Substantive procedures for purchases and other expenses

– Calculate the operating profit and gross profit margins and compare them to last year and budget
and investigate any significant differences.

− Review monthly purchases and other expenses to identify any significant fluctuations and discuss
with management.

− Discuss with management whether there have been any changes in the key suppliers used and
compare this to the purchase ledger to assess completeness and accuracy of purchases.

− Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure
expense has been included in the correct nominal code.

− Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the
expense charge included in the statement of profit or loss.

− Select a sample of post year-end expense invoices and ensure that any expenses relating to the
current year have been included.

− Select a sample of payments from the cash book and trace to expense account to ensure the
expense has been included and classified correctly.

− Select a sample of goods received notes (GRNs) from throughout the year; agree them to purchase
invoices and the purchase day book to ensure the completeness of purchases.

− Select a sample of GRNs just before and after the year end; agree to the purchase day book to
ensure the expense is recorded in the correct accounting period.

Summary - Substantive tests for purchases and other expenses

• Calculate operating and gross margin and compare to PY

• Review monthly purchases and investigate unexpected difference

• Discuss changes in key suppliers and compare to purchase ledger

• Recalculate a sample of purchase invoices

• Recalculate prepayments and accruals

• Review post year-end invoices for pre year-end liabilities

• Sample of cash book payments to appropriate expense account

• GRNs to purchase invoice to purchase day book

• Cut-off testing using GRNs

Revenue substantive procedures
• Compare the overall level of revenue against prior years and budgets and investigate any
significant fluctuations.

• Obtain a schedule of sales for the year broken down into the main product categories and
compare this to the prior year breakdown and for any unusual movements discuss with
management.

• Calculate the gross profit margin for Heraklion Co and compare this to the prior year and
investigate any significant fluctuations.

• Select a sample of sales invoices for customers and agree the sales prices back to the price list or
customer master data information to ensure the accuracy of invoices.

• Select a sample of credit notes raised, trace through to the original invoice and ensure the invoice
has been correctly removed from sales.

• Select a sample of customer orders and agree these to the despatch notes and sales invoices
through to inclusion in the sales ledger and revenue general ledger accounts to ensure completeness
of revenue.

• Select a sample of despatch notes both pre and post year-end and follow these through to sales
invoices in the correct accounting period to ensure that cut off has been correctly applied.

Summary - Substantive procedures for revenue

• Analytical review over revenue compared to budget and prior year

• Analytical review of main product categories of sales compared to prior year

• Gross margin review

• Agree sales prices for customers to price list or master file data

• Review credit notes

• Follow orders to goods despatched note to sales invoice to sales ledger

• Sales cut-off
Payroll substantive procedures
• Agree the total wages and salaries expense per the payroll system to the trial balance, investigate
any differences.

• Cast a sample of payroll records to confirm completeness and accuracy of the payroll expense.

• For a sample of employees, recalculate the gross and net pay and agree to the payroll records to
confirm accuracy.

• Recalculate the statutory deductions to confirm whether correct deductions for this year have
been made in the payroll.

• Compare the total payroll expense to the prior year and investigate any significant differences.

• Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management for any significant variances.

• Perform a proof in total of total wages and salaries, incorporating joiners and leavers and the
annual pay increase. Compare this to the actual wages and salaries in the financial statements and
investigate any significant differences.

• Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation,
recalculate that their first/last pay packet was accurately calculated and recorded.

• Agree the total net pay per the payroll records to the bank transfer listing of payments and to the
cashbook.

• Agree the individual wages and salaries per the payroll to the personnel records for a sample.

• Select a sample of weekly overtime sheets and trace to overtime payment in payroll records to
confirm completeness of overtime paid.

Summary- Payroll substantive procedure.

• Agree wages and salaries per payroll to trial balance

• Cast payroll records

• Recalculate gross and net pay

• Recalculate statutory deductions

• Compare total payroll to prior year

• Review monthly payroll to prior year and budget

• Proof in total of payroll and agree to the financial statements

• Verify joiners/leavers and recalculate first/last pay

• Agree wages and salaries paid per payroll to bank transfer list and cashbook

• Agree the individual wages and salaries as per the payroll to the personnel records

• Agree sample of weekly overtime sheets to overtime payment in payroll records

Substantive procedures over bank and cash balance
• Obtain client’s current bank account reconciliation and check the additions to ensure arithmetical
accuracy.

• Obtain a bank confirmation letter from client’s bankers for all of its accounts.

• For the current account, agree the balance per the bank statement to an original year-end bank
statement and also to the bank confirmation letter.

• Agree 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.

• Trace all un-presented cheques through to a pre year-end cash book and post year-end statement.
For any unusual amounts or significant delays obtain explanations from management.

