Topic 10 Audit Procedures

Question 1

We dealt with the principles of audit evidence in an earlier chapter. This chapter deals with the application of those principles

how should answers for audit procedures be written.. i.e. in what formant/order?

Answer 1

An audit procedure should be a clear instruction of how the audit evidence is to be gathered.

• > It should contain an ACTION
• > applied to a SOURCE to
• > achieve an OBJECTIVE.

In other words, it should describe what needs to be done, how it should be done and why it should be done.

Question 2

what are the three ways of designing an audit procedure?

Answer 2

Identify the financial statement assertion to be tested.

-> E.g. to test accuracy of a sale the auditor will need to agree the amount on the sales invoice matches the amount recorded in the sales day book.

Identify the sources of evidence available.

-> E.g. when testing payroll, evidence can come from payslips issued to employees. The auditor can agree amounts recorded on the payslip to the amounts recorded in the payroll payment list.

Identify the types of procedure the auditor can use from ISA 500.

-> E.g. analytical procedures. When testing receivables, the auditor may calculate the receivables collection period and compare it with the prior year to identify any unusual variation.

Question 3

what is directional testing?

Answer 3

The concept of directional testing derives from the principle of double-entry bookkeeping, i.e. for every debit there should be a corresponding credit. Therefore any misstatement of a debit entry will also result in a misstatement of a credit entry.

Question 4

Auditors primarily test debit accounts (assets and expenses) for ______and credit entries (liabilities and income) for ____,

Indirectly testing the corresponding entries at the same time, e.g. directly testing payables for understatement also indirectly tests expenses/cost of sales for understatement.

Answer 4

Auditors primarily test debit entries (assets and expenses) for overstatement and credit entries (liabilities and income) for understatement,

Indirectly testing the corresponding entries at the same time, e.g. directly testing payables for understatement also indirectly tests expenses/cost of sales for understatement.

Question 5

Testing for understatement tests which assertion?

Answer 5

Testing for understatement tests completeness.

Question 6

Testing for overstatement tests which assertion?

Answer 6

Testing for overstatement tests valuation, existence, rights and obligations, and occurrence

Question 7

how does an auditor test for understatement?

Answer 7

To test for understatement the auditor must select the sample from outside of the accounting system (e.g. source documents) and trace the transaction through to the accounting system which eventually make it to the financial statements

Source of the transaction/Asset—> Accounting Record–> Financial statements

Question 8

how does an auditor test for overstatement?

Answer 8

To test for overstatement the auditor must select the sample from the accounting system/FS and trace the transaction through to the supporting documentation.

Financial statements–>Accounting Record–> Source of the transaction/Asset

Question 9

commonly, what method are used to test the assets and liabilities ?

test or control
substantive testing

Answer 9

Substantive procedures such as;

• test of detail
• Analytical procedures

Because although there are balances as at YE and the auditors will be testing these balances, there isn’t going to be hundreds transactions compared to P/L

Question 10

substantive procedure is what

Answer 10

SP is where the auditor is aiming their testing at trying to find material misstatements by verifying or couching the figures/transactions within the accounts.

Question 11

When writing about an audit test, what tip/brief steps must you remember?

Answer 11

1) Action
2) Source
3) Objective/Assertion you’re trying to prove

Eg select a sample of items from the NCA Register (2) and physically inspect (1) the asset to confirm their existence (3)

Question 12

when talking about audit procedures, what assertions are you trying to prove for things in the SOFP

Answer 12

1 Existence
2 Rights and obligations
3 Completeness
4 Valuation/Accuracy & Allocation
5 Classification
6 Presentation

Question 13

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Answer 13

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Question 14

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Answer 14

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Question 15

under statement of financial position, which things do you need to know audit procedures for

Answer 15

Receivables
Inventory 
Trade payables
Accruals
Loans and overdraft procedures
Provision and contingencies
Bank and cash
Non current assets

Question 16

describe the audit procedures for non-current assets (tangible)

• Existence

Answer 16

EXISTENSE

Select a sample of assets from the non current register and physically inspect the asset is present (existence)

Question 17

describe the audit procedures for non-current assets (tangible)

