Substantive procedures Flashcards
substantive procedures for litigation/ legal case?
1) inspect 3rd party correspondence to confirm the basis of claim and amount they want to receive
2) inquire legal advisor to obtain their view about likelihood
3) inquire management about their views, assumptions about the case to assess the likelihood of the outcome - obtain written representations
4) inspect the notes to FS to confirm adequate disclosure of contingent liability
5) review board minutes to get directors beliefs
INVENTORY
obtain a schedule of inventory and cast to confirm completeness and accuracy and agree with FS and trial balance.
1) Take a sample of inventory from the count sheet and visit the warehouse to physically verify inventory to confirm it’s existence
2) Take a sample of inventory in the warehouse and confirm if it is recorded in the count sheet, to verify that all items are completely recorded
3) For a sample of inventory items, agree the cost with supporting document to ensure that cost is accurate.
4) For a sample of inventory items, agree the NRV to the support document (sales invoice) to confirm that NRV is above cost or adjustment is required
5) For a sample of inventory, inspect the purchase invoices to ensure inventory is owned by company
6) for a sample of inventory, recalculate the NRV, to confirm inventory is valued accurately
7) review FS to make sure disclosures are in accordance with IAS 2
damaged/ slow moving inventory
1) review inventory report to confirm the quantity of this inventory
2) review NRV from appropriate source doc like management calculation of scrap value of DI or sales invoices of SMI to connfirm NRV
3) discuss with management the basis of calculating scrap value to assess reasonableness
4) analyse the inventory holding period, compare with last yr to confirm is there any indication of slow moving inventory
PPE
1) take a sample from asset register and physically verify
2) go to warehouse, take a sample and verify if included in register
3) discuss basis of useful life to assess reasonableness
4) recalculate depreciation to confirm FS values are accurate
5) for a sample of PPE, obtain ownership documents to assess if company has a right to control, (ownership)
what to do if third party if not replying to correspondence / confirmation letter
1) send a reminder letter
2) telephone them
if still no reply, discuss with management why they may not be replying
-instead auditor can verify source document:
what to do if third party replies, but the amount disagrees?
1) discuss with management to discuss possible reaosns for difference
2) review reconciling item and understand reason or nature behind it
3) review subsequent clearance of the reconciling amount
substantive procedures for trade recievables
1) analyze the difference in trade receivables balances and discuss with sales director the reason behind increase/ decrease to confirm the reasons are justifiable.
2) analyze difference in allowance and discuss reason with finance director to assess reasonableness
3) inspect documents- select a sample of trade receivables and agree with valid supporting documentation, like sales invoice, orders, GDNs to confirm existence
2) inspect aged recievables listing and agree to the balances on RL control account and trial balance.
3) inspect aged receivables listing and identify any old balances, discuss with management if any of them need to be written off
4) inspect board minutes to identify if there are any concerns related to payments from customers
5) inspect a sample of trade receivables for any after date cash receipts
6) calculate avg receivables collection period and compare to past year, and investigate any differences
7) recalculate allowance for bad debts, by obtaining a breakdown, and assess if the allowance is adequate.
BANK BALANCES
1) obtain confirmation letter to confirm existence and agree with the trial balance and year bank reconcilation balance.
2) review the FS to make sure disclosure is complete and accurate, and classified appropriately between current assets and liabilities
3) obtain bank reconciliation and check for mathematical accuracy
4) review bank reconciliation and agree to supporting documents
5) agree balance as per bank reconcilation with official year end bank statement
6) agree bank reconciliation’s balance as per cash book with cash book’s year end balance
7) review cash book and bank statements for large transfer /unusual balances at year end as this could be evidence of window dressing.
