Substantives Flashcards
1
Q
Generic Substantive Procedures
A
[P2 A S2 T O R]
1. Rep letter: Obtain a management representation letter confirming the [assertions] of [balance/transaction]
- Tax: Re-perform all the deferred tax and tax computations related to the account for reasonability and arithmetic accuracy
- Adjusting Entries: Inspect any adjusting entries to the financial records, evaluate materiality of differences and investigate material differences.
- System: Inspect the audit working papers for any test of controls performed to assess the adequacy of the system
- O/B: Agree opening balance to prior year closing balance
- Presentation and Disclosure: Inspect the financial statements to ensure [balance/transaction] is presented and disclosed appropriately in terms of IFRS
- Posting: Agree the closing balance to the general ledger, trial balance, financial statements to ensure consistency of posting / re-perform the posting [transaction]
- Schedule: Obtain a schedule
o Enquire with management as to the basis of their estimates and preparation
o Recalculate / Cast
2
Q
Revenue general
A
- Obtain a sample of delivery notes/till slips and perform the following procedures:
• Re-perform the calculation of the sales amount to ensure AA
• Agree by inspection the sales price to the price list
• Agree by inspection the delivery notes/till slips to the sales journal to ensure completeness
•Inspect the sales amounts to ensure they are exclusive of VAT - Select a sample of entries in the sales journal and agree to till slips/delivery notes (occurrence)
- Ensure no other amounts not classified as revenue have not been included e.g. commission income/ interest by inspecting the general ledger (classification)
- Select a sample of till slips/delivery notes before and after year end and agree by inspection to the sales journal to ensure they were recorded in the correct period (cut-off)
- Risk recognise revenue prematurely/performance obligation not satisfied
3
Q
Trade Receivables
A
- Circularisation:
Select a sample of material debtors (with a Data CAAT?) for positive circularisation to confirm the amounts and existence of debtors (a.k.a. confirmation letter). [existence] - Subsequent receipts testing:
Inspect post year-end bank statements for payments made by debtors from the account receivable balance to confirm the existence of debtors. [existence] - Bad Debts impairment:
- Enquire with management as to the credit terms extended to debtors and what their policies are for bad debts impairment
- Scrutinize correspondence with lawyers for evidence of customers inability to pay.
- Obtain the debtors list and take note of the following debtors:
o Those with excessive interest on their accounts
o Credit limits that have been exceeded
o Long outstanding debtors
And enquire with management as to why the identified debtors have not been written off.
[valuation] - Allowance for Doubtful Debt:
Obtain the calculation of allowance for doubtful debts from management and perform the following procedures:
o Re-perform the calculation to ensure arithmetic accuracy
o Agree the TR balance in the calculation to the TR balance in the trial balance *credit risk (IFRS 9?)
o Enquire with management as to the estimates used in coming to that % and compare the % allowance used to prior year, budgeted and industry standards to assess the reasonability
[valuation] - Age analysis:
Obtain the debtors age analysis and perform the following procedures:
o Re-perform the calculations for AA
o Agree the debtors and amounts to the debtors list to ensure consistency of the debtors balance
o Test that amounts have been aged properly by taking a sample of debtors from each aging category, looing at the dates on the delivery note/till slip and recalculate days outstanding. [valuation] - Rights:
o Enquire with management whether any receivables have been ceded, factored or pledged as security and confirm by inspecting correspondence with the third party involved (bank?) to ensure that the entity controls the AR balance
o Obtain a bank certificate to establish whether AR has been pledged as security
o Inspect Board meeting minutes for any debtors that have been ceded/pledged or factored - Credit notes?
- Estimates?
- Customer complaints.
4
Q
Accounts Payable
A
- Unrecorded liabilities test
i. Obtain post year end bank statements and perform the following procedures:
- Select a sample of material payments
- Enquire with management as to the nature of the payments
- Corroborate with supporting documents e.g. goods received note
- Noting the following:
o Description
o Amount
o Date
And agree to the supporting document to ensure that it has been recorded in the correct period at the correct amount.
ii. Inspect Board meeting minutes or any unrecorded accounts payable liabilities
iii. Enquire with management if there are any unrecorded liabilities - Supplier statements
Select a sample of creditors from the creditors listing and obtain the relevant supplier statements at year-end.
Agree by inspection:
- The details
- Amounts
- Year end balance as per the creditors statement
To confirm the appropriateness of year-end individual creditors balances. - Circularisation
With the client’s permission, confirm via written confirmation all material creditors at year-end to verify the appropriateness of year-end individual creditor balances. - Cut off
Sample of GRN just before and just after Y/E and agree to accounting records to ensure recorded in correct period - Listing:
- Cast the listing
- Reconcile the listing to the creditors ledger and control accounts
- Ensure all major suppliers last year are included in current listing and if not enquire with management as to why.