• Completeness

3 points

Answer 17

COMPLETENESS
* Select a sample of assets visible at the client premises and inspect the asset register to ensure they are included

• Review repairs and maintenance account in SOP/L for items of capital nature
• Reconcile the PPE register with the general ledger

Question 18

describe the audit procedures for non-current assets (tangible)

• Rights and obligations

think of leases and normal NCA

Answer 18

RIGHTS AND OBLIGATIONS
* Verify ownership of property/vehicles via inspection of title deeds

• For additions, agree the purchase invoices to verify invoice relates to the entity
• review any new lease agreements to ensure assets are correctly treated as finance or operating leases

Question 19

In testing the ‘Valuation/Accuracy & Allocation’ of non-current assets (tangible), what categories include under it that have their own audit procedures that you could do

list the items that procedures can be completed for under the valuation/accuracy

Answer 19

1) Additions
2 Depreciation
3 Disposals
4 Revaluation

Question 20

In testing the ‘Valuation/Accuracy & Allocation’ of non-current assets (tangible),

what are the audit procedures for Additions and disposals

Answer 20

Additions

▪ Review the capital expenditure budgets for the next few years to assess whether there are any plans
to replace any of the equipment.
▪ For a sample of the new equipment additions vouch the cost to a recent purchase invoice (who it is addressed to show if company or individual)

Disposals

▪ Agree sale proceeds to the sales invoice and trace receipt on the bank statement
▪ Recalculate the profit or loss on disposal, and investigate any excessive profits or losses
▪ Review the capital expenditure budget to identify if disposal had been planned and has met expectations, if not investigate to why

Question 21

In testing the ‘Valuation/Accuracy & Allocation’ of non-current assets (tangible),

what are the audit procedures for depreciation and revaluations

Answer 21

Revaluations
▪ If any assets have been revalued during the year then assess the reasonableness of the valuer. In particular consider their experience, independence, scope of work and assumptions used.

▪ Agree the revalued amounts to a valuation report, for a sample recalculate the revaluation surplus and agree to the revaluation reserve.

▪ Physically inspect the assets for impairment (any indication of damage or lack of use) to ensure it ties up with the valuation report

Depreciation
▪ Review depreciation policies for reasonableness by comparison to prior year, industry practices, the entity’s replacement policy and the profits/losses arising on disposal of assets.

▪ For a sample of assets recalculate the depreciation charge for the year and agree to the entity asset
register.

▪ Perform a proof in total calculation of depreciation, considering the timing of additions and disposals and compare this expectation to the actual charge, and investigate any significant differences.

▪ Review the disclosure of the depreciation charges and policies in the draft financial statements

Question 22

In testing the ‘completeness’ of non-current assets (tangible),

what are the audit procedures

Answer 22

Reconcile the schedule of PPE with the general ledger.

▪ Select a sample of assets physically present at the entity’s premises and inspect the asset register to ensure that these are included.

▪ Reperform the reconciliation of the non-current asset register to the general ledger, investigate any differences.

▪ Review the repairs and maintenance expense account in the statement of comprehensive income for items of a capital nature.

Question 23

In testing the ‘rights and obligations’ of non-current assets (tangible),

what are the audit procedures

Answer 23

▪ Verify ownership of property via inspection of title deeds and land registration documents.

▪ For a sample of additions agree to purchase invoices to verify invoice relates to the entity.

▪ Review any new lease agreements to ensure assets are correctly treated as finance or operating leases.

▪ Inspect vehicle registration documents to confirm ownership of motor vehicles.

Question 24

in accordance with ISA 540, you can use one or combination of 3 available processes when performing audit process for accounting estimates

Answer 24

• Review and test the process used by mang to develop the estimate
• Use an independent estimate and compare this with managements estimate
• Review subsequent events which provide evidence about the estimate

Question 25

describe the audit process prior to attending the inventory count

Answer 25

▪ Review prior year working papers (to see if there were any problems last year/which inv was counted)

▪ Contact client to obtain stocktaking instructions (time, location)

▪ Book audit staff to attend the inventory counts (taking into account if there are multiple locations)

