Susbstantive procedures Flashcards
Obsolete inventory
- Enquire from management reasons for change in the basis of determining obsolescence
- Assess whether new method for computing obsolescence allowance is reasonable and appropriate by comparing prior year value to amounts after year end
- Enquire from management why allowance made is adequate and assess validity of their explanation
- Enquire from management plans to sell by special sale
- For a sample of inventory items, inspect selling price
- If cost >sp request that the inventory items be written down to NRV
Creditors clerk did not record volume rebate
- Inspect the agreement as to terms and conditions
- Obtain a schedule of purchase invoices for which volume rebate was due
- Inspect invoices if they qualify for volume rebate
- Reperform calculations
- Inspect inventory valuation report
- Inspect amended FS that effects of the journal entry have been correctly taken into account
Cash flow and going concern issues
- Obtain a schedule…
- Reperform the casts and cross cast on the schedule
- Select a sample
- Inspect inventory valuation report
- Enquire from management
- Send a confirmation letter to the liquidator
- Request that the client makes necessary adjustments
- Report the weakness of the internal control system
Debtors refused to confirm
- Reperform casting for debtors account in debtors ledger and agree to balanced reflected in the age analysis
- Compare list of outstanding invoices
If no payment made after year end
- Agree outstanding invoices to customer orders
- Enquire reasons for any long outstanding invoices
- Review correspondence from debtors from debtors to identify disputed amounts
Did not account for accumulative leave pay
- Inspect schedule prepared by..
- Inspect employment contract
- Confirm leave days due
- Request that the client make the necessary adjustments
- Inspect the FS that effects of change in accounting policy have been disclosed in terms of IFRS
Dividends payable
- Inspect minutes of directors meeting
- Resolution to declare ordinary dividends and amount of declarations
- Application of solvency and liquidity
- Inspect minutes of meeting authorization the dividend declared
- IAS 10
- Compute and evaluate solvency and liquidity ratios
- Reperform calculation of the dividend with reference to number of shares in issue
Restoration of land
- Inspect lease agreement to ascertain company’s obligations
- Inspect reports for evidence
- Reperform calculations
- ISA620 (independence, qualification and experience)
- With clients consent, hold discussions to obtain and understanding of the scope
- Inspect workings
- Assess the reasonability of assumptions
- Review events after the end of reporting period still reasonable
- Inspect the FAR
- Inspect minutes of board meetings
Opening balance of accounts receivable
- Inspect general ledger reconciliation and agree to supporting docs
- Enquire with accounting staff
- Contact previous auditor with client permission
- Stratify debtors book and concentrate on big debtors
- Inspection if credit notes
- Obtain understanding of basis and process of provision
- Test impairment provision by
* Test accuracy of data on which provision is based on
* Test correctness of aging of accounts
* Test reasonableness of assumptions
* Consider appropriateness of methods used
* Recalculate provision for impairment
Audit procedures:
FOR BOTH DEBTORS
- Note all details in the working papers for potential reversal of the debt (fictious) and request management to make the necessary accounting adjustments
- If they refuse, include the difference on the schedule of overs and unders / audit adjustments.
- Perform analytical procedures on the specific debtors balances from last year to this year to identify whether there was any large / unusual changes based on expectation.
- Consider whether one needs to re-assess the control risk for the entity as a result of the debtors not being added correctly / being provided with a discount appropriately.
