13 - Substantive procedures Flashcards
What are some examples of tangible non current assets?
Land
Buildings
Plant
Vehicles
Fittings
Equipment
What are the reasons for a risk of misstatement for tangible NCA and also which assertions are they
The company not actually owning the assets - rights and obligations
The assets not actually existing or having been sold by the company - existence.
Omission of assets owned by the company - completeness.
The asset being undervalued, by not including appropriate revaluation or by overcharging depreciation - valuation
The asset being overvalues, by inflating cost or valuation, or by undercharging depreciation.
The assets being incorrectly presented in the FS - presentation and disclosure.
What would you like to have ready when you’re about to audit NCA?
The NCA register
Purchase invoices for assets purchased within the year
Sales invoices for assets sold within the year
Registration documents or other documents of title such as title deeds for property
Valuations carried out by employees or third party valuers
Leases or hire purchase documentation in respect of assets
Physical inspection of the assets themselves by the auditor
Depreciation records or calculations.
What are some examples of Intangible NCA?
Licenses, development costs and purchased brands.
What are the reasons for a risk of misstatement with intangible NCA and also which assertions are they?
Expenses being capitalised as NCA inappropriately - Existence
Intangible assets being carried at the wrong cost or valuation due to inflating the cost or valuation - Valuation
Intangible assets being carried at the wrong cost or valuation due to charging inappropriate amortisation, wrongly amortising or not amortising - Valuation
Intangible assets being carried at the wrong cost or valuation due to impairment reviews not being carried out appropriately - Valuation.
What are the reasons for a risk of misstatement with inventory and also which assertions are they?
Inventory that does not exist being included in the FS - Existence
Not all inventory that exists is being included in the FS - Completeness
Inventory being included in the FS at full value when it is obsolete or damaged - Valuation
Inventory being included in the FS at the wrong value, whether due to miscalculation of cost or the fact that cost as neem used although NRV is lower than cost - Valuation
Inventory that actually belongs to 3rd parties being included in the FS - Rights and obligations
Inventory which has actually been sold is included in the FS - Cut off
What would you like to have ready when you’re about to audit Inventories?
The company’s control over inventory counting
The auditors attendance at the annual inventory count
Confirmations with 3rd parties holding inventory on behalf of entity
Purchase invoices for inventory
Work in progress records for inventory
Post year end sales invoices for inventory
Post year end price lists for inventory
Post year end sales order
What types of controls will the auditor be looking for at the inventory count?
Organisation of the count:
Supervision by senior staff
Restriction and control of the production process and inventory movements during the count.
Identification of damaged, obsolete, slow - moving, third party and returnable inventory
Counting:
Systematic counting to ensure all inventory is counted
Teams of 2 counters, with one counting and the other checking, or 2 independent counts.
Recording:
Serial numbering, control and return of all inventory sheets
Inventory sheets being completed in ink and signed
Recording of quantity, conditions and stage of production of work - in progress.
Recording of last numbers of goods inwards and outwards and also of internal transfer records
Reconciliation with inventory records and investigation and correction of any differences.
List 4 examples of when NRV is likely to be less than cost. (what could cause your stock to be less than what you bough tit for?)
NRV is sales price - any costs attached to it
Out of date stock
Market strategy
Production error - defects
Broken or recently returned
What are the reasons for a risk of misstatement with Trade receivables and also which assertions are they?
Debts being uncollectable - valuation
Debts being contested by customers - Existence, rights and obligations.
What would you like to have ready when you’re about to audit Trade receivables?
Receivables ledger info
Confirmations from customers
Cash payments received after the year end
What is the positive and negative method when asking for confirmation from customers regarding their payment?
Positive method: (High risk balances)
The customer is required to give the balance to confirm the valuation of the balance shown or state in what respect he is in disagreement
Negative method: (Remaining balances)
The customer is required to reply only if the amount stated is disputed. (Less reliable than positive method as no reply could mean not disputed but could also mean the customer didn’t receive the confirmation request or ignored it).
When should the negative method be used?
Only when:
Assessed risk of material misstatement is low
The relevant controls are operating effectively
A large number of small balances is involved
A substantial number of errors is not expected
The auditor has no reason to believe that customers will disregard the requests
When should the positive method be used?
Material, risky accounts
Old unpaid accounts
Accounts written off during the period under review
Accounts with credit balances
Accounts settled by round sum payments
Accounts with nil balances
What alternative procedures are there to verify existence/rights and obligations for trade receivables
Check receipts of cash after date
Examine the account to see if the balance outstanding represents specific invoices and confirm their validity to dispatch notes.
Test company’s controls over the issue of credit notes and the write - off of bad debts
What are the reasons for a risk of misstatement with the audit of Bank and also which assertions are they?
Not all bank balances owned by the client being disclosed - Completeness
Reconciliation differences between bank balance and cash book balance being misstated - Valuation
Material cash floats being omitted or misstated - Completeness
What would you like to have ready when you’re about to audit bank?
Cash book
Confirmations from the bank
Bank statements
Bank reconciliations carried out by the client
What is the procedure of sending a request letter to ask for confirmation from a bank?
The banks will require explicit written authority from their client to disclose the info requested.
The assurance providers request must refer to the clients letter of authority and the date of it.
The request should reach the branch manager at least 2 weeks in advance of the clients year end and should state both that year end date and previous year end date
The bank confirmation should be sent directly from the bank back to the assurance provider
Bank reconciliations and liquidity
Example would be keeping the cash book open to take credit for remittances actually received after the year end. They would put it before year end and state it as a lodgement which hasn’t been approved yet. This enhances your balance at bank and reduces your receivables, as cash is more liquid than debt. The assurance provider should examine the paying in slip to ensure that the amounts were actually paid into the bank on or before the balance sheet date.
Another example would be recording cheques paid in the period under review which are not actually dispatched until after the year end. Therefore decreasing the balance at bank and reducing payables. This can make your current ratio look more healthy. The assurance providers should check whether these were cleared within a reasonable time in the new period. If not, this may indicate the dispatch occurred after the year end.
What are the reasons for a risk of misstatement with the audit of Trade payables and also which assertions are they?
The entity understating its liabilities in its FS - completeness
Cut off between goods inwards and liability recording being correct - cut off
Non existent liabilities being declared - Existence
What would you like to have ready when you’re about to audit Trade payables?
Payables ledger records
Confirmations from supplier - the most important test when considering TP is comparison of supplier statements with payables ledger balances
What are the reasons for a risk of misstatement with the audit of Long term liabilities and also which assertions are they?
That not all long term liabilities have been disclosed - Completeness
That interest payable has not been calculated correctly and included in the correct accounting period - Accuracy and rights and obligation.
That disclosure is incorrect - Presentation and disclosure
What would you like to have ready when you’re about to audit Long term liabilities?
Schedule of loans and client calculations
Loan agreements
Bank letter and direct confirmation from other lenders
Cash book
Board minutes
How to test for different assertions on Long term liabilities?
Completeness:
Analytical procedures to prior year
Inspect board minutes
Existence:
Obtain and inspect confirmations from banks
Rights and obligations:
Obtain and inspect confirmation from banks
Valuation:
Recalculate - agreeing B/fwd to prior year and movements to any 3rd party documentation
Disclosure:
Inspect classification, Current liability vs Long term liability
Appropriate written disclosures