▪ Obtain copy of inventory count instructions from the client

▪ Ascertain whether any inventory is held by third parties (if material amount held, seek permission to go and count)

▪ Obtain last year’s inventory count memo

▪ Prepare audit programme for the count (sample size)

Question 26

what are the main test areas for inventory

Answer 26

1) Does the inventory exist- attend the inventory count
2) Is it valued correctly

Existence / completeness (Attend inventory count)

Valuation

e.g. during count, auditor could identify damaged or rusty (slow moving) invesntory and confirm these inventory have been written down to NRV in the valuation exercise

Question 27

describe the audit process during the inventory count for existence and completeness

Answer 27

▪ Observe the counting teams to confirm whether the inventory count instructions are being followed
correctly.

▪ Select a sample and perform test counts from inventory sheets to warehouse aisle (overstatement-existence) and from warehouse aisle to inventory sheets (understatement-completeness)

▪ Observe the procedures for movements of inventory during the count, to confirm that no raw materials or finished goods have been omitted or counted twice.

▪ Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing on
the final audit. (Completeness)

▪ Identify and make a note of the last goods received notes (GRNs) and goods despatched notes (GDNs)
for the year end in order to perform cut-off procedures.

▪ Identify and record any inventory held for third parties (if any) and confirm that it is excluded from the
count.

Question 28

describe the audit process during the inventory count for valuation

Answer 28

▪ Discuss with the warehouse manager how he has estimated the raw materials quantities. To the
extent that it is possible, re-perform the procedures adopted by the warehouse manager.

▪ Confirm the procedures for identifying and segregating damaged goods are operating correctly.

▪ Select a sample of damaged items as noted on the inventory sheets and inspect these to confirm
whether the level of damage is correctly noted.

Question 29

describe the audit process for inventory held at third party locations

Answer 29

▪ Send a letter requesting direct confirmation of inventory balances held at year end from the third party warehouse providers used regarding BOTH quantities and condition.

▪ Attend the inventory count (if one is to be performed) at the third party warehouses to review the
controls in operation to ensure the completeness and existence of inventory.

▪ Inspect any reports produced by the auditors of the warehouses in relation to the adequacy of internal controls over inventory.

▪ Inspect any documentation in respect of third party inventory.

Question 30

Regarding standard costs for inventory, what must the auditors do

Answer 30

• Obtain breakdown of the standard cost calculation and agree a sample of costs to invoices
• Enquire of management the basis for the standard costs and how often they are updated

Question 31

describe the audit process during the inventory count for valuation AT FINAL AUDIT

Answer 31

▪ Select a representative sample of goods in inventory at the year end, agree the cost per the records to a recent purchase invoice and ensure that the cost is correctly stated.

▪ Discuss with management of the basis of the standard costs applied to the inventory valuation, and how often these are reviewed and updated.

▪ Review the level of variances between standard and actual costs and discuss with management how these are treated.

▪ Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices or wage records to assess their reasonableness.

▪ Select a sample of year end goods and review post year end sales invoices to verify NRV (To ascertain if NRV is above cost or if an adjustment is required.)

▪ For a sample of manufactured items obtain cost sheets and confirm:
o raw material costs to recent purchase invoices
o labour costs to time sheets or wage records
o overheads allocated are of a production nature.

▪ Review aged inventory reports and identify any slow moving goods, discuss with management why these items have not been written down.

▪ Review the inventory records to identify the level of adjustments made throughout the year for damaged/obsolete items. If significant consider whether the year end records require further adjustments and discuss with management whether any further write downs/provision may be required. (Or calculate inventory days ratio and compare with prior year to identify any slow moving items requiring writing down)

▪ Follow up any damaged/obsolete items noted by the auditor at the inventory counts attended, to ensure that the inventory records have been updated correctly.

▪ Perform a review of the average inventory days for the current year and compare to prior year inventory days. Discuss any significant variations with management.

▪ Compare the gross margin for current year with prior year. Fluctuations in gross margin could be due to inventory valuation issues. Discuss significant variations in the margin with management.

