Substantive Procedures Flashcards
What assertions are tested for a risk of misstatement due to:
Not owning the asset
The asset not existing/sold
Omission of assets
Asset undervalued/overcharging depn
Assets overvalued/undercharging depn
Assets incorrectly presented
Rights and obligations
Existence
Completeness
Valuation
Valuation
Presentation
What sources of information of NCA can be used to prove the assertions are correct?
NCA register, purchase invoices, sales invoices, registration documents, valuations, leases, physical inspection, and depn records
What are the risks of misstatement that have the assertions existence and valuation?
Expenses capitalised inappropriately
Intangible assets carried at wrong value/cost: inflating the cost/valuation, amortising wrong, impairment review not done correctly
What sources of information of intangible assets can be used to prove the assertions are correct?
Accounting standards, purchase invoices, client calculations for research and development, specialist valuations
How do we test for completeness/existence?
Completeness: field to NCA register
Existence: NCA register to field
How do we test for cut-off?
Make sure all sales and purchases were done within the accounting period
What risks of misstatement for inventory are for the assertions existence, completeness, valuation, rights and obligations, cut-off?
Inventory does not exist being included in FS
Not all inventory that exists being included
Obsolete/damaged inventory valued in full
Wrong value inventory included
3rd party inventory included
Inventory included that has been sold
What are the sources of information that prove the assertions for inventory?
Controls over counting
Auditor’s attendance at inventory counts
Confirmation from 3rd parties
Purchase invoices
WIP records
Post year end sales invoices
Post year end price lists
Post year end sales orders
What controls are looked for at an inventory count?
Organisation of count - supervision by senior staff, restriction and control of production process, identification of damaged/obsolete/3rd party inventory
Counting - systematic counting, teams of independent checkers
Recording - Serial numbering, inventory sheets completed and signed, records of quantity, stages and WIP, goods inward/outward, reconciliation with inventory records
What are some examples of NRV less than cost?
Damaged inventory, heavily discounted products, outdated items, marketing strategy and production error
What risks of misstatement for receivables are the assertions valuation, and existence, rights and observations?
Debts being uncollectable
Debts being contested by customers
What sources of information can be used to prove the assertions correct for receivables?
Receivables ledger, confirmation from customers, cash payments after year end
What are the positive and negative method of confirmation from customers?
Positive: customer requested to give the balance to confirm valuation
Negative: customer only replies if the amount stated is disputed
When should the negative method be used?
Assessed risk of material misstatement is low
Relevant controls are operating effectively
Large no of small balances
Substantial number of errors not expected
No reason for customers to disregard request
What cases should receive special attention?
Material risky accounts, old unpaid accounts, accounts written off, accounts with credit balances, accounts settled by round sum payments, accounts with nil balances
When is further work in receivables needed?
Customers disagree with balances or do not respond
What differences in receivables do not require adjustments?
Those caused by invoices or cash in transit
What are the alternative procedures to verify existence/rights and obligations?
Check receipt of cash after date, examine the account and confirm validity, test controls over credit notes and bad debt write off
What are the risks of misstatement for bank for rights/completeness, valuation and completeness/existence?
Not all bank balances disclosed
Reconciliation differences misstated
Material cash floats omitted/misstated
What sources of information can be used to verify bank assertions?
Cash book
Confirmation from bank
Bank statements
Bank rec carried out by client
What is needed for direct confirmation of bank?
Explicit written authority from client to bank
Assurance request must refer to client letter
Request should reach branch manager 2 weeks in advance of year end
Should be sent directly from bank to provider
What are the risks of misstatement for payables for the assertions completeness, rights, existence/rights?
Understatement of liabilities
Cut-off between goods inward and liability incorrect
Non-existent liabilities declared
What are the sources of information to prove the assertions are correct for payables?
Payables ledger
Conformation from suppliers
Goods received notes
Credit note
What balances from suppliers should be checked?
Low, nil or negative balances
Large balances
What are risks of misstatement for long-term liabilities for the assertions completeness, accuracy/rights, presentation?
Not all disclosed
Interest payable wrong
Disclose incorrect
What are the sources of information to prove the assertions for long-term liabilities?
Schedule of loans and clients calcs
Loan agreements
Bank letter/direct confirmation from other lenders
Cash book
Board minutes
What are the statement of profit or loss substantive tests?
Revenue - inspect a sample of transactions to sales invoices
Purchases - Inspect sample of transactions, invoices, trace through system
Payroll costs - recalculate sample of payroll and inspect a sample by verifying to bank statements
Interest paid/received - inspect statements
Expenses - inspect transactions to purchase invoices