- Select a sample of creditors from the listing:
o Re-perform calculation on individual balances
o Ensure amounts are net of VAT
o Assess reasonability of discounts - Completeness and occurrence (listing to GRN, GRN to listing)
- Supplier contract
5
Q
Sundry Expenses and Accruals:
A
- Obtain a schedule of accounts making up of sundry accruals for current and prior years:
- Agree current year opening balance to prior year closing balance
- Agree Current year closing balance to general ledger, trial balance and financial statements to ensure consistency of posting.
- Cast
- Inspect for any abnormalities e.g. missing entries/duplicates
- Select a sample and agree to relevant supporting documents - Unrecognised accruals
Obtain post year-end bank statements and inspect for payments relating to accruals.
- Enquire with management as to their nature
- Corroborate explanation with relevant supporting documents e.g. invoices
- Noting the date, details and amount and agree to the accounting records to ensure all accruals are accounted for in the correct period at the correct amount - Inspect the General ledger to identify missing entries (e.g. should be 12)
- Enquire with management as to whether all known accruals have been accounted for
* issues – accrual, expense vs. capitalise, 12 pmts, VAT, contract e.g. lease
6
Q
Inventory:
A
- Risks and rewards Transfer
- Inspect purchase agreement/ enquire with management as to when risks and rewards of ownership transfer (FOB shipping/destination)
- Select a sample of purchases from the purchases journal and inspect the related bill of lading/GRN for the date that items were shipped to determine whether risks and rewards of ownership have transferred. - Inventory pledged
- Inspect board meeting minutes
- Enquire with management
As to whether any inventory is pledged as security - Consignment – enquire with management of any consignment stock.
- Stock count
- Observe and enquire with storeroom staff whether the count was performed in accordance with the count instruction
- Re-perform, on a sample basis, inventory test counts for arithmetic accuracy
o From sheet to floor (existence)
o From floor to sheet (completeness) - GRN - Purchases journal
(Completeness and existence) - Schedule of purchases (P x Q)
- Obtain a schedule of purchases and perform the following procedures on a sample of purchases:
o Agree the price to the supplier invoice
o Agree the exchange rate used to the SARB website on the date risks and rewards transferred
o Ensure the amount is net of Vat
o Re-perform the calculation - Exchange rate – to SARB website
- Classification
Inspect the general ledger for expenses that should have been capitalised to the cost of inventory:
- Enquire with management as to the nature of the costs
- Corroborate with the details on the relevant invoice
- Assess whether the amounts meet the IAS2 requirements for capitalisation. - NRV
i. Compare the inventory listing to the price list to ensure that inventory carrying amounts are not held at higher than the net realisable value
ii. Obtain a schedule of write downs and agree:
- The cost of inventory to the listing
- The net realisable value to the latest invoice to customers (excl. selling costs?)
- The quantity on hand to the inventory listing after testing stock count
- Re-perform the calculation for arithmetic accuracy
iii. Indication for Write downs – Inspect inventory for damage, obsolete, slow moving or expired
iv. Agree Inventory on hand to the listing post stock count to ensure none has been stolen since the stock count
- Manufacturer
i. Raw materials
- Purchases – risk and rewards transferred (date) and agree amount on invoice (price)
- Reconcile the quantity used to the material requisition forms
- Re-perform calculation
- Agree cost of raw materials transferred into WIP to the cost of raw materials transferred out.
ii. Direct labour
- Contract (signed, date, details)
- Agree rate on job card to contract
- Hours to time sheet
- Calculate
- Enquire with employees and inspect timesheet explanation to ensure only manufacturing labour capitalised to cost of inventory
- Stage of completion WIP (enquire, reasonable, re-perform)
iii. FMOH
- Normal capacity – enquire with management and assess reasonability by comparing to industry
- Schedule of overheads
o Agree to supporting documents
o Inspect description – pertains to manufacturing and can be capitalised
o Cast / re-perform
- Variance calculation (standard costing)
- Units produced
7
Q
PPE
A
- Schedule of PPE
- Agree to Fixed asset register
- Cast - Import goods
- Inspect purchase agreement for when R+R transfer
- Forex
- Transport costs
- Import duties
- Bank statement to ensure paid = recorded - PV calculation (capitalised to PPE) – re-perform
- Constructed PPE - think manufacturer Inventory (DL, FMOH, DM)
- Maintenance costs (cap v. expense) – look at description, enquire man, apply IAS16 capitalisation requirements
- Disposal schedule
- NCAHFS?