Question 32

describe the audit process during the inventory count for completeness AT FINAL AUDIT

Answer 32

▪ Cast the inventory sheet and agree to the financial statements (to check if it adds up)

▪ Trace the items on the count sheet (obtained during inventory count day) into the investor listing to ensure the quantities have not been changed and that they agree to the client’s final inventory sheets (which will make up the figure in the financial statements.)

▪ Inspect the inventory listing for the items on the last GRN and GDN obtained during count to ensure cut off is correctly applied (This is more a cut off testing)

Question 33

what are some generic audit procedures you could do for receivables to get the ball rolling

Answer 33

▪ Perform a positive trade receivables circularisation of a representative sample of the company’s yearend balances, for any non-replies, get permission, and send a reminder letter to follow up.

▪ Enquire mang about any long overdue debts

▪ Inspect correspondence with customers for disputes

Question 34

what are the audit procedures for receivables for the assertion

• Valuation/Accuracy & Allocation

Answer 34

▪ Inspect the aged receivables report to identify any slow moving balances, discuss these with the credit
control manager to assess whether an allowance or write down is necessary.

▪ Calculate average receivable days and compare this to prior year, investigate any significant
differences. (and compare this with credit terms)

▪ Review the after date cash receipts and follow through to pre-year-end receivable balances.

▪ Review the reconciliation of sales ledger control account to the sales ledger list of balances

▪ For any slow moving/aged balances review customer correspondence to assess whether there are any invoices in dispute.

▪ Review board minutes to assess whether there are any material disputed receivables.

▪ Review a sample of post year-end credit notes to identify any that relate to pre-year-end transactions to verify that they have not been included in receivables.

▪ Recalculate the allowance for irrecoverable debts and compare with level of old debts to assess adequacy

Question 35

what are the audit procedures for receivables for the assertion

• classification

Answer 35

▪ Review the sales ledger for any credit balances and discuss with management whether these should be
reclassified as payables.

▪ ensure receivables are included in the FS as current assets

Question 36

what are the audit procedures for receivables for the assertion

• existence

Answer 36

select a sample of year end receivable balances and agree back to valid supporting documents (such as GDN and invoices/sales order) included in the listing to confirm amounts as well as existence

Question 37

what are the audit procedures for receivables for the assertion

• rights and valuation

Answer 37

▪ Select a sample of receivables and confirm the trade terms to original credit agreements and sales invoice

Question 38

what are some generic audit procedures you could do for payables to get the ball rolling

Answer 38

▪ Perform a positive trade payables circularisation of a representative sample of the company’s yearend balances, for any non-replies, get permission, and send a reminder letter to follow up.

▪ Obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any
reconciling items.

▪ Enquire mang about any disputes with creditors and inspect any correspondence

Question 39

what are the audit procedures for payables for the assertion

• classification

Answer 39

▪ Review the purchase ledger for any debit balances and discuss with management whether these
should be reclassified as receivables.

Question 40

what are the audit procedures for payables for the assertion

• valuation

Answer 40

▪ Inspect the aged payables report to identify any slow moving balances, discuss these with the purchase ledger control manager to assess whether an allowance or write down is necessary. (also inspect purchase invoices and GRN included on the listing to confirm accuracy of recording)

▪ Calculate average payable days and compare this to prior year, investigate any significant
differences. (and compare this with credit terms given to identify unsual differences and discuss with management)

▪ Inspect post year end bank statements for payments and trace it to the pre year end balance to ensure it was recorded- it not it may indicate unrecorded liabilities

Review the after date cash payments and follow through to pre-year-end payable balances.

▪ Review the reconciliation of purchase ledger control account to the purchase ledger list of balances

▪ For any slow moving/aged balances review supplier correspondence to assess whether there are any
invoices in dispute.

▪ Review board minutes to assess whether there are any material disputed payables.

▪ Review a sample of post year-end credit notes to identify any that relate to pre-year-end transactions to verify that they have not been included in payables. (do accruals need be provided)

Question 41

what are the audit procedures for payables for the assertion

• completeness

Answer 41

▪ Obtain a list of payable balances. Cast and agree to the payable control account and the financial
statements.

▪ Select a sample of goods received notes (GRN) before and just after the year end and follow through
to the purchase invoice to ensure they are recorded in the correct accounting period.

