Susbtantive Procedures: Key Financial Statement Figures Flashcards
Existence of non-current assets: Audit procedures
Physical verification of assets selected from the non-current asset register
Rights and obligations in relation to non-current assets: Audit procedures
Inspection
E.g.
Title deeds for property
Vehicle registration documents
Share certificates
Purchase invoices
Completeness of non-current assets audit procedures
Trace sample seen in use to non-current asset register
Valuation of non-current assets audit procedures: cost
Inspect purchase invoices
Valuation of non-current assets audit procedures: revaluations
Inspect surveyor’s report
Valuation of non-current assets audit procedures: self-constructed assets
Agree labour costs to payroll records
Agree subcontractor costs to invoices
Consider reasonableness of assumptions underlying overhead calculations
Reperform calculations
Valuation of non-current assets audit procedures: depreciation
Consider appropriateness of depreciation policy
By investigating significant profits or loss on disposal
Recalculate depreciation charge
Some types of business where inventory will be key audit area
Retail
Manufacture
Some reasons for significance of inventory
- Can be highly material
- Valuation is subjective
- Affects neither SPL and SFP
Is attendance at inventory count required by ISA501?
Yes
What inventory count provides assurance over
- Quantity (test counts to check)
- Valuation (identifying damage, old, dusty)
Before the inventory count…
- Review locations and count instructions
- Consider whether expert help is required
- Review systems of control and internal auditor arrangements
- Arrange to verify any inventory help at 3P premises
During the inventory count…
- Observe counts for compliance with instructions
- Check cut-off arrangements
- Identify procedures for keeping 3P inventory separate client’s inventory
- Perform 2 way test counts
- Identify slow-moving it old inventory that may require impairment
After the inventory count…
Follow up the sample selected for test counting to check the correct quantity has been included in the final inventory listing
Inventory existence audit procedures
- Take sample already counted from count sheets
- Agree to number of items in warehouse
Rights and obligations in inventory audit procedures
Confirm inventory held by 3P from 3P
(On behalf or on premises)
Completeness
Take sample of items in the warehouse
Count them
Agree to count sheets
Valuation of inventory audit procedures
- Evidence over cost
- Evidence over net realisable value
Evidence over cost
Agree costs to purchase invoice
Evidence over cost: Inventory manufactured by company
- Agree materials cost to invoice
- Agree labour costs to payroll
- Evaluate the reasonableness of assumptions underlying overhead calculations
Reperform calculations
Evidence over net realisable value of inventory sold by time of audit
Inspect post year-end sales invoices for evidence of actual selling prices
Evidence over net realisable value of inventory not sold by time of audit
Inspect order books/price lists
Evidence over net realisable value of inventory at inventory count
Looks for old it damaged items
Which may indicate obsolescence
Evidence over net realisable value of inventory
Review shed inventory listing
To identify old or slow-moving items
Discuss need for impairment
Audit of receivables main focuses
- Whether customer agrees with recorded balance
- Whether debt likely to be paid
Receivables existence + rights and obligations audit procedures
Obtain direct confirmation of receivables balances from customers
Valuation of receivables audit procedures
Select sample of receivables from receivables ledger
Inspect post year end bank statements to identify cash received from customers
Discuss allowance for doubtful debts with management
Evaluate reasonableness of their assumptions and reperform calculations
IAS (UK) 505 external (e.g. customer) confirmations process
- Auditor prepares confirmation requests
- Client sends requests to customers
- Customers send replies direct to auditor
Types of customer confirmation
- Positive
- Negative
Positive customer confirmation
Confirm agreement
Negative customer confirmation
Only send disagreement
Valuation of bank audit procedures
Agree reconciling items to post year-end bank statements to confirm they are reasonable
Rights and obligations testing of bank audit procedures
Confirm bank balances directly with bank
Existence in bank statements audit procedures: Material cash balances held at client
Count it
Existence in bank statements audit procedures: bank balances
Confirm directly with bank
1 Difference between bank confirmations v customer confirmations
Client signs request prepared by auditor before sending to bank
Other things an auditor may confirm with bank as well as balances
- Loans and overdraft facilities and terms
- Contingent liabilities
E.g. guarantees given - Securities belonging to the client that are held in safe custody by the bank
Key payables audit risk
Understatement
I.e. completeness
Completeness of payables audit procedures
- Obtain a sample of supplier statement reconciliations
Test the reconciling items - Inspect post year-end bank statements
Identify payments to suppliers
Trace to GRNs
Check included in payables balance (if related to pre year end receipts)
What do long term liabilities include?
Debentures
Loan stock
Other loans repayable more than one year after the year end
If it important that financial statements disclose the correct split between current- and long-term liabilities?
Yes
Long term liabilities: Key audit concepts to test
- Completeness
- Presentation and disclosure
- Accuracy and cut-off
Completeness of long-term liabilities audit procedures
Obtain direct confirmation from lenders if balances, accrued interest and any security held against the loan
Inspect board minutes for evidence of any new loans
Confirm repayments are in affordable with loan agreements
Presentation and disclosure or long term liabilities audit procedures
Recalculate split of loan between current and long-term
Inspect the financial statements disclosure note for adequacy
Accuracy and cut off of long-term liabilities audit procedures
Verify interest charged for period
Verify adequacy of accrued interest
P&L items key assertion
Completeness
Testing P&L often requires:
- Tests of control
- Analytical procedures
E.g. comparison of figured to prior year and budget
Review on a month by month or branch by branch basis
Using relationship between SPL items and balances (e.g. revenue and receivables, purchases and payables)
Proof in total for items such as payroll, depreciation, interest expense - Some tests of detail
