit?

Answer 23

Existence & Completeness

Valuation

Question 24

What are the 7 tests for valuation during the final audit?

Answer 24

▪ Agree costs to purchase invoice for a sample

▪ Discuss with management the costs and how these are updated

▪ Review variances of costs and discuss with management how these are treated.

▪ Select a sample of year end goods to test if NRV is approprate

▪ Review aged inventory reports and identify any slow moving goods, discuss with management why

▪ Review the inventory records to identify the level of adjustments made throughout the year fordamaged/obsolete items.

▪ Follow up any damaged/obsolete items noted by the auditor at the inventory counts attended, to ensure that the inventory records have been updated correctly.

Question 25

What are the 2 tests for existence and completeness during the final audit?

Answer 25

▪ Cast the inventory sheet and agree to the financial statements ▪ Trace the items counted on the inventory count day and agree to the client’s final inventory sheets

Question 26

What is a substantive procedure for receivables to help ensure we don't have receivables that wont get paid?

Answer 26

Perform a positive trade receivables circularisation for a sample of the year end balances and get permission to follow up with any non-replies.

Question 27

What substantive procedure helps to ensure receivables are all correctly classified?

Answer 27

Review sales ledger for any credit balances and discuss with management whether these should be classified as payables.

Question 28

What are 7 substantive procedures for valuation of receivables?

Answer 28

- Inspect aged receivables report to identify slow moving balances and discuss whether allowance or write down is necessary - Calculate aged rec days and compare with prior years. Investigate differences. - Review after date cash receipts and follow through to pre-year end balances. - Review rec of sales ledger control account to sales ledger list of balances - Review board minutes to see if there are any materially disputed receivables - Review customer correspondence to assess if there are any invoice disputes - Review a sample of post year end credits to identify any relating to pre year end transactions to verify that they have not been included in receivables.

Question 29

What is a substantial procedure to confirm existence of receivables?

Answer 29

Select a sample of year end receivables and agree back to supporting documentation of GDN and sales order.

Question 30

What is a substantive procedure to confirm rights and obligations to a receivable?

Answer 30

For a sample confirm the trade terms to original credit agreement and sales invoice

Question 31

What are two substantive tests to confirm cut off for receivables?

Answer 31

- For a sample cast to the receivables control account and the financial statements - Select a sample of GDN before and after year end and follow through to sales invoice to ensure they are recorded in the correct period.

Question 32

What is a test to confirm correct classification of receivables

Answer 32

Ensure they are recorded as non current assets.

Question 33

What are two substantive procedures to confirm from external parties the trade payables balance?

Answer 33

- Perform a positive trade payables circularisation for a sample of the companies year end balances and get permission to send a reminder letter to follow up. - Obtain a supplier statement and reconcile to purchases ledger balance and investigate reconciling items

Question 34

What is a good test to ensure payables are recorded correctly in FS?

Answer 34

Check the purchase ledger for any debit balances and check whether these should be included as receivables.

Question 35

What are 7 substantive procedures for valuation of payables?

Answer 35

- Inspect aged payables report to identify slow moving balances and discuss whether allowance is necessary - Calculate aged payables days and compare with prior years. Investigate differences. - Review after date cash payments and follow through to pre-year end balances. - Review purchases ledger control account to sales ledger list of balances - Review board minutes to see if there are any materially disputed payables - Review supplier correspondence to assess if there are any invoice disputes - Review a sample of post year end credit notes to identify any pre year end transactions that may need to be included in payables

Question 36

What is a substantive procedure for confirmation of payables balances existence?

Answer 36

Select a sample of payables balances and agree back to valid supporting documentation such as the GRN

Question 37

What are four substantive procedures for completeness of payables?

Answer 37

-Obtain a list of payable balances. Cast and agree to the payable control account and the financial statements. ▪ Select a sample of goods received notes (GRN) before and just after the year end and follow through to the purchase invoice to ensure they are recorded in the correct accounting period. ▪ Review the list of trade payables against prior years to identify any significant omissions. ▪ Enquire of management their process for identifying goods received but not invoiced or logged in the purchase ledger and ensure that it is reasonable to ensure completeness of payables.

Question 38

What are the 9 substantive procedures for contingent liabilities/provisions?

Answer 38

- Enquire with management how the estimate is made and the data it is based - Determine whether events occurring up to the date of the auditors report provide evidence regarding the estimate - Review method of measurement used and assess reasonableness of assumptions made - Test operating effectiveness of controls over how management made the estimate - Develop an expectation of the possible estimate to evaluate managements estimate - Evaluate whether estimates are reasonable or misstated - Obtain evidence on whether uncertainty is reasonable - Obtain written representation letter confirming they think their estimates are reasonable

Question 39

What are 5 substantive procedures for cash flow forecast?

Answer 39

- Check the opening balance of the forecast matches closing balance of cash book to ensure opening balance is accurate. - Consider how accurate company forecast has been in past by comparing past forecast with actual outcomes. To test reliability. - Determine assumptions made in preparation of forecast. - Review board minutes for relevant issues relating to forecast. - Review work of internal audit department in prepping the forecast.

Question 40

What are 4 substantive procedures for loan payables?

Answer 40

- Agree year end loan balance to any available loan statements to confirm obligations existence and valuation. - Agree interest payments to the loan agreement and bank statements - Analyse any relevant disclosures of interest rates, amounts due to ensure completeness and accuracy. - Recalculate interest accrual to ensure arithmetic accuracy

Question 41

What are 4 substantive procedures for share capital?

Answer 41

- Agree authorised share capital and nominal value disclosures with underlying shareholder agreements. - Inspect cashbook for evidence of cash receipts from share issues - Inspect terms of share certificates and reconcile cash receipts and new share capital totals - Inspect board minutes any dividends declared prior to year end.

Question 42

What are 5 substantive procedures for directors enolments?

Answer 42

- Rec reported directors salary o payroll records - Inspect board minutes for evidence of directors bonus announcements - Rec director bonus payments to cash book - Inspect board minutes for approval of related third party transactions - Obtain representation letter from directors that they have disclosed all directors remuneration.

Question 43

What are 4 substantive procedures for reserves?

Answer 43

- Rec opening reserves to closing reserves including profit for year and dividends paid. - Compare opening reserves to closing reserves in financial statements - Rec movements in revaluation reserves to the non-current asset register - Corroborate revaluations by comparing independently produced reports

Question 44

What are 5 substantive procedures for reserves?

Answer 44

▪ Inspect invoices received after the year end that relate to services provided before the year end. Trace them to any accruals made to ensure completeness and accuracy of the amounts. ▪ Obtain a list of accruals from the client; cast it to confirm arithmetical accuracy. ▪ Agree the figure per the schedule to the general / nominal ledger and financial statements. ▪ Recalculate a sample of accrued costs by reference to contracts and payment schedules. ▪ Analytically review in comparison to previous period to try and identify if any balances are perhaps missing.