AUDIT PROCEDURES: -

NOTE:- THIS IS NOT AN EXHAUSTIVE LIST. HOWEVER, IT SHALL PROVIDE VALUABLE

PRACTISE FOR YOUR EXAMINATION
Questions:
1) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
evidence in relation to Comet Publishing Co’s purchases and other expenses.
2) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Heraklion Co’s revenue
3) Describe substantive ANALYTICAL PROCEDURES you should perform to confirm Bronze Industries
Co’s payroll expense.
4) Describe substantive procedures you should perform at the final audit to confirm the completeness
and accuracy of Trombone Co’s payroll expense.
5) Describe the audit procedures required in respect of the year-end accrual for tax payable on
employment income.
6) Describe substantive procedures the auditor should perform to confirm the bank and cash balance
of Fox Industries Co at the year-end.
7) Describe the procedures to be undertaken by the auditor DURING the inventory count of Lily
Window Glass Co in order to gain sufficient appropriate audit evidence.
8) Describe FOUR audit procedures that could be carried out using computer assisted audit techniques
(CAATS)
9) Describe substantive procedures you should perform at the year-end to confirm each of the following
for plant and equipment: (i) Additions; and (ii) Disposals.
10) Describe substantive procedures the auditor should perform on the year-end trade payables of
Greystone Co.
11) Describe substantive procedures an auditor would perform in verifying a company’s bank balance.
12) Describe the steps the auditor should perform in undertaking a positive receivables circularisation
for Dashing Co.
13) Describe substantive procedures, other than a receivables circularisation, the auditor should perform
to verify EACH of the following assertions in relation to Dashing Co’s receivables: (i) Accuracy,
valuation and allocation (ii) Completeness, and (iii) Rights and obligations.
14) Describe substantive procedures the auditor should perform to confirm the redundancy provision at
the year end.
15) Describe substantive procedures the auditor should perform to confirm the directors’ remuneration
included in the financial statements at the year end.
16) Describe the procedures which the auditor of Elounda Co should perform in assessing whether or not
the company is a going concern.
17) Describe audit procedures you would perform during the audit of Andromeda Industries Co in
relation to research and development expenditure
18) Describe substantive procedures an auditor would perform in verifying a company’s Non-current
Liabilities
19) Describe substantive procedures an auditor would perform in verifying a company’s Non-current
asset’s Depreciation.
20) Describe the procedures to be undertaken by the auditor BEFORE attending the inventory count.
21) Substantive procedures to be performed during the final audit of Inventory Balance.
22) Describe substantive procedures an auditor would perform in verifying a company’s Accounting
Estimate.
ANSWERS:-

1. 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.

2. 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 cutoff has been correctly applied.

3. Substantive analytical procedures to confirm payroll expense

 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 any significant variances.
  Compare overtime pay as a percentage of factory normal hours pay to investigate whether it is at a
similar level to the prior year and within an acceptable range. Investigate any significant differences.
 Perform a proof in total of total wages and salaries, incorporating joiners and leavers and any pay
increase. Compare this to the actual wages and salaries in the financial statements and investigate
any significant differences

4. 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.

5. Procedures for Accrual for income tax payable on employment income:

 Agree the year-end income tax payable accrual to the payroll records to confirm accuracy.
 Recalculate the accrual to confirm accuracy.
 Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.
 Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due; if so, agree they are included in the year-end accrual.
 Review any disclosures made of the income tax accrual and assess whether these are in compliance
with accounting standards and legislation.

6. Substantive procedures over bank and cash balance of Fox Industries Co (Fox)
 Obtain Fox’s current bank account reconciliation and check the additions to ensure arithmetical
accuracy.
 Obtain a bank confirmation letter from Fox’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 Fox’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 Fox 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.

7. 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.

8. Audit procedures using CAATS

  The audit team can use audit software to calculate inventory days for the year-to-date to compare
against the prior year to identify whether inventory is turning over slower, as this may be an
indication that it is overvalued.
 Audit software can be utilised to produce an aged inventory analysis to identify any slow-moving
goods, which may require write down or an allowance.
 Cast the inventory listing to confirm the completeness and accuracy of inventory.
 Audit software can be used to select a representative sample of items for testing to confirm net
realisable value and/or cost.
 Audit software can be utilised to recalculate cost and net realisable value for a sample of inventory.
 CAATs can be used to verify cut-off by testing whether the dates of the last GRNs and GDNs recorded
relate to pre year-end; and that any with a date of 1 January 20X3 onwards have been excluded from
the inventory records.
 CAATs can be used to confirm whether any inventory adjustments noted during the count have been
correctly updated into final inventory records.