▪ Review the list of trade payables against prior years to identify any significant omissions.

▪ Enquire of management their process for identifying goods received but not invoiced or logged in the
purchase ledger and ensure that it is reasonable to ensure completeness of payables.

Question 42

describe the audit procedures for accruals

Answer 42

▪ Inspect invoices received after the year end that relate to services provided before the year end. Trace
them to any accruals made to ensure completeness and accuracy of the amounts.

▪ Inspect post year end bank statements for payments of accruals to confirm the amount is reasonable

▪ Obtain a list of accruals from the client; cast it to confirm arithmetical accuracy.

▪ Agree the figure per the schedule to the general / nominal ledger and financial statements.

▪ Recalculate a sample of accrued costs by reference to contracts and payment schedules.

▪ Analytically review in comparison to previous period to try and identify if any balances are perhaps missing.

▪ Agree corporation tax accrual to tax computation

▪ Agree payroll tax accrual to payroll records

Question 43

describe the audit procedures for loan and overdraft

Answer 43

▪ Agree the yearend loan balance to any bank confirmation letter/loan statements to confirm obligations, existence and valuation.

▪ Agree interest payments to the loan agreement and the bank statements.

▪ Analyse relevant disclosures of interest rates, amounts due (e.g. between current and noncurrent
payables) to ensure complete and accurate.

▪ Recalculate the interest accrual to ensure arithmetical accuracy.

▪ Inspect the loan agreement for terms and conditions such as restrictive covenants

▪ Recalculate the split of current and non current liabilities and agree to the FS

Question 44

describe the audit procedures for provisions and contingencies

Answer 44

▪ Enquire of management how the accounting estimate is made and the data on which it is based.

▪ Determine whether events occurring up to the date of the auditor’s report (after the reporting period)
provide audit evidence regarding the accounting estimate.

▪ Review the method of measurement used and assess the reasonableness of assumptions made.

▪ Recalculate the provision to confirm arithmetical accuracy

▪ For a legal provision, obtain confirmation from lawyers regarding amount and probability

▪ Inspect board minutes to confirm an obligation exists at year end

▪ Test the operating effectiveness of the controls over how management made the accounting estimate.

▪ Develop an expectation of the possible estimate (point estimate) or a range of amounts to evaluate management’s estimate.

▪ Review the judgments and decisions made by management in the making of accounting estimates to identify whether there are indicators of possible management bias (e.g. to increase profit and therefore bonue)

▪ Evaluate overall whether the accounting estimates in the financial statements are either reasonable or misstated.

▪ Obtain sufficient appropriate audit evidence (e.g. expertise of a lawyer) about whether the disclosures in the financial statements related to accounting estimates and estimation uncertainty are reasonable.

▪ Obtain written representations from management and, where appropriate, those charged with governance whether they believe significant assumptions used in making accounting estimates are
reasonable.

Question 45

describe the audit procedures for cash

Answer 45

▪ Obtain the company’s bank reconciliation and recalculate the additions to ensure arithmetical accuracy.

▪ Obtain a bank confirmation letter from the company’s bankers.

▪ Obtain a listing of bank and cash balances, cast and agree to FS

▪ Verify the balance per the bank statement to an original year end bank statement and also to the bank confirmation letter.

▪ Verify the reconciliation’s balance per the cash book to the year end cash book.

▪ Trace all of the outstanding lodgements to the pre year end cash book, post year end bank statement and also to paying-in-book pre year end.

▪ Examine any old unpresented cheques to assess if they need to be written back into the purchase ledger as they are no longer valid to be presented.

▪ Trace all unpresented cheques through to a pre year end cash book and post year end statement (to confirm they are been cleared in a reasonable time). For any unusual amounts or significant delays obtain explanations from management.

▪ Agree all balances listed on the bank confirmation letter to the company’s bank reconciliations or the trial balance to ensure completeness of bank balances.

▪ Review the cash book and bank statements for any unusual items or large transfers around the year end, as this could be evidence of window dressing.

▪ Examine the bank confirmation letter for details of any security provided by the company or any legal right of set-off as this may require disclosure.

