Chapter 10

Question 1

What general audit procedures are performed by auditor and in which area.

Answer 1

1. Agree F/S with records (All Areas)
2. Physical Verification (Tangible non-current assets, Inventory, Cash)
3. External Confirmation (Debtors, Creditors, Banks, Lawyers)
4. Reconciliation (Tangible non-current assets, Inventory, Bank, Debtors, Creditors, Cash)
5. Inspection/ Vouching (All Areas)
6. Analytical Procedures (Inventory, Debtors, Creditors, Accruals & Prepayments, Expenses, Payroll, Interest).
7. Aging Analysis (Inventory, Debtors, Creditors, Accruals & Prepayments).
8. Recalculation (Tangible non-current assets, Inventory, Provisions, Sales, Purchases, Expenses).
9. Subsequent Clearance (Inventory, Debtors, Creditors, Accruals & Prepayments, Provisions, Contingencies).
10. Cut-off (Inventory, Debtors, Creditors, Sales, Purchases, Expenses).
11. Scan Ledger (All areas)
12. Presentation & Disclosure (All areas)
13. Inquiry/Discuss (All areas)

Question 2

What general procedures are performed in Tangible non-current assets.

Answer 2

 Agree F/S with records 
 Physical Verification.
 Reconciliation.
 Inspect (Title Documents). 
 Scan Ledger.
 Disclosure (as per IAS – 16).

Question 3

Substantive procedures to verify Closing Balance of tangible non-current assets.

Answer 3

1. Existence:
    Select a sample of assets from fixed asset register and ensure whether the asset physically exists. If asset is not available inquire about reasons.
2. Completeness:
    Obtain a schedule of fixed assets showing opening balance, closing balance, depreciation expense, disposals made.
    Agree opening balance with prior year records.
    Obtain fixed asset register and agree the balance with F/S.
    Select a sample of assets that physically exists and verify whether they are recorded in fixed asset register.
3. Rights and Obligations:
    For land and building, inspect legal and title documents.
    For vehicle, inspect vehicle registration book.
   For other assets, inspect relevant invoices.
4. Classification:
    Scan ledger for any unusual entries if small figures exist there may be misclassification of revenue expenditure to fixed asset account.
5. Disclosure and Presentation:
    Ensure that appropriate disclosure has been included as per IFRS.
6. Accuracy, Valuation and Allocation;
    Review Fixed Assets’ Register to ensure that depreciation has been recorded on all assets..
    Recalculate depreciation and impairment on sample.
    Check estimates are reasonable (e.g. rate, life, residual value).Engage Expert, if necessary.
    Review gain or losses on disposals as indication of understatement or overstatement of depreciation expense.
    Perform analytical procedures (compare ratio of depreciation with prior year and and depreciation rates.).
    Understand management’s process to identify and record impairment.
    Perform inspection to check physical condition of asset to evaluate reasonableness of impairment.

Question 4

Auditor procedures for addition on tangible non-current assets.

Answer 4

 Obtain list of additions made during year and agree them with F/S.
 Inspect authorization to purchase fixed assets.
 Inspect sale deed and legal documents as the evidence of transfer of ownership.
 Inspect supplier’s invoice to confirm cost of asset.
 Check date of capitalization and ensure that it is depreciated from the date it is available for use.
 Test calculation of depreciation on sample basis.
 Physically inspect to verify existence
 Assess the reasonableness of useful life.

Question 5

Audit procedures when there are disposal of fixed assets.

Answer 5

 Obtain list of disposal made during year and agree with F/S.
 Inspect authorization to dispose of the assets.
 Inspect sale invoice and agree sale price with figure recorded in cash book.
 Verify removal of cost and Acc. Dep from books and register.
 recalculate profit or loss on disposal on sample basis.
 Inquire management possibility of unrecorded disposals.

Question 6

Audit procedures if there is a self constructed fixed asset.