9. Substantive procedures – 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.

10. Substantive procedures over year-end 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 cut-off.
 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.

11. Substantive procedures over bank balance

 Obtain the company’s bank reconciliation and cast to ensure arithmetical accuracy.
 Obtain a bank confirmation letter from the company’s bankers.
 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 bank
statement. 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.

12. Steps in undertaking a positive receivables circularisation for Dashing Co

 Obtain consent from the finance director of Dashing Co in advance of undertaking the circularisation.
 Obtain a list of trade receivables at the year end, cast this and agree it to the sales ledger control
account total.
 Select a sample from the receivables list ensuring that a number of nil, old, credit and large balances
are selected.
 Circularisation letters should be prepared on Dashing Co’s letterhead paper, requesting a
confirmation of the year-end receivables balance, and for replies to be sent directly to the audit team
using a pre-paid envelope.
 The finance director of Dashing Co should be requested to sign all the letters prior to them being sent
out by a member of the audit team.
 Where no response is received, follow this up with another letter or a phone call and where necessary
alternative procedures should be performed
 When replies are received, they should be reconciled to Dashing Co’s receivables records, any
differences such as cash or goods in transit should be investigated further.
 13. Receivables substantive procedures

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. Tutorial note: Marks will be awarded for any other
relevant receivables tests.

14. Substantive procedures to confirm the redundancy provision

 Discuss with the directors of Dashing Co as to whether they have formally announced their intention
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.
 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 Asset
15. 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

16. Going concern procedures

 Obtain Elounda’s cash flow forecast and review the cash in and out flows. Assess the assumptions for
reasonableness and discuss the findings with management to understand if the company will have
sufficient cash flows to meet liabilities as they fall due.
 Discuss with management their ability to settle the next instalment due for repayment to the bank
and the lump sum payment of $800k in January 20X7 and ensure these have been included in the
cash flow forecast.
 Review current agreements with the bank to determine whether any key ratios or covenants have
been breached with regards to the bank loan or any overdraft.
 Review the company’s post year-end sales and order book to assess the levels of trade and if the
revenue figures in the cash flow forecast are reasonable.
 Review post year-end correspondence with suppliers to identify whether any restrictions in credit
have arisen, and if so, ensure that the cash flow forecast reflects the current credit terms or where
necessary an immediate payment for trade payables.
 Enquire of the lawyers of Elounda Co as to the existence of litigation and claims; if any exist, then
consider their materiality and impact on the going concern basis.
 Perform audit tests in relation to subsequent events to identify any items which might indicate or
mitigate the risk of going concern not being appropriate.
 Review the post year-end board minutes to identify any other issues which might indicate financial
difficulties for the company.
 Review post year-end management accounts to assess if in line with cash flow forecast and to identify
any issues which may be relevant to the going concern assessment.
 Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the financial
statements.
 Obtain a written representation confirming the directors’ view that Elounda Co is a going concern.

17. Research and development

  Obtain and cast a schedule of intangible assets, detailing opening balances, amount capitalised in the
current year, amortisation and closing balances.
 Agree the opening balances to the prior year financial statements.
 Agree the closing balances to the general ledger, trial balance and draft financial statements.
 Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is line with the amortisation policy of straight line over five years.
 For the five new projects, discuss with management the details of each project along with the stage
of development and whether it has been capitalised or expensed.
 For those expensed as research, agree the costs incurred to invoices and supporting documentation
and to inclusion in profit or loss.
 For those capitalised as development, agree costs incurred to invoices and confirm technically
feasible by discussion with development managers or review of feasibility reports.
 Review market research reports to confirm Andromeda has the ability to sell the product once
complete and probable future economic benefits will arise.
 Review the disclosures for intangible assets in the draft financial statements are in accordance with
IAS 38 Intangible Assets.

18. Non-current Liabilities procedures:

 Obtain a breakdown of all loans outstanding at the year-end, cast to verify arithmetical accuracy and
agree the total to the financial statements: completeness.
 Agree the balance outstanding to the bank confirmation letter: accuracy & valuation, rights &
obligations.
 Inspect bank confirmation letters for any loans listed that have not been included in the financial
statements: completeness
 Inspect the bank confirmation letter for details of any security over assets and agree the details to
the disclosure in the financial statements: presentation
 Inspect financial statements for disclosures of interest rates, and the split of the loan between current
and non-current: allocation, classification, presentation.
 Recalculate the split between current and non-current liabilities: allocation, classification, and
presentation.
 Inspect the loan agreement for restrictive covenants (terms) and determine the effect of any loan
covenant breaches: allocation, classification, presentation. [If loan covenants have been breached
the loan may become repayable immediately and should therefore be included as a current liability].
 Inspect the cash book for loan repayments made: existence, accuracy & valuation.
 For the related finance cost in the statement of profit or loss, recalculate the interest charge and any
interest accrual in accordance with terms within the loan agreement, to ensure mathematical
accuracy: accuracy of finance costs in the statement of profit or loss, completeness of accruals.