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

• Agree all balances listed on the bank confirmation letter to client’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 client or any legal
right of set-off as this may require disclosure.

• For the saving (deposit) bank accounts, review any reconciling items on the year-end bank
reconciliations and agree to supporting documentation.

• In respect of material cash balances, count cash balances at the year-end and agree to petty cash
records, such as the petty cash book.

• Review the financial statements to ensure that the disclosure of cash and bank balances are
complete and accurate.

Summary- Bank & Cash Balance substantive procedure

• Check additions of bank reconciliation

• Obtain bank confirmation letter

• Bank balance to statement/bank confirmation

• Cash book balance to cash book

• Outstanding lodgements

• Unpresented cheques review

• Old cheques write back

• Agree all balances on bank confirmation

• Unusual items/window dressing

• Security/legal right set-off

• Review reconciliations for saving (deposit) accounts

• Cash counts for significant cash balances

• Review disclosure of bank and cash in financial statements

Procedures during the inventory count
• Observe the counting teams of Lily to confirm whether the inventory count instructions are being
followed correctly.

• Select a sample and perform test counts from inventory sheets to warehouse aisle and from
warehouse aisle to inventory sheets.

• 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 windows to
confirm whether the level of damage is correctly noted.

• 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.

• Identify and make a note of the last goods received notes (GRNs) and goods despatched notes
(GDNs) for 31 December in order to perform cut-off procedures.

• Observe the procedures carried out by the warehouse manager in assessing the level of work-in-
progress and consider the reasonableness of any assumptions used.

• 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.

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

Summary - Procedures during the inventory count

• Observe the counters to confirm if inventory count instructions are being followed

• Perform test counts inventory to sheets and sheets to inventory

• Confirm procedures for damaged goods are operating correctly

• Inspect damaged goods to confirm whether the level of damage is correctly noted

• Observe procedures for movements of inventory during the count

• Obtain a photocopy of the completed inventory sheets

• Identify and make a note of the last goods received notes and goods despatched notes

• Observe the procedures carried out by warehouse manager in assessing the level of work-in-
progress

• Discuss with the warehouse manager how he has estimated the raw materials quantities

• Identify inventory held for third parties and ensure excluded from count
Substantive procedures –Asset Additions and disposals
Additions
• Obtain a breakdown of additions, cast the list and agree to the non-current asset register to
confirm completeness of plant & equipment (P&E).

• Select a sample of additions and agree cost to supplier invoice to confirm valuation.

• Verify rights and obligations by agreeing the addition of plant and equipment to a supplier invoice
in the name of Pear.

• Review the list of additions and confirm that they relate to capital expenditure items rather than
repairs and maintenance.

• For a sample of additions recorded in P&E physically verify them on the factory floor to confirm
existence.

Disposals
• Obtain a breakdown of disposals, cast the list and agree all assets removed from the non-current
asset register to confirm existence.

• Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry
sales invoices.

• Recalculate the profit/loss on disposal and agree to the income statement.

Substantive procedures –Asset Additions and disposals

Additions
• Cast list of additions and agree to non-current asset register

• Vouch cost to recent supplier invoice

• Agree addition to a supplier invoice in the name of Pear to confirm rights and obligations

• Review additions and confirm capital expenditure items rather than repairs and maintenance

• Physically verify them on the factory floor to confirm existence

Disposals
• Cast list of disposals and agree removed from non-current asset register

• Vouch sale proceeds to supporting documentation such as sundry sales invoices

• Recalculate the profit/loss on disposal

Substantive procedures over Trade payables
• Obtain a listing of trade payables from the purchase ledger and agree to the general ledger and the
financial statements.

• Reconcile the total of purchase ledger accounts with the purchase ledger control account, and cast
the list of balances and the purchase ledger control account.

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

• Calculate the trade payable days for Greystone and compare to prior years, investigate any
significant differences.

• Review after date payments, if they relate to the current year then follow through to the purchase
ledger or accrual listing to ensure completeness.

• Review after date invoices and credit notes to ensure no further items need to be accrued.

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

• Select a sample of payable balances and perform a trade payables’ circularisation, follow up any
non-replies and any reconciling items between balance confirmed and trade payables’ balance.

• 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.

• Select a sample of goods received notes before the year-end and follow through to inclusion in the
year-end payables balance, to ensure correct cutoff.

• Review the purchase ledger for any debit balances, for any significant amounts discuss with
management and consider reclassification as current assets.

• Review the financial statements to ensure payables are included as current liabilities.

