Substantive procedures - liabilties & p&l Flashcards
Risk associated with liabilities
The biggest risk with liabilities (current or non-current) is that they haven’t all be included leaving the liabilities balance understated and the company statement of financial position looking “healthier” than it actually is.
For this reason, completeness is one of the most important assertion for all liability testing. The other assertion that is key across all liabilities is classification as the auditor needs to be comfortable that the client has correctly split liabilities between current and non-current categories.
Non current liabilities
Long term loans will be the most likely non-current liability you will need to deal with.
Completeness - Obtain a confirmation letter from bank or lender.
Classification - Recalculate the split of the loan between non-current and current liabilities.
Valuation, Rights and obligations Existence - Review loan documentation for rates and terms of loan.
Current liabilities - short term loan/overdraft
Completeness - Obtain a confirmation letter from bank or lender.
Classification -Recalculate the split of the loan between non-current and current liabilities.
Valuation, Rights and obligations, Existence - Review loan documentation for rates and terms of loan.
Current liabilities - trade payables and accruals
Completeness, Valuation , Existence - For a sample of payments made post year end agree amount back to purchase invoices. If sent, review supplier statement reconciliations and agree to payables listing. Review assumptions around accruals estimation and recalculate if necessary. Agree accruals to post year end invoices received.
Rights and obligations - Ensure invoices relating to payables and accruals are in client name.
Current liabilities - Items on statement of profit & loss
Occurrence - Agree a sample of sales back to orders or sales invoices
Completeness - Agree a sample of expenses invoices to the breakdown of expenses balances.
Accuracy - Check amounts on invoices agree to amounts per accounts listing breakdown.
Cut-off - Review invoices dates to ensure revenue/expense is recorded in the right period.
Classification - Review type of invoice to make sure expense is in the correct category
Difficulty with auditing P&L
The difficulty with auditing the profit and loss account is that depending on the client’s business it might be that there are a large number of low value transactions which can make even sample testing still very time consuming.
Auditors will therefore often try to perform:
1. Tests of control
2. Analytical procedures
3. Limited tests of detail
Using analytical procedures as the main choice of substantive procedures allows the auditor to gather evidence over a large volume of transactions in one go.
Analytical procedures used could involve:
• Comparing figures to prior year or to budget
• Using relationships between data (e.g. revenue and receivables)
• Calculating proof in totals (e.g. depreciation)