Substantive audit procedures over existence and completeness of inventory on hand
- Schedule from management of RM and FG agree to TB
- Discuss inventory controls with management
- Perform counts of RM and FG at clients premises
- Test numerical sequence of inventory sheets
- Select items using CAATs from stock sheets
- Record cut off numbers for all documentation
- Investigate fluctuations
Substantive procedures: Impairment loss
- Reperform VIU calculation
- Agree amounts
- Evaluate reasonableness of CF
- Determine active market price
- Evaluate completeness of cash outflows
- Evaluate reasonableness of cash inflows
- Reasonableness of expected prices, discount rates
- Terminal value
> FVLCTS
- Expert
- Competency and capabilities
- Area of specialization
- Objectivity of expert
- Inspect engagement letter
- Nature scope and objective
- Reperform calculations
> IMPAIRMENT LOSS
- Obtain mngt adjustment calculation of VIU and FVLCTS
- Inspect RA
- Reperform CA/RA
Substantive audit procedures on Deferred Tax
- Request a schedule reflecting computation of DTA and Reperform calcs
- Agree tax loss per schedule to clients tax workings
- Inspect schedule to ensure deferred tax amount computed by applying 28%
- Agree schedule amount to total DT balance in GL, TB and AFS
- Audit assessed tax loss for py:
* Agree amounts per client tax computation
* Inspect any errors with clients tax computation
* Agree tax loss to audit work performed on income tax
* Discuss tax work and assess loss with audit firms tax specialists - Inspect latest SARS income tax assessment to ensure tax loss bf from py and used in computation of DTA is accurate
- Inspect budget to determine estimated taxable income
- Understand management budgetary process
- Consider qualification and competence of persons performing the budget
- ARP- obtain understanding of any unusual changes
- Evaluate assumptions made by mngt in prep budget and inspect supporting docs
- Reperform calcs for clerical accuracy
- Inspect notes to AFS for disclosures and expected recoverability of DTA
- Test completeness of long term debt
- Substantive test of details
- Compare list of long term debt for CY with list of PY
- Inspect MOI for any restrictions on power of xxx to make loans to other entities
-Inspect minutes of meetings for authorization of new term loan - Review minutes for unrecorded long term debt
- Obtain schedule of leased assets at year end
-Inspect BS and cash book for:
*Installments paid
*Large deposits received - Third party correspondence and confirmation and agree :
* confirm from bank
* confirm from attorneys - inquire with directors and mngt any major source of capital expenditure which has not been accounted for
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2. - Obtain loan schedule from mngt agree to GL and FS
-Cast and cross cast schedule for mathematical accuracy - Obtain a signed MRL stating that mngt has considered accuracy of assumptions made in effective interest rate calculation and interest is complete
- Inspect loan policy used in CY and determine if policy is consistent with PY in accordance with IFRS
- Recalculate loan balance for mathematical accuracy
-Inspect loan contract for:
* Contract is signed by both parties to ensure validity of contract
* Date of contract to ensure loan is recognized from correct date
* Amount of loan to ensure accuracy
* Covenants included in loan to ensure validity of loan as well as valuation
*Terms and conditions for accuracy - Inspect loan statement from bank and agree outstanding balance to loan schedule
- Obtain bank confirmation stating balance of outstanding loan
- Inspect bank statement for loan repayment to determine all necessary payments have been made
- Inspect disclosure provided in financial statements to ensure in accordance with IFRS 7; IAS 32
Net investment in lease balance
- Obtain a signed MRL
- Obtain a report extracting following data:
~ Reperform total gross investment balance and total unearned finance income
~ Recalculate net investment by deducting total unearned finance income
~ Agree total closing net investment in GL and TB
-Using CAATs perform ARP by:
~ Comparing the balance to PY/ budgets
~ Investigate unexpected finding through enquiry with Mngt and corroborate response with documentation - Use CAATs to identify anormalies eg negative balances etc.
- Recalculate gross investment balances of each contract
- Recalculate unearned finance income
- Identify and changes to lease terms
- Select a sample of payments agree to BS and relevant contract to verify amounts
- Identify any variable lease payments linked to rate
- Inspect any guaranteed or unguaranteed RV
- Calculate expected RV of similar assets at end of lease term are reasonable
- If any changes in input, recalculate new investment
- Follow up with management and request adjustment
- Recalculate report for clerical accuracy
- Identify through CAATs the lessees who have not paid their accounts to identify whether report is complete
- Consider policy and methods or assumptions used by Mngt:
- Adhere to IFRS
- Are they consistently applied from PY
- Consider Mngt competence to apply and account for impairment policy
Nature of Further Audit procedures
- Risk is considered to be high based on the above.
Nature of testing
- There has been a change in the control environment in the current year, from manual to the new system - therefore the audit plan as to be considered in two parts.
- In the first portion of the year the process was manual and no strong control environment existed, therefore it is not possible to test controls.