Answer 6

 Inspect permission of land development authorities to constructe the fixed asset.
 Physical inspection of construction place to verify whether asset is completed or under construction.
 Select sample of cost, and agree them with supporting documents
i. for material to supplier invoices
ii. labor cost to payroll sheet or time sheet.
iii. overheads to relevant invoices
 Review list of capital expenditure to ensure that no revenue expenditure is misclassified.
 Discuss with MGT capitalization policy on self-constructed assets.
 Compare budget with actual cost and investigate differences
 Review Expert’s assessment of stage of completion.
 Depreciation starts when asset is available for use.
 Presentation and Disclosures.

Question 7

Audit procedures when fixed assets are kept at revalued amount.

Answer 7

1. Evaluate Competence, Capability and Objectivity of Expert.
2. Evaluate Adequacy of work of Expert.
3. Evaluate Accounting/Disclosures:
    Obtain a list of assets revalued during the year and them Agree with valuer’s report.
    Ensure that Valuation is up-to-date.
    Ensure that Entire class of assets is revaluated.
    ensure that method used to estimate fair value is consistent.
    Recalculate revaluation surplus and depreciation expense on sample basis.
    Inspect physically condition of assets to ensure that condition is same as explained in report.
    Appropriate disclosure has been included as per IFRS.
    Written Representation (on reasonableness of assumptions)

Question 8

Audit procedures to be performed to verify purchased goodwill.

Answer 8

 Inspect approval to acquire the new business unit.
 Inspect sale agreement and agree the cost of acquisition paid to cash book and bank statement. .
 Inspect due diligence report to ensure that all identifiable assets are included and appropriately valued.
 Recalculate the goodwill on acquisition of business.
 Adequacy of disclosures in F/S as per IFRS. relating to purchased goodwill.

Question 9

Audit procedures for valuation and impairment of Intangible assets.

Answer 9

 Understand management’s process for recording impairment of goodwill.
 Ensure that annual impairment testing is conducted and recorded appropriately..
 Evaluate appropriateness of assumptions used in impairment testing by comparing with auditor’s own assessment based on knowledge of client and industry.
 Engage expert, if necessary to ensure that assumptions and estimates used are reasonable.
 Obtain written representation (about assumptions)

Question 10

Audit procedures to verify development cost of intangible assets.

Answer 10

 Ensure that recognition criteria is met before capitalization of intangible.
 Discuss the project with mgt to assess feasibility of project:
1. review reasonableness of projections and forecasts.
2. consider funding requirements.
3. obtain written representation from MGT regarding their intention to complete this project
4. assess whether market for the product exists or not.
 Discuss with MGT any technical problem with project or possibility of impairment.
 Review development cost to verify that it is correctly classified and doesn’t include any revenue expenditure.
 Select a sample of cost, and inspect supporting documents (development contracts, billing, timesheets).
 Test controls over scientists’ documentation of costs capitalized.

Question 11

Audit procedures for Other intangibles.

Answer 11

 Inspect approval to purchase an intangible.
 Inspect legal and title documents to ensure the existence and transfer of ownership of intangible .
 Check reasonableness of useful life and check amortization calculation is appropriate.
 Discuss with MGT regarding possibility of impairment and check the calculation of value-in-use and whether estimates used are reasonable.

Question 12

Substantive procedures for conducting Inventory count.

Answer 12

1. Before Inventory Count (Planning):
    Review the client’s instructions for inventory count.
    Determine whether inventory is held by third party and assess the need to send confirmation letter.
    Determine whether there is a need of expert
    Decide which locations are to observed by audit team.
2. During Inventory Count:
    Observe the count to ensure that MGT instructions are followed.
    Inspect sample of items from inventory sheet to warehouse.
    Select sample of items physically exist and ensure that they are recorded in inventory sheet.
    Observe condition of inventory to identify obsolete stock.
    Ensure that inventory belonging to third party is identified.
    Perform cut off on sales and purchases.
    Obtain signed copies of count sheets from client
3. After Inventory count:
    Ensure quantity of final count with inventory list.
    Inspect the ageing report of inventory to identify obsolete inventory.
    Ensure that inventory is kept at lower of cost or NRV.
    Ensure that cut off test has been correctly applied.