- Profit/loss of disposal – recalculate and agree to amount in accounting records - Authorise – inspect board meeting minutes for authorisation for asset disposals/additions
- Sheet to floor, floor to sheet
- Cap vs. expense
- Rights
- Review bank documentation for PPE used as security for debt
- Enquire management and inspect board meeting minutes - Depreciation
- Enquire with management as to their policy for depreciation
- Enquire with management as to the basis for their estimates and assess reasonability by comparing to similar assets in the market and write off periods in the tax act
- Enquire with management of any changes in estimates and if so recalculate depreciation to ensure accuracy
- Inspect the Fixed asset register for any fully depreciated assets - Impairment
- Re-perform write down calculation and assess reasonableness of estimates used
- Compare carrying value per the fixed asset register and compare to the physical condition of the assets to ensure the CA is not > recoverable amount
- Discuss possibility of further write downs
8
Q
Shares
A
- MOI – authorised
- Board authorised – meeting minutes
- Valuation calculation
Obtain:
- Re-perform discounted CF @ WACC and do P/E multiple
- Assess competence of person who performed
- Enquire as to the estimates and assess reasonability
To ensure issued for adequate value as per S40 - Amount received + date – bank statements & only recognise after consideration received
- Prospectus – obtain and inspect disclosure
- All share issues have Share certificate/ recorded in register
- Share issue costs – inspect GL, enquire management nature and inspect description
9
Q
Long-Term Liabilities
A
- Repayment of loans
- With client permission, request confirmation letter from creditor that the amount was paid and that interest has been settled in full
- Inspect bank statement for repayment - Authority to take new loans out
- MOI, board minutes - Loan agreement/contract
- Amount to bank statement
- Signatures
- Details
- Date
- Security
- Interest rate – compare to external market rate for similar loans in corporate debt market with similar risk profile to assess reasonability - Interest calculation – re-perform
- Unrecorded liabilities testing – post year end B/S, sample material payments, enquire management nature, corroborate with sup doc and agree details in sup doc to accounting records.
10
Q
Contract
A
Contract:
Inspect the contract between the company and [x], noting the following:
- The amount – agree to bank statement
- The date and the terms and conditions
- That both parties have signed
And confirm with [x] the terms and amount.
11
Q
Expert:
A
Expert:
(only if THEY brought the expert in)
Through discussion with management and inspection of certificates and prior work performed, ascertain the following in relation to the expert:
- Independence to assess integrity
- Qualifications
- Membership to professional bodies – check online
- Accuracy of work done previously
Assess reasonability of inputs, findings and accuracy of source data
12
Q
Deferred Revenue: (contract liability)
A
- Obtain a Schedule of deferred revenue and perform the following procedures:
• Cast the schedule
• Re-perform the calculations for arithmetic accuracy
• Agree by inspection the date and value per contracts to the calculation to ensure the correct inputs are used
• Agree by inspection the contracts to the schedule to ensure that all contracts have been recorded - Inspect sample of contracts for the assumptions made for the satisfaction of performance obligations
- Contract names, signature, dates, T+Cs
- Payment bank statement
- Work performed Inspect timesheet
- Inspect the audit work on the sales system to ensure that controls are operating effectively and that the system provides reliable information
- Perform ARPs by comparing the following to budget and prior years:
• Deferred revenue as a percentage of revenue
• Trends in deferred revenue compared to trends in revenue
• Agree the ARP to sales records
Discuss any abnormalities with management and corroborate their explanations with supporting documentation e.g. sales contracts.
13
Q
Goodwill
A
- Agree purchase price paid to bank statement
- Obtain purchase agreement (contract)
- Obtain calculation of goodwill
- Enquire basis of calculation and any material inputs and assumptions made
- Re-perform - Obtain most recent audited FS of acquiree and inspect for evidence of all separately identifiable assets and liabilities
- Enquire with management as to the basis of the fair value calculation
- Expert valuation of assets and liabilities – audit expert
14
Q
Cash incentive scheme:
A
- General:
- Obtain the cash incentive scheme calculation from the client and reperform for arithmetic accuracy
- Obtain management representation letter which includes all relevant assertions
- Agree the amount in the calculation to the general ledger, the trial balance and the financial statements (posting)
- Inspect the financial statements for the presentation and disclosure of the scheme to ensure it complies with IFRS 2
- Tax – included in employees tax? - Authorized? (board meeting minutes)
- Approved by board
- Meets the terms and conditions for payment - Companies Act: Pursuant to employee share scheme or authorized by special resolution of shareholders in past 2 years? (shareholder meeting minutes)
- Obtain a schedule of all employees who received payment during the year
- Select a sample and ensure they meet the criteria to be eligible for the payment
- Agree payment to bank statement
- Agree to list of employees to ensure they are employed
15
Q
Fair value of property done by valuation expert:
A
- Obtain valuation calculation and reports, and perform the following procedures:
- Reperform all calculations
- Agree the figures used in the calculation to the relevant account balances in the general ledger, trial balance and financial statements
- Agree the property details in the report to the title deeds to ensure the correct property was valued - Obtain an understanding of the process to get the valuation by:
- Inspecting the contract between the client and the expert for the details of the valuation (scope, nature and objectives)
- Inspecting the valuation report
- Through enquiry with the expert - Evaluate the expert – independence and competence
- Consult with our own property experts to reperform some of the procedures performed by the expert, such as:
- Comparing fair value to recent disposals of similar properties in the market
- Assess reasonability of DCF and discount rates used
- Agreeing the cash flows in the DCF to budgets, contracts and market rates - General – rep letter etc.
