Susbstantive procedures Flashcards
1
Q
Obsolete inventory
A
- 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
2
Q
Creditors clerk did not record volume rebate
A
- 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
3
Q
Cash flow and going concern issues
A
- 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
4
Q
Debtors refused to confirm
A
- 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
5
Q
Did not account for accumulative leave pay
A
- 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
6
Q
Dividends payable
A
- 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
7
Q
Restoration of land
A
- 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
8
Q
Opening balance of accounts receivable
A
- 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.
9
Q
Substantive audit procedures over existence and completeness of inventory on hand
A
- 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
10
Q
Substantive procedures: Impairment loss
A
- 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
11
Q
Substantive audit procedures on Deferred Tax
A
- 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
12
Q
- Test completeness of long term debt
- Substantive test of details
A
- 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
13
Q
Net investment in lease balance
A
- 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
14
Q
Nature of Further Audit procedures
A
- 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.
15
Q
Opening balance of accounts receivable
A
- 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