Question 13

Audit procedures to verify inventory balance at year end.

Answer 13

1. Classification:
    Ensure that proper cut off test is performed on sales and purchases
    Scan the ledger to identify any unusual entries.
2. Rights and Obligations;
    Inspect the purchase invoice, GRN, GDN and other documents to verify the ownership of property.
    Ensure that inventory belonging to third party is segregated and not included in closing balance.
3. Completeness:
    Obtain stock sheets from MGT and agree them with F/S.
    Ensure that inventory held by third party is identified and included in closing balance.
    Select sample of items physically exist and ensure that they are recorded in inventory sheet.
4. Existence:
    Inspect sample of items from inventory sheet and ensure that they physically exist.
5. Presentation and Disclosure:
    Ensure that appropriate disclosure has been been included as per IFRS.

Question 14

Audit procedures to be performed to verify Accuracy, Valuation and Allocation of Inventory.

Answer 14

Cost of Goods Purchased:
 Test whether valuation method is consistent with IFRS and check whether it is correctly applied.
 On sample basis, compare cost of purchased inventory with purchase invoices.

Cost of goods manufactures:
1. For material:
 Check whether correct quantity of material is used in calculation.
 Inspect cost of material with purchase invoices.
2. For labor:
 Inspect the hours worked from time sheet.
 Check hourly rate from worker’s record.
3. For Production overheads:
 Confirm that only production overheads are included in valuation.
 compare the cost with relevant invoices.

NRV:
 Review the MGT process of comparing cost with NRV.
 Inquire client about calculation of NRV and check reasonableness of calculations.
 Check physical condition of inventory items to identify obsolete and damaged inventory.
 Check the amount of sales return and credit notes issued during the year.
 Inspect the ageing report to identify obsolete or slow moving stock.
 Discuss reasons with MGT for increase in inventory level ( difficulty to made sales )

Question 15

Audit procedures to verify Trade Receivables.

Answer 15

1. Existence, Rights and Obligations:
    Select a sample of debtors at year end and send external confirmation request to confirm their existence. Perform alternative procedures of no replies are received and additional procedures if exceptions are identified.
    Scan the ledger to identify any unusual entries in control account and investigate them.
    Select a sample of entries and inspect supporting documents to confirm their existence.
2. Completeness:
    Obtain list of debtors from client and ensure that they agree with F/S.
    Select a sample of GDN and ensure that they are recorded in control account.
3. Classification, Presentation and Disclosure:
    Inquire about the receivables from related parties.
    Ensure that receivables are correctly classified and appropriate disclosure is included as per IFRS.
4. Cut off:
    Ensure that sales are recorded in correct accounting period.
5. Valuation, Accuracy and Allocation;
    Review the adequacy of provision and assumption used for calculation of provision for bad debts.
    Obtain aging report of receivables to identify long outstanding receivables that should be provided for.
    Inquire about disputed receivables, inspect communication with that customer and expected recover from those receivables.
    Assessed historical accuracy of provision for bad debts.
    Inspect the subsequent status of debtors whether any cash was received subsequent to year end.

Question 16

Audit procedures for insurance receivables.

Answer 16

 Read Insurance Policy.
 Inspect correspondence.
 Record only if virtually certain

Question 17

Audit procedures for Litigations and claims.

Answer 17

 Inspect correspondence.
 Written representation (on likely settlement).
 Effect of Subsequent events
 Possibility/Impact of regulatory action
 Send external confirmation letter to lawyer.

Question 18

Audit procedures for Warranty.