in case of overdraft:
8) inspect bank confirmation letter to check if any security is given by company over the overdraft, as it may require disclosure
GOING CONCERN PROCEDURES
1) Obtain cash flow forecast and review cash inflows and outflows, assess reasonableness of assumptions used by management
2) perform sensitivity analysis on cash flows to understand the margin of safety the company has in net cash flow
3) evaluate management plans for future, like plans for generating reveue / financing. and consider the feasibility of these plans
4) review post year end sales to assess if sales are likely to increase and if revenue figure in forecast is reasonable
5) review any correspondence with suppliers to see if any legal action is threatened or any have refused to supply goods
6) review any correspondance with bank to assess if it will review overdraft facility
7) inquire lawyers if any litigation exists and likely outcome (with permission)
8) review post yr end board minutes to identify any financial difficulties
9) get a written representation confirming directors view that Co is a going concern
10) consider if any additional disclosure is requiredby IAS1 related to going concern is required in FS
11) consider if going concern basis is appropriate for preparation of financial statements
research and development expenditure
1) obtain schedule of intangibe assets that contains opening balances, amounts capitalized, amortisation cost and closing balances
2) agree closing balances to general ledger, trial balance and draft financial staements
3) discuss useful life logic with finance director and assess reasonableness
4) recalculate amortisation charge, check that policy, life and time period is correct
5) dicuss with mnagement how much has been expensed and capitalised.
6) for the amount expensed as research, agree to supporting documentation and confirm it is included in PnL
7) for the amount capitalised, agree costs to invoices, and confirm technical feasibility by discussion with developers or seeing feasibility reports
8) check market research reports to confirm that company can sell asset once its completed
9) review FS to check if adequate disclosures according it IAS are made
DIRECTOR’S BONUSES
1) obtain schedule of directors bonuses paid and agree with the amount disclosed in FS
2) review current liabilities and confirm that the bonus accrual is included
3)confirm amount of bonus paid by agreeing to cash book and bank statements
4) review board minutes and agree the amounts paid to each director with FS accruals and disclosure amounts.
5) recalculate bonus payments and agree the bonus criteria to supporting documentation and the percentages to be paid in director’s contracts
6) get a written representation from management confirming the completeness of directors renumeration including bonus
7) review FS to ensure disclosures made regarding bonus are in compliance with local legislation
REVALUATION OF PPE
1- obtain a schedule of all PPE revalued during the year and agree with trial balance and FS
2- assess competence of the expert inquire about qualification, membership, experience
3- consider if expert is independent, inquire of any financial interest/ family relationship with company.
4) agree valuation amounts to statement provided by the expert
5- review valuation report and confirm that all assets of same category are revalued as required by IAS 16
6- agree revalued amounts with NCA register, to make sure they are correct
7- recalculate total adjustment and agreee its correctly recorded in revaluation surplus
8- recalculate depreciation and ensure based on new value and spread over 12 months
9) review FS for disclosures to ensure they are in accordance with IAS 16
BANK LOAN
-get direct confirmation from loan provider and agree with amount included in FS.
-INSPECT confirmation letter and check for any security provided, as disclosures need to be made.
-review FS to ensure bank loan is classified correctly as current and non-current liability, and adequate disclosures are made.
-agree balance of loan with prior year FS and audit file
-for loan payments made, agree cash outflow to Cash book and bank statements
-check if late payments are made, any penalty is charged, and included in finance cost.
audit procedures before and during inventory counts
before:
-review prior year audit files to identify whether any issues occurred in any warehouse
-discuss with management who will be conducting the count, ensuring the warehouse staff who are responsible on daily basis are not part of it
-discuss with management if any warehouses have had any control issues
-decide which locations audit team will attend, based on materiality and risk of each site
-get a copy of instructions, review if there are any control deficiencies, discuss with management
during:
-observe the teams to ensure instructions are being followed
-get a sample of counted sheets, and test from inventory sheets to warehouse isle and vice versa
-confirm procedures regarding identifying and separating damaged goods are operating correcty
-observe procedures for movements are in place, to confirm all movements are stopped
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what factors influence reliability of audit evidece?
- source: internal or external
-effectiveness of controls
-directly obtained by auditor or indirect
-written or oral
-originality of documents
