Ideas for the procedures question

Question 1

What are some general procedures trends?

Answer 1

• First year audit: Ascertain if the current year audit procedures provide evidence in respect of opening balances. Confirm opening balances are correctly brought forwards and reflect appropriate accounting policies.
• Materials are invoiced in local currencies which could result in translation errors: Check the exchange rates used to an independent reliable source and reperform the calculations.
• Possible window dressing of financial statements due to directors’ remuneration scheme based on certain aspects or the bank requiring the audited financial statements in support of a loan application
• Tight reporting deadline resulting in a limited period for subsequent events review
• If there is a key person missing/job role vacant this may result in insufficient oversight
• New finance directors – lack of familiarity with company?
• Management override may indicate disregard for internal controls – raises doubts about management integrity

Question 2

What are some common going concern justifications?

Answer 2

• If the company is dependent on a single or only two suppliers
• Loss of reputation and customer goodwill
• Termination of retailer contracts
• Refunds are payable to customers which will have a negative impact on cash flow and the company may not be able to pay its debts as they fall due

Question 3

What are some common going concern procedures?

Answer 3

• Inspect profit forecasts for the 12 months after the year end/date of approval of financial statements to assess whether the business can pay their debts as they fall due/to meet loan covenants
• Perform sensitivity analysis on key components of the forecast such as revenue, interest rates
• Obtain written representation from management regarding the feasibility of the company’s plans
• Inspect post year-end management accounts to assess company performance
• Inspect correspondence with the bank to ascertain the quality of the company’s relationship with its bank
• Have retail contracts/revenue contracts been renewed?
• Inspect correspondence with legal teams to assess the likely outcome of any claims
• Inspect board minutes for reference to financing issues, contract issues, or legal claims.
• If reliant on an overdraft loan: Review and ascertain management’s contingency plans for alternative sources of finance should the overdraft be withdrawn or the loan unsuccessful

Question 4

What are some common procedures in relation to development costs?

Answer 4

• Obtain a schedule of development costs and check that costs meet the relevant capitalisation criteria
• Inspect the audit work performed on tangible assets to ascertain whether depreciation charges are reliable
• Inspect evidence of management’s impairment review
• Ascertain the basis for the estimate of useful life and consider its reasonableness by comparing it to other similar companies, comparing it to the length of contracts negotiated with retail customers.
• Obtaining expert advice
• Reperform the amortisation calculation

Question 5

What are some common justifications for land and buildings?

Answer 5

• The year-end revaluation adjustments may not have been correctly accounted for
• The calculation of the cost of the portion of land sold may be incorrect
• Revaluations involve judgement and might not be appropriate (look for bias, e.g. related parties)

Question 6

What are some common procedures for land and buildings?

Answer 6

• Valuations: ascertain who perform the valuation, inspect the valuation report, consider the appropriateness of the basis of valuation and the reasonableness of any assumptions
• Inspect accounting records to ensure valuations have been correctly reflected
• Reperform calculations of the revaluation adjustments
• Ascertain the value of similar properties in the area
• Consider appointing an auditor’s expert to perform an independent valuation
• Physically inspect the land and buildings
• Inspect the title deeds/land registry records
• If sold, ensure the portion of land/building has been removed from the non-current asset register

Question 7

What are some common justifications for revenue?

Answer 7

• Advance payments may not be deferred correctly
• Refunds may not be correctly pro-rated
• Where this is an increase: risk of overstatement. Compare to PY figures.
• Revenue is interlinked to lots of other balances on the statement too

Question 8

What are some common procedures for revenue?

Answer 8

• Provisions: Inspect post year-end credit notes/refunds and compare to the level of provision recorded at year end
• Ascertain the basis for calculating deferred income
• Re-perform the deferred income calculation
• Re-perform any related calculations
• Provision: Inspect post year-end payments/bank statements for refunds and compare to the level of provision made at year end
• Refunds: Ascertain the basis for provisions relating to refunds. Consider the reasonableness of the basis by inspecting correspondence from retailers to assess the likely volume/value of refunds. Re-perform any related calculations.

Question 9

What are some common justifications for WIP/Warranties?

Answer 9

• Judgement is involved in the calculation of WIP which may result in an inappropriate allocation of overheads

Question 10

What are some common procedures for work in progress?