Answer 18

 Inspect sales agreement.
 Check reasonableness of cost of warranty repair.
 Discuss nature of defect in inventory, and impact on
other areas.
 Subsequent events, and their impact on recognition.
 Written representation.

Question 19

Audit procedures for loss by fire/flood.

Answer 19

 Physically inspect location.
 Assess reasonableness of inventory/assets balance at location.
 Appropriate accounting and disclosures (e.g. Impairment, NRV, Loss). Use Expert, if needed

Question 20

Audit procedures for Inventory count after B/S date.

Answer 20

 Inventory count at other date.
 Prepare reconciliation.
 Inspect documents for intervening transactions.

Question 21

Alternative audit procedures when physical verification is not possible.

Answer 21

Perform alternative procedures i.e.
 Inspect documents (e.g. GRN).
 Use technology (e.g. drone cameras, video calls)

Question 22

Audit procedures for impairment of fixed assets.

Answer 22

1. Ask MGT to test impairment
2. obtain working paper, review source data and assumptions used to check reasonableness.
3. Use of expert of necessary.

Question 23

Audit procedures for Bankruptcy of debtor

Answer 23

1. Inspect agreement with customer and check for security.
2. Send confirmation letter to liquidator to confirm about expected recovery.
3. Inquire MGT about expected recovery.
4. Check subsequent status whether any cash was received subsequent to year end.

Question 24

Audit procedures for Interest income/expenses.

Answer 24

1. Inspect loan agreement creating the right/obligation to receive/pay interest.
2. Perform analytical procedures to calculate the expected interest expense for year.
3. Inspect whether any interest was received or paid during the year and agree them with cash book and bank statement.

Question 25

Audit procedures for accrual and pre-payments

Answer 25

For Accrued Wages and Salaries:
 Perform analytical procedures to test reasonableness of accrual balance.
 Check amount of accrued wages and salaries be comparing them with payroll sheets.
 Check payment of accrued wages and salaries after year end.
 Consider which additional items should be accrued at year end.

For other Accrued Expenses:
 Obtain list of all accruals and agree balances with F/S.
 Review the list of accruals to ensure the completeness of accruals by comparing them with prior year.
 Select a sample of accruals and verify its calculations with supporting documents.
 Select sample of accruals and inspect whether payment is made subsequent to year end.

For other prepaid expenses:
 Obtain list of prepayments and agree them with F/S.
 Review the list of prepayments to ensure their completeness by comparing them with prior year.
 Select a sample of prepayments and verify its calculations with supporting documents.
 Select a sample of prepayments and evaluate their subsequent status.

Question 26

Audit procedures to verify Bank Balance appearing in F/S.

Answer 26

 Obtain the list of all bank accounts along with closing balances and agree them with F/S.
 Review the cash book and bank statement to identify any unusual entries and investigate any unusual entry.
 Send a bank confirmation letter for all bank accounts.
 Agree balances as per confirmation with list of accounts and BRS.
 Check that bank has answered all questions.
 Cast BRS to ensure mathematical accuracy.
 Agree balance as per cash book with cash book and balance as per bank statement with Bank statement and bank confirmation letter.
 check reconciling items and inspect their supporting documents and subsequent clearance.

Question 27

Audit procedures to verify cash balance.

Answer 27

 Perform physical verification at year end to confirm existence of cash.
After cash count obtain acknowledgement from.client about return of cash.
 Compare cash balance as per count with balance appearing in F/S.
 Perform cut off test on cash receipt and payment
 Ensure that currency notes of high domination are real one.

Question 28

Audit procedures to verify trade payables.

Answer 28

General Procedures:
 Obtain a list of creditors from purchase ledger and agree them with control account and F/S.
 External Confirmation
 Subsequent clearance
 Presentation and disclosure.
 Scan Ledger
 Review aging report.
 Inquire about payables to related parties.