- After implementation of Tracker:
Possible
- Although the system appears more automated, the FM still is the only person controlling the classification of the costs.
- The FM is responsible for assessing the IAS 38 requirements, changing the status on the system and reviewing the journals - there is no segregation of duties.
- Although the R&D division manager is capturing all the costs in the system there is no review of his work to ensure all costs are correctly captured.
- Internal audit did not assist in testing or implementing the system, therefore there is a risk that the controls are not effective.
- Therefore a combined approach does not seem possible.
Necessary
- There is no information to indicate that the volume of transactions is too high that substantive procedures alone would not be sufficient, especially considering that prior year a substantive approach was used.
- Risk has been assessed to be high and controls have not be considered in the risk assessment.
Desirable
- Although desirable to test controls it is not possible.
- Based on the above a fully substantive approach should be used to test intangible assets.
- Due to the change in environment wrt COVID it will not be possible to use analytical procedures appropriately as a detailed expectation would be difficult to determine.
- Alternatively it could be argued that the system would calculate the journals accurately therefore possibility of using a combined approach on the accuracy assertion.
Opening balance of accounts receivable
- Inspect general ledger reconciliation and agree to supporting docs
- Enquire with accounting staff
- Contact previous auditor with client permission
- Stratify debtors book and concentrate on big debtors
- Inspection if credit notes
- Obtain understanding of basis and process of provision
- Test impairment provision by
* Test accuracy of data on which provision is based on
* Test correctness of aging of accounts
* Test reasonableness of assumptions
* Consider appropriateness of methods used
* Recalculate provision for impairment
Substantive audit procedures on accuracy of loyalty program liability
- Inspect minutes to verify points were authorized
- Consider mngt competence to apply and account IFRS 15
- Terms and conditions met
- Inspect signed contract to verify agreed upon percentage
- Perform CAATs and recalculate:
* Number of loyalty points earned by commuters each month based on fares sold
* Recalculate stand alone value of points earned
* Stand alone transaction price of commission - Recalculate using CAATs transaction of contract liability in proportion of stand alone SP
- Recalculate number of points earned each month
* Through discussion with mngt to obtain an understanding of rate of loyalty points
* Inspect independent market research report
* Calculation average of percentage of loyalty points over 6 months period
* Select a sample of payments where loyalty points used for payment and through inspection to ensure no additional loyalty points earned on that transaction
General substantive procedures
- When including MRP (link to an assertion)
- Do general procedures
- Think about the T account (related accounts) initial and subsequent measurement
- Do not consider general substantive procedures if there has already been a confirmation
- Think accounting policy
- Do not use REVIEW in substantive procedures
- Think of impairment
- Presentation and disclosure
- Deferred Tax
Exam technique
1. What am I dealing with?
BS (CPERVC)
IS ( COCPAC)
2. Audit/Standard/Accounting/Tax/ISA/IFRS
3. Documents (Invoice, Contract,Delivery)
- When you see amounts always calculate
- When dealing with analytics consider the expectation
- Include CoAct procedures
- Obtain a schedule detailing
- Reperform calcs
- Select sample of contracts to…
- Bank confirmations
- Inspect FS ensure disclosure
- Mathematical accuracy
- Expert to review
- Enquire with management
- External confirmation
Substantive analytical procedures
- Discuss with management and obtain production records to corroborate what production levels were achieved in CY and PY
- Compare costs in CY to PY to determine if moved consistently with change in production levels
- Obtain average cost p/u from (source) and determine whether movement in expense is consistent with change in average cost
- Perform a recalculation analytic and compare to the total in FS
- Perform a ratio analysis whereby relationship between cost for x and revenue is calculated, the ratio should remain stable
- Follow up any material variance identified with mngt and obtain corroborating evidence
Substantive procedures on Fixed Assets
- Inspect GL to ensure no maintenance costs are capitalized
- Obtain contract and inspect for T&Cs and acquisition price
- To test arms length obtain price list from other market participants and inspect SP of similar assets