Summary - Substantive procedures over Trade payables

• Agree purchase ledger to general and financial statements

• Review payable to prior year

• Calculate trade payables

• After date payments review

• After date invoices/credit notes review

• Supplier statement reviews

• Payables’ circularisation

• Goods received not invoiced

• Cut-off testing

• Debit balances review • Disclosure within current liabilities

Substantive procedures over Receivables
Accuracy, valuation and allocation

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

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

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

• Review board minutes of Dashing Co to assess whether there are any material disputed
receivables.

Completeness

• Select a sample of goods despatched notes from before the year end, agree to sales invoices and
to inclusion in the sales ledger and year-end receivables ledger.

• Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial
balance.

• Obtain the prior year aged receivables listing and for significant balances compare to the current
year receivables listing for inclusion and amount due.

• Discuss with management any missing receivables or significantly lower balances.

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

Rights and obligations

• Review bank confirmations and loan agreements for any evidence that receivables have been
assigned as security for amounts owed by Dashing Co.

• Review board minutes for evidence that legal title to receivables has been sold onto a third party
such as a factor.

• For a sample of receivables, agree the balance recorded on the sales ledger to the original name of
the customer on a sales order or a contract.
Substantive procedures to confirm the redundancy provision
• Discuss with the directors of Dashing Co as to whether they have formally announced their
intention to close the production site and make their employees redundant, to confirm that a
present obligation exists at the year end.

• If announced before the year end, review supporting documentation to verify that the decision has
been formally announced.

• Review the board minutes to ascertain whether it is probable that the redundancy payments will
be paid.

• Obtain a breakdown of the redundancy calculations by employee and cast it to ensure

completeness and agree to trial balance.

• Recalculate the redundancy provision to confirm completeness and agree components of the
calculation to supporting documentation such as employee contracts.

• Review the post year-end cash book to identify whether any redundancy payments have been
made, compare actual payments to the amounts provided to assess whether the provision is
reasonable.

• Obtain a written representation from management to confirm the completeness of the provision.

• Review the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

Summary- Substantive procedures to confirm the redundancy

provision
• Discuss with directors when announcement was made

• If before year end, agree to supporting documentation

• Review board minutes for details of redundancy payments

• Obtain a breakdown of redundancy calculations

• Recalculate the redundancy provision

• Review post y/e cash book for payments

• Obtain written representation

• Review disclosure in FS
Substantive procedures for directors’ remuneration
• Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in December and
cast the schedule to ensure accuracy.

• Agree a sample of the individual monthly salary payments and the bonus payment in December to
the payroll records.

• Confirm the amount of each bonus paid by agreeing to the cash book and bank statements.

• Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.

• Agree the amounts paid per director to board minutes to ensure the sums included are genuine.

• Obtain a written representation from management confirming the completeness of directors’

remuneration including the bonus.

• Review the disclosures made regarding the directors’ remuneration and assess whether these are
in compliance with local legislation.

Summary- Substantive procedures for directors’ remuneration

• Cast schedule of remuneration • Review board minutes for additional remuneration

• Agree payments to payroll records • Obtain written representation confirming

completeness • Confirm bonus payments to cash book
Summary- Substantive procedures for revaluation of property,
plant and equipment (PPE)
• Cast schedule of PPE revalued this year and agree to TB/FS

• Consider reasonableness of the valuer’s qualifications, membership of professional body and

experience

• Discuss with management if the valuer has financial interests in the company which may impact his
independence

• Agree the revalued amounts to the valuation statement

• Consider if all items in the same class of assets have been revalued

• Agree the revalued amounts included correctly in the noncurrent assets register

• Recalculate the total revaluation adjustment and agree recorded in the revaluation surplus

• Recalculate the depreciation charge for the year

• Review the financial statements disclosures for compliance with IAS 16

Substantive procedures for supplier statement reconciliations
• Select a representative sample of year-end supplier statements and agree the balance to the
purchase ledger of client. If the balance agrees, then no further work is required.

• Where differences occur due to invoices in transit, confirm from goods received notes (GRN)
whether the receipt of goods was pre year-end, if so confirm that this receipt is included in year-end
accruals.

• Where differences occur due to cash in transit from Hawthorn to the supplier, confirm from the
cashbook and bank statements that the cash was sent pre year-end.

• Discuss any further adjusting items with the purchase ledger supervisor to understand the nature
of the reconciling item, and whether it has been correctly accounted for.

Substantive procedures for supplier statement reconciliations

• Select a sample of supplier statements and agree the balance to the purchase ledger

• Invoices in transit, confirm via GRN if receipt of goods was pre year-end, if so confirm included in
year-end accruals

• Cash in transit, confirm from cashbook and bank statements the cash was sent pre year-end

• Discuss any further adjusting items with the purchase ledger supervisor89