Procedures to ensure completeness;
 Cut-off on purchases.
 Inspect pending GRN and ensure that they are recorded at B/S date.
 Select a sample of Subsequent payments and ensure whether such liability was recorded at b/s date or not.
 Compare the balance as per records with account statement sent by creditors.
 Compare list of suppliers with last year

Question 29

Audit procedures for verification of provisions.

Answer 29

 Obtain list and agree with F/S
 Review list to ensure completeness that it include all necessary items as per knowledge of auditor about client and relevant industry.
 Compare list with last year to identify any provision which declined as compared to last year.
 Evaluate recognition and measurement criteria
 Written representation (on adequacy)
 Evaluate whether assumptions used are reasonable.
 Send external confirmation letter to lawyer to confirm recognition and adequacy of disclosure.

Question 30

Audit procedures for verification of contingencies.

Answer 30

Contingencies:
 Obtain list of detail about contingencies and inquire about approach used to identify them.
 Follow up contingencies reported in last year.
 Effect of subsequent events.
 Letter of Inquiry to lawyer.
 Identify undisclosed contingencies (Inquire MGT, Read BOD minutes, Review Legal expenses account, Written Representation from MGT, correspondence with lawyer)

Question 31

Audit procedures for verification of Non-current liabilities.

Answer 31

 Obtain schedule of all borrowings and agree with F/S.
 Inspect loan agreement.
 New borrowings (approval, legal requirements).
 Inspect repayments and agree them with payments recorded in cash book and bank statement (recalculation and payment).
 Interest expense (calculation and presentation)
 External Confirmation
 Presentation and Disclosure

Question 32

Audit procedures to verify share capital.

Answer 32

Share Capital:
 Agree authorized share capital(as per memorandum) and issued share capital (as per register of shareholders) with F/S.

Share capital issued:
 Inspect Authorization
 Inspect supporting documents to check compliance with legal requirements.
 Check Cash received
 Recalculate the split of proceeds b/w nominal value and premium/discount and agree that they are correctly recorded in relevant accounts.
 Review disclosures

Question 33

Audit procedures for verification of reserves and dividend distributed during the year.

Answer 33

Reserves:
 Obtain the schedule of reserves and agree with F/S.
 Agree the movements with supporting documents and Inspect Authorization of these movements to reserves..
 Check compliance with legal requirements.
 Presentation and Disclosure(revenue & capital reserves)

For Dividend distributed:
 Inspect Authorization.
 Recalculate dividend as the percentage of share capital.
 Ensure payment out of distributable profit, within legal time, deduction of zakat & tax,
 Unpaid/unclaimed dividend (accounted for and disclosed)

Question 34

Audit procedures to verify Sales

Answer 34

 Select sample from GL and check supporting documents.
 Select sample of GDN and check recording in GL.
 Select invoices and check mathematical accuracy.
 Cut-off
 Scan Ledger
 Classification, Presentation & Disclosures
 Perform analytical procedures to calculate expected sales figure for the year and investigate any unusual differences.

Question 35

Audit procedures to verify purchases.

Answer 35

 Select sample from GL and check supporting documents.
 Select sample of GDN and check recording in GL.
 Select invoices and check mathematical accuracy.
 Cut-off
 Scan Ledger
 Classification, Presentation & Disclosures
 Perform analytical procedures to calculate expected purchases figure for the year and investigate any unusual differences.

Question 36

Procedures to verify payroll expense for the year.

Answer 36

1. Agree total of payroll sheet with F/S.
2. Compare total payroll expense with prior year and investigate any unusual difference.
3. Perform analytical procedures on salaries expense, incorporating joiners, leavers and pay increase. Compare this figure with actual figure and investigate any unusual differences.
4. Recalculate gross salary, deductions and net pay of sample of employees.
5. Select sample of employees from payroll sheet and verify whether they actually exist or not.
6. Select a sample of newly employed staff and verify whether their pay rate is consistent with appointment letter.