- Inspect accounting policy for UL, and if consistent
- Obtain FAR inspect for RV and consider reasonability by comparing to industry reports
- Recalculate depreciation, accuracy
Impairment
- Assess reasonability of mngt assumptions
* FV (obtain industry price, ISA 620)
*CTS inspect assessment by mngt and agree to similar sale transaction
*VIU (inspect CF and compare to PY)
* Discount rate - use expert to assess rate used by client
-Reperform comparisons VIU and FVLCTS
Intercompany loan
Cash advance:
- Satisfied solvency and liquidity
- Fair and reasonable terms
- Inspect TB if still meet solvency and liquidity
- Inspect MOI on if there are any restrictions or conditions
- Inspect minutes of shareholders meeting for special resolution pass
- s45(5)
- Inspect loan agreement to confirm (parties,amounts etc)
Management fee:
- Reasonability of the fee in relation to service rendered
Interest
- Reperform calculations of interest
Further audit procedures on debtors
- They don’t agree with balance
- They are not clients
- Request management to make accounting adjustments
- If they refuse include difference on schedule of overs and unders
- Perform ARP, large or unusual change based on expectation
- Inspect agreement to confirm if they qualify for the discount if they settle 7 days after y/e
- inspect debtors ledger account:
* Sales invoices for June total of xxx
* Date pertains to the month of xxx
- Inspect bank statement to confirm amount received on x date
- Recalculate amount of discount by multiplying x by discount
-All sales invoices total xxx
- Request management to make a correction - Inspect invoices for evidence that amount was addressed to client?
- A stamp of a delivery note that indicates where goods are delivered
-Confirm it’s delivered to xxx
- Obtain and inspect original signed credit approval application
If evidence found that sale made to client:
- Request credit controller to provide client with evidence
- Obtain direct confirmation from xxx that they acknowledge debt
If no evidence of sale or debtor:
- Extend existence testing of debtors
- Alert audit manager for risk of fraud
- Increased sample of debtors to identify if this is a recurring event
Substantive procedures: Journal entries
- Reperform posting on JE to GL accounts
- Request schedule…detailing invoice
- Inspect dates
- Inspect corresponding GRN
- Reperform calcs including VAT calcs
- Inspect contracts for….
Impairment loss for T+OR
- Obtain impairment loss calculation for T+R and xxxx
- Confirm use of simplified approach in calculation of impairment loss with reference to LECL
- Cast and cross cast provision matrix
- Enquire with xxx distinguishing characteristics for all customer accounts
- International debtors might not share similar payment frequency
- Recalculate groupings based on characteristics
- Recalculate default rate and agree variables used to prior years audited
- Agree forward looking information used in calculation and discuss with xxx to assess reasonableness of information
- Follow up on any significant difference through discussion with mngt
- Inspect disclosure of the impairment loss and confirm it is in line with disclosure of IFRS 7&9
Test compliance with covenants of long term loan
- Obtain loan agreement and verify…
- Contact bank with client’s permission (EBITDA)
- Obtain legal advise
- Covenants ( FS/Remunerations/EBITDA/Working capital days
Substantive Audit Procedures: FV of properties included as HFS
- Request report and re-perform all calculations in reports
- Agree valuation reports in GL, TB and AFS
- Evaluate if reliance can be placed on mngt expert ISA 620
- Obtain understanding of process followed by Co. In computing FV by:
* Inspect engagement letter
* Inspect vacation report
* Assess their understanding of accounting requirements framework - Agree property details in valuation reports to title deeds to ensure correctly valued
- Perform procedures to assess the reasonableness of experts by:
* Comparing FV to other recent disposals
* Assessing reasonability of discounted CF and discount rates used in determining FV
* Agree DCF to budget, contracts or market rates
Problems with trust formed under the company
- Validity of trust (legal)
- Negligence and reckless trading by directors
- According to trust deed they should have…
- This may constitute gross negligence in terms of common law
- Breach of fiduciary responsibilities towards company
- Recklessness s24 Co Act
- Consider RI
IAS 38 Intangible Assets
Test of controls
-Inspect the access tables to determine that only the HOD and FM has access to the programme.
-Use test data to try gain access to the system to ensure that it is secure
-Select a sample of project costs and inspect that it has been correctly capitalised/expensed based on the status of the project.