▪ Perform a cash count for any material cash balances or where fraud may be suspected

▪ look at overdraft facilities if nearing their limit

Question 46

describe the audit procedures for Director emoulment

Answer 46

Reconcile reported directors’ salaries to payroll records.
▪ Inspect board minutes for evidence of directors’ bonus announcements.
▪ Reconcile directors’ bonuses to cash payments in the cash book.
▪ Inspect board minutes for approval of related party transactions.
▪ Obtain a written representation from directors that they have disclosed all related party transactions and
director remunerations to the auditor.

Question 47

describe the audit procedures for share capital

Answer 47

▪ Agree authorised share capital and nominal value disclosures to underlying shareholding agreements,
such as company memorandums, articles of association and lists of registered members.
▪ Inspect cash book for evidence of cash receipts from share issues.
▪ Inspect terms of share certificates and reconcile to cash receipts and new share capital totals.
▪ Inspect board minutes to identify if any dividends have been declared prior to the yearend.

Question 48

describe the audit procedures for reserves

Answer 48

▪ Reconcile closing profit reserves to: opening reserves, profit for the year and dividend paid and proposed
during the year.
▪ Compare opening reserves to closing reserves reported in the prior year’s financial statements.
▪ Reconcile movements in revaluation reserves to the noncurrent asset register.
▪ Corroborate revaluations by comparing to independently produced reports.

Question 49

describe the audit procedures for cash forecast

Answer 49

▪ Check that the opening balance of the cash forecast is in agreement with the closing balance of the cash book, to ensure the opening balance of the forecast is accurate.

▪ Consider how accurate company forecasts have been in the past by comparing past forecasts with actual
outcomes. If forecasts have been reasonably accurate in the past, this would make it more likely that the
current forecast is reliable.

▪ Determine the assumptions that have been made in the preparation of the cash flow forecast.

▪ Recalculate and cast the cash flow forecast balances.

▪ Review board minutes for any other relevant issues which should be included within the forecast.

▪ Review the work of the internal audit department in preparing the cash flow forecast.

Question 50

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Answer 50

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Question 51

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Answer 51

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Question 52

commonly, what method are used to test the Profit and loss?

test or control
substantive testing

Answer 52

Test of control which if successful then reduced/some substantive work - (analytical procedures)

if the test of control is not too good then they will do more substantive testing

Question 53

when talking about audit procedures, what assertions are you trying to prove for things in SOPL I.e.1) Transactions and event (SOP/L)

Answer 53

1 Occurrence
2 Cut off
3 Completeness 
4 Accuracy
5 Classification
6 Presentation

Question 54

under statement of PL, which things do you need to know audit procedures for

Answer 54

revenue
purchases
payroll

Question 55

describe the audit procedures for revenue

Answer 55

▪ Compare revenue to prior year, investigate significant differences

▪ Compare revenue against budget, investigate significant differences

▪ calculate Gross Profit Margin and compare to prior year

▪ Inspect GDN’s before and after year end to conform cut off

▪ Inspect sales invoices to confirm accuracy

▪ trace GDNs into sales listing to confirm completeness

Question 56

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Answer 56

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Question 57

describe the audit procedures for purchases

Answer 57

▪ Compare purchases to prior year, investigate significant differences

▪ compare purchases against budget, investigate significant differences

▪ calculate gross profit margin and compare to prior year

▪ inspect GRNs before and after year end to confirm cut off

▪ inspect purchase invoices to confirm accuracy

▪ trace GRN into purchases listing to confirm completeness

Question 58

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Answer 58

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Question 59

describe the audit procedures for payroll

Answer 59

▪ Compare payroll to prior year, investigate significant differences

▪ Compare payroll against budget, investigate significant differences

▪ agree a sample of amounts from the payroll listing to payslips to confirm accuracy

▪ recalculate a sample of employees pay to confirm accuracy

▪ Agree a sample of names from employee contract into payroll listing to confirm completeness

Question 60

What is the primary purpose of the inventory count

Answer 60

The primary objective of the count is to ascertain accurate quantities

NOT to check if it is valued correctly

Question 61

who performs the inventory count

Answer 61

The client performs the inventory count. The external auditor will perform a sample of test counts to ensure the count is accurate.