Substantive procedures - assets

Question 1

Financial statement assertions

Answer 1

P/L statement - occurence, completeness, accuracy, cut off, classification
SOFP - existence, rights & obligations, completeness, valuation, allocation

Question 2

Non current assets

Answer 2

Existence - Physically inspect a sample of assets selected from non-current asset register

Rights and obligations - Inspect ownership documents:
• Title deeds
• Purchase invoices
• Car registration documents

Completeness - Trace a sample of assets seen in use through to the non-current asset register

Valuation - Select a sample of assets from the non-current asset register and trace back to source document:
• Purchase contracts
• Invoices
Review depreciation policy for reasonableness
Check adherence to depreciation policy
Recalculate depreciation charge
Review assets for evidence of impairment of value
Inspect building surveyors report for revaluations

Allocation - Ensure assets are disclosed in the financial statements in accordance with
relevant accounting standards

Question 3

Current assets - Inventory

Answer 3

In companies operating in manufacturing and retail sectors inventory will often be classed as a key item and possibly a significant risk.
Inventory may be considered high risk because:
• It will likely be material
• Valuation (lower of cost and net realisable value) can be subjective.
• It affects multiple statements; the SPL (cost of sales) and SoFP (inventory).

Management conduct stock counts to ensure that the QUANTITY and VALUE is correct and consequently the inventory figure in the accounts is correct.

ISA 501 requires the auditor to attend the inventory count. This allows the auditor to perform substantive procedures to gain their own evidence over QUANTITY and VALUE.

Before the inventory count -

• Review prior year working papers to what was done previously
• Discuss inventory counts with management
• Consider locations inventory is held at and where to visit
• If internal audit are involved consider whether any reliance can be placed on their work
• Establish whether expert help might be required to identify/value items
• Review count instructions provided to company staff performing the inventory count

During the inventory count -
•Observe count to ensure staff follow instructions
•Check the count a sample of items of inventory
•Check cut-off arrangements
•Identify slow moving or obsolete inventory
•Document procedures for identifying slow moving or obsolete inventory

After the inventory count -
•Check cut-off by reviewing last goods in and goods out notes during and after the
year
•Follow up on any notes made during count attendance
•Test that final inventory sheets have been prepared from count records

Assertions
Existence - Select a sample of items from the inventory listing and agree to the number of items in the warehouse

Rights and obligations - Gain confirmation from third parties about:
• Inventory held by your client that does not belong to them
• Inventory held at a third party location that belongs to your client

Completeness - Select a sample of items from the warehouse and agree to inventory listing

Valuation - Understand accounting policy for inventory valuation. Agree costs to invoices/purchase documents. Test net realisable value has been correctly arrived at

Review inventory count write up for evidence of damaged, obsolete or slow-moving stock and check whether any impairment is needed

Question 4

Current assets - Receivables

Answer 4

Due to its’ link with the revenue system receivables are a key part of the audit process. The auditor will concentrate on whether the amount
recorded as a receivable is correct and whether the customer is likely to pay!

Existence, Rights & obligations & completeness - Obtain confirmation of receivables balances directly from customers by conducting receivables circulations (see below)

Valuation - Select a sample of year end receivables balances and agree amount to cash received from customer post year end.
Discuss the process for identifying and allowing for doubtful debts with management.
Review the ageing of receivables and discus with management whether any
write off is needed.

Question 5

Current assets - bank and cash

Answer 5

When auditing bank and cash the auditors need to gain evidence over the amount of money but also that the balances and accounts are in the name of the client company.

Existence - Count physical cash. Confirm all accounts are listed on the bank confirmation letter.

Valuation - Re-perform bank reconciliation and agree reconciling items to supporting evidence. Checkamount per bank balance in the accounts agrees to bank confirmation letter.

Rights and obligations - Obtain confirmation from the bank (bank letter) for all bank accounts (including those with nil balances).