19. Non-current asset’s Depreciation procedures:

 Inspect the capital expenditure budgets for the next few years to assess the appropriateness of
the useful economic lives in light of plans to replace assets: verifies valuation
 Recalculate the depreciation charge for a sample of assets to verify arithmetical accuracy:
verifies accuracy, valuation.
  Inspect the financial statement disclosure of the depreciation charges and policies in the draft
financial statements and compare to the prior year to ensure consistency: verifies presentation.
 Recalculate the depreciation charge for revalued assets to ensure the charge is based on the
new carrying value: verifies accuracy, valuation.
 Review profits and losses on disposal of assets disposed of in the year to assess the
reasonableness of the depreciation policies (if depreciation policies are reasonable, there
should not be a significant profit or loss): verifies valuation.
 Compare depreciation rates to companies with the same type of assets to assess
reasonableness: verifies valuation.
 Perform a proof in total calculation for the depreciation charged for each category of assets,
discuss with management if significant fluctuations arise: verifies completeness, valuation.
(Analytical procedure)

20. Procedures Before Inventory Count:

 Contact the client to obtain a copy of the inventory count instructions to understand how the count
will be conducted and assess the effectiveness of the count process.
 Inspect prior year working papers to understand the inventory count process and identify any issues
that should be taken into account this year.
 Book audit staff to attend the inventory counts.
 Consider the need for using an expert to assist in valuing the inventory being counted.
 Ascertain whether any inventory is held by third parties, and if possible, make arrangements to visit
the third party site to obtain sufficient appropriate evidence.
 Alternatively, send a letter requesting direct confirmation of inventory balances held at the year-
end from any third party warehouse providers regarding quantities and condition of inventory held
on behalf of the client.

21. Substantive procedures during the final audit of Inventory:

 Trace the items counted during the inventory count to the final inventory list to ensure it is the
same as the one used at the year-end and to ensure that any errors identified during counting
procedures have been rectified: verifies completeness, presentation.
 Cast the list (showing inventory categorised between finished goods, WIP and raw materials) to
ensure arithmetical accuracy and agree totals to financial statement disclosures: verifies
completeness, classification.
 Inspect purchase invoices for a sample of inventory items to agree their cost: verifies valuation.
 Inspect purchase invoices for the name of the client: verifies rights and obligations.
 Inspect post year-end sales invoices for a sample of inventory items to determine if the net
realisable value is reasonable. This will also assist in determining if inventory is held at the lower
of cost and net realisable value: verifies valuation.
 Inspect the ageing of inventory items to iden fy old/slow moving amounts that may require an
allowance, and discuss these with management: verifies valuation.
 Recalculate work-in-progress and finished goods valuations using payroll records for labour
costs and utility bills for overhead absorption: verifies valuation.
 Trace the good received immediately prior to the year-end to year-end payables and inventory
balances: verifies completeness & existence.
  Trace goods despatched immediately prior to year-end to the nominal ledgers to ensure the
items are not included in inventory and revenue (and receivables where relevant) has been
recorded: verifies completeness & existence.
 Calculate the inventory holding period and compare this to prior year to identify slow-moving
inventory which requires an allowance to bring the value down to the lower of cost and NRV:
verifies valuation. (Analytical procedure)
 Calculate gross profit margin and compare this to prior year, investigate any significant
differences that may highlight an error in cost of sales and closing inventory: verifies valuation.
(Analytical procedure)

22. Accounting estimate substantive procedures:

 Obtain an understanding of how management identifies those transactions, events and

conditions that give rise to the need for an estimate.

For each estimate in the financial statements, the auditor must also:
 Enquire of management how the accounting estimate is made and the data on which it is based.
 Review the outcome of accounting estimates included in the prior period financial statements.
 Determine whether events up to the date of the auditor's report provide additional evidence
with regard to the appropriateness of estimates.
 Test how management made the estimate and evaluate whether the method is appropriate.
 Test the effectiveness of controls over estimations.
 Develop a point estimate to use in comparison to managements'.
 If there are significant risks associated with estimates the auditor should also enquire whether
management considered any alternative assumptions and why they rejected them and whether
the assumptions used are reasonable in the circumstances.
 Obtain written representations from management confirming that they believe the
assumptions used in making estimates are reasonable