Answer 10

• To identify potential losses compare actual costs to budget to identify cost overruns
• Compare contract price to estimated total costs.
• Inspect ageing of WIP to identify any irrecoverable WIP.
• Inspect post year-end receipts.
• Overhead calculations: Ascertain the basis of the assumptions, reperform the calculation, agree the figures to the management accounts, assess reasonableness of basis.
• Agree the figure on the WIP schedule to the amount included in the financial statements

Question 11

What are some procedures for warranty claims?

Answer 11

• Inspect the terms of the warranty agreements
• Ascertain the basis of the assumptions used in the provision calculations: reperform any calculations, assess the reasonableness of the basis
• Compare the previous year’s provision to actual claims made to establish the reliability of the estimates
• Perform an analytical procedure based on the historical claim rate and the level of current year contracts
• Inspect post year-end claims and compare to the provision
• Inspect customer correspondence
• Inspect board minutes for an indication of problems
• Obtain a written representation from management regarding the assumptions underlying the provisions
• Agree the figures on the warranty schedule to the amounts included in the financial statements

Question 12

What are some common justifications for payables?

Answer 12

• Risk of understatement due to a backlog of invoices which may result in cut-off issues
• Are payables consistent with suppliers’ credit terms (e.g. day length)

Question 13

What are some common procedures for payables?

Answer 13

• Undertake direct confirmation with suppliers
• Obtain or prepare supplier statement reconciliations and ensure that differences can be explained
• Inspect correspondence with suppliers for evidence of overdue payments
• Inspect purchase orders/delivery notes/goods received records/invoices for purchases made before the year end and trace to the payables listing
• Perform data analytics routines for three-way matching of orders/goods received records/invoices
• Inspect unprocessed invoices for items relating to goods received before the year end
• Identify invoices recorded after the year end and establish if they relate to goods received before the year end
• Inspect post year-end bank statements for payments to suppliers and check that payments relating to purchases made before the year end are included in payables
• Inspect contracts/invoices for any changes to credit terms in the year
• Direct confirmation of suppliers’ balances to identify any unrecorded liabilities
• Trace goods received records to entries in the payables ledger

Question 14

What are some common justifications for redundancy payments?

Answer 14

• Are the redundancies in line with the portion of the business that is closing down?
• Are provisions for redundancy costs stated by management? Are there reasons for under or overstatement?
• Does the timing of redundancy payments limit audit evidence?

Question 15

What are some common procedures for redundancy payments?

Answer 15

• Obtain the schedule detailing the redundancy provision
• • Discuss with the directors the basis for their estimate of the provision and consider reasonableness
• Inspect board minutes and ensure that the basis of the provision is consistent with what directors have agreed
• Re-perform any calculations
• Check HR records to confirm length of service
• Check payroll records to confirm salary
• Inspect applications for redundancy and ensure they are included in the redundancy provision
• Confirm that letters to employees detail any offered terms
• Obtain a written representation from management on whether the assumptions underlying the provision are complete

Question 16

What are some common justifications for inventory?

Answer 16

• Watch for obsolete inventory as a result of increased inventory days
• Movements of inventory during counts which may not be accurately reflected in count figures
• Discrepancies between the quantities of physical inventory and the perpetual inventory records
• Physical count once a year so at year end some warehouses will not have been counted for many months
• Risk of understatement: Inventory may be in transit or held by the shipping company at year end. This inventory may be incorrectly omitted from the year-end inventory records

Question 17

What some common procedures for inventory?

Answer 17

• If control deficiencies during a count: review working papers from the firm’s attendance at other warehouse counts held during the year to ascertain if similar control deficiencies were identified
• If problems with counts: Arrange additional counts at other warehouses
• Inspect the year-end inventory listing to identify whether there were any significant discrepancies between the physical inventory and the perpetual inventory system
• Check the accuracy of any adjustments in the inventory records for discrepancies identified during the inventory counts
• Review the aged inventory analysis for any slow-moving items
• Ascertain the basis for inventory write downs, assess the reasonableness of the basis and re-perform any related calculations.
• Agree costs of inventory to contracts
• Compare post year-end selling prices to the carrying value of inventory at the year-end
• Inspect shipping documents and goods received records soon after the year end to identify any inventory which may have been in transit at year end

Question 18

What are some common justifications for plant and machinery?