-Inspect whether there has been any changes made to the journals created by the R&D system by the FM and enquire as to the reason therefore.
-Inspect invoices to support any changes to the journals (inspect the dates to determine whether cost was incurred in research or development phase
General
-Obtain a schedule of intangible asset balance and cast and cross cast
-Agree schedule to TB and AFS through inspection
-Agree the opening balance of Intangible asset to prior year closing balance through inspection
-Obtain a management representation letter on the valuation of the Intangible asset.
Substantive
-Expert - used for discount rate
-Inspect expert qualifications (certificates) to determine if expert has appropriate knowledge and skills
-Discuss with expert and management to determine if expert is independent (inspect minutes of meeting to identify any relationship between management and expert)
-Obtain expert report and recalculate workings as far as possible
-Discuss assumptions used by expert and agree to source for reasonability (beta, cost of debt, etc)
-Inspect accounting policy for intangible to determine if in line with IFRS.
-Recalculate managements impairment assessment to determine accuracy of outcome and compare to that of expert.
-Recalculate impairment of intangible asset using and auditor’s assumptions (point estimate) and compare to that of management/expert.
Detail:
Select a sample of projects that entered the development phase:
-Discuss with management what they took into consideration when determining when the IAS 38 criteria is met and determine whether the treatment is appropriate.
-Select a sample of additions and agree through inspection to invoice to determine if amounts are accurate
-Select a sample of disposals and agree through inspection to bank statement that amount was received.
-Recalculate amortisation using management inputs on schedule
-Compare through inspection of competitors financial statements whether the useful life of assets is reasonable
-Discuss assumptions made by management and verify through inspection, assumptions are used appropriately in the VIU schedule
-Inspect whether cashflows for software is complete based on current income and expense items generated by the business.
-Determine whether the growth rate used by management is appropriate based on recalculating past growth trends of the company and project cash flows, as well as inspection of industry growth rates.
-Determine the accuracy if management budgets and forecast by comparing (inspection) prior year forecasts with current year actuals.
-Inspect the minutes of meetings where the forecasting period has been agreed trace to schedule to determine whether appropriate period was used.
-Inspect the discount rate to ensure that it is before tax.
-Inspect the cash flows to ensure that it is also before tax.
IFRS 2
Valuation/completeness of the options
-How many share options were granted in the current year
-To how many employees were they granted
-What vesting conditions were incorporated in the share options?
-If market conditions were incorporated - How were they taken into account in the fair value of the options?
-How was the equity and expense account
Source Documents
-Listing/calculation of share options FV
Share option contracts (grant date, number of options grated, vesting conditions)
-Employment contracts
Existence (Valid)
-Where the share options approved by the BOD and the shareholders in a special resolution (s41,42)?
-Does the MOI contain sufficient shares approved but not yet in issue?
-Was the share option approved by the remuneration committee in terms of King IV?
-Was the remuneration policy updated with the share options, and was the policy voted on by the shareholders?
Source Documents
-Minutes of the remuneration committee meeting where the policy was approved
-Minutes of director and shareholder meetings where the options were approved
-Directors and shareholders special resolutions
Disclosure
-Is the share options disclosed in terms of IFRS 2 as well as the companies act (remuneration committee report directors emoluments)
Controls over SBP
- Think of masterfile procedures
- A reconciliation should be performed between the employee list approved by the BOD and the Masterfile
Goodwill Substantive procedures
- Obtain and inspect purchase contracts
Purchase price
Contingent consideration
Date, Parties involved, T&C’s, percentage acquired
- Assess competence of the valuation expert
- Agree FV of NCI to goodwill
- Agree FV assets and liabilities
- Consider impairment indicators
- Agree amount to bank statement
Procedures: Trade receivables and allowance for credit losses
- Debtors remittances
- Invoice-DN-Orders
- Sales journals
- Debtors control account
- Debtors as per age analysis
Allowance for credit losses
- Discuss nil estimates with management for allowance for credit losses
- Who has authorized the estimates and if they have any authority
- Reasonability
- Assessment of the recoverability
- Legal documents
- Calculate own estimates
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