12: Substantative Procedures Flashcards
What are the four FSAs to be address for NCAs?
Existence
- physical verification from NCA register
Rights and Obligations
- title deeds
- vehicle registration
- share certificates
- purchase invoices
Completeness
- trace a sample to NCA register
- review repairs and maintanance
Valuation
- examine self-constructed assets
- consider correctness of depreciation
- inspect invoices and surveyor’s reports
What equation makes up final inventory figures?
Inventory = quantity x value
Why is inventory a key audit area?
Inventory is highly material
Valuation is subjective
Affects both the SPL and SFP
Is attendance at an inventory count compulsory?
Why?
What FSA is it for?
Yes - required by ISA 501.
Provides evidence about quantity as the auditor performa tests counts to check the client’s counting
Evidence over valuation by identifying items that are damaged, old or dusty
EXISTENCE is the primary FSA
4 steps before an inventory count?
- review location and count instructions
- consider expert help
- review systems of control and internal auditor
- arrange to verify inventory at third party premises
5 steps during an inventory count?!
- observe counts for compliance with instructions
- check cut-off arrangements
- identify procedures for keeping any third party inventory separate from client’s inv
- perform two way test counts
- find slow-moving or old inventory
What to do after the inventory count?
Follow up the sample selected for test counting to check the correct quantity has been included for final listing
What are the four FSAs to be addressed with Inventory?
Existence
- take sample of count sheets, agree number to number in warehouse
Rights and obligations
- seek confo from third parties about inventory THEY hold
Completeness
- take a sample and agree to count sheets
Valuation
- To get cost: agree labour, material costs, etc, from invoices
To get NRV: inspect selling prices, review aged or damaged inventory
What does the audit of receivables mainly focus on?
Whether the customer agrees with the recorded balance
Whether the debt is likely to be paid
What are the key FSAs to do with Receivables?
Existence
Rights and Obligations
- obtain direct confo of receivables balance
Valuation
- inspect the post year-end bank statements
- discuss allowance for doubtful data
- evaluate reasonableness of assumptions
How do customer/bank confirmations work?
- Auditor prepares confo requests
- Client sends requests to customers/bank
- Customer/bank send replies directly to auditor
Can be positive ‘please confirm’
Or negative ‘let us know if you disagree’
Note: bank confo would require the client to sign the request, as they need written authority to disclose
When should negative confirmations be used?
- RoMM is low
- Controls are operating effectively
- Large number of small balances are involved
- No reason to believe the customers will disregard the request
What are the three FSAs to be addressed for Bank and cash?
Valuation
- bank reconciliation
Rights and obligations
- confirm balances directly with bank
Existence
- count material cash balances
- confirm bank balances with bank
What else may the auditor want to get from bank?
Confo of:
- loans and overdraft facilities and terms
- contingent liabilities
- securities belonging to the client that are held in safe custody by bank
What FSA are addressed with Payables and how does it work?
Key risk is that payables are understated
Directional testing important: reciprocal population must be used
Key FSA: Completeness
- obtain sample of supplier statement reconciliations
- inspect bank statements and identify payments to suppliers. Trace to GRNs and receipts