Answer 18

• Increase in cost/carrying amount: risk of overstatement of cost
• If some components purchased in other currencies, there are risks of translation errors
• Scrapped components may not have been removed from the non-current asset register
• If the depreciation charge has fallen there may be a risk of understatement
• Does depreciation charge percentage follow policy?
• Increased complexity when different components have different useful lives

Question 19

What some common procedures for plant and machinery?

Answer 19

• Increase in cost/carrying amount: risk of overstatement of cost
• If some components purchased in other currencies, there are risks of translation errors
• Scrapped components may not have been removed from the non-current asset register
• If the depreciation charge has fallen there may be a risk of understatement
• Does depreciation charge percentage follow policy?
• Increased complexity when different components have different useful lives

Question 20

What are some common justifications for related party transactions?

Answer 20

• If the company has a new owner and a new board consequently, the firm may not be aware of all related parties
• Risk that transactions have not been (properly) disclosed in the financial statements
• Transactions may be deliberately concealed from the auditor if management is reluctant to disclose them

Question 21

What are some common procedures for related party transactions?

Answer 21

• Request a list of related parties from the directors
• Inspect register of shareholders (of company’s doing deals with)
• Review the list of related parties supplied by group auditors
• Inspect accounting records for transactions with related parties or use data analytics routines to scrutinise the records for transactions with known related parties
• Read the board minutes for evidence of related party transactions
• Ascertain the internal control procedures in place to: identify related parties and record related party transactions in the accounting system. Evaluate and test these controls.
• Inspect the related party disclosures in the financial statements
• Obtain a written representation from management that related party disclosures are complete

Question 22

What are some common procedures for receivables?

Answer 22

• BIGGEST RISK IS NOT BEING PAID - CUT-OFF
• Review cash received after year-end regarding the year-end balances
• Review aged debt list for any balances that are very old and speak to the credit controller to see if any allowances need to be made
• Review board minutes and correspondence with customers to see if there are any disputes or customers in financial difficulty and whether any allowances will need to be made
• Review credit notes post year-end to ensure none relate to year end balances
• ——— If they do, the balance needs reducing for the amount of the credit note
• For any material prepayments that straddle year end, recalculate the amount of the payment
• Perform the sales cut-off test as this will also tell us if all the recorded balances belong in the current year
• Agree a sample of customer balances back to invoices, despatch notes and sales orders - to prove there was a real transaction creating the balance
• For a sample of larger prepayments, agree to the relevant invoice
• Recalculate receivables days and compare with PY for reasonableness - management assumptions
• Obtaining the list of prepayments - comparing them with PY to check for omissions or new ones (most reoccur year after year)
• Recalculate any general allowance for IDE made, to confirm amount
• Cast the receivables ledger list
• Pick a sample of sales invoices issued close to the year end and agree their inclusion in the sales ledger

Question 23

Balances back to source documents test what?

Answer 23

Existence- the same test in the opposite direction tests completion

Question 24

How do you test liabilities?

Answer 24

Main risk with liabilities is presentation and completeness - not included or disclosed properly in the hopes of ‘window dressing’

• Bank letter from ‘all accounts’
• Agree all loans and balances to the bank letter - search for any we don’t know about
• Obtain a list of loans, add it up and agree to FS
• Agree advances and repayments to cash book and bank statement
• Presentation: Review bank letter and loan agreement for terms requiring disclosure - restrictive covenants or assets taken for security
• Appropriate disclosure of interest rates
• Look at repayment terms
• Look at the split between current and non-current - is it appropriate?
• Recalculate expected interest charge and agree to SPL

Question 25

What are some general procedures for SPL items (Revenue, Purchases, Payroll)?

Answer 25

Analytical procedures:

• Rev and Purch: Recalculation of sales tax
• Compare figure to PY and budget to assess reasonableness
• If we think there should be a pattern, perform month to month analysis (seasonal business for example)
• GP% to prior year (Rev & purchases)
• Payroll = changes in payroll cost vs changes in number of employees
• Tracing source documents to TB (completeness), or the other way round (occurrence)
• Sales: Match to orders, goods delivery notes, invoices
• Purchases: oders, to goods received notes, invoices
• Payroll: timesheets/clock-cards to wage analysis/payslips/payroll listing
• Cut-off
• Post year end credit note review (received for purchases and sent for revenue) - to ensure they were reflected in the correct period