Substantive procedures for completeness of trade payables and accruals:

- Calculate payables payment period for Pacific Co., compare to prior years and investigate
any significant differences, in particular any decrease this year due to the inclusion of the
payment run on 01 June.
- Compare the total trade payable or major supplier balances and goods received but not
invoiced accrual against prior year and investigate any significant difference
- Compare the list of accruals this year with the prior year to identify any missing item or
unusual fluctuation and discuss with management
- Discuss with management the process they have undertaken to quantify misstatement of
trade payables due to the payment run and consider the materiality of the error in isolation
as well as with other misstatements found
- Review the journal entry processed to correct the misstatement of the trade payables due to
the payment run to ensure all errors have been included
- Select a sample of purchase invoices around the year end. Ascertain, through reviewing
goods received note, if the goods were received pre or post year end. If post year end, then
confirm that they have been excluded from the ledger
- Review after date payments, if they relate to the current year, then follow through to the list
of individual supplier balances or GRNI accrual to ensure they have been recorded in the
current year
- Reperform a sample of supplier statement reconciliations and agree these to the list of
individual supplier balances. Investigate any reconciling item
- Select a sample of trade payables balances and perform a trade payables circularization,
follow up any non-responses and any reconciling items between the balances confirmed and
the trade payable balances

Substantive procedures for provision for legal claim

- Enquire with the directors or inspect relevant supporting documents to confirm if there is
present obligation at the year end
- Discuss with directors how the mislabeling of ingredients alleged to have occurred and
whether it is likely that any other customers have been affected
- Inspect board minutes to ascertain whether the payment is probable
- Inspect the post year end bank statement to identify whether any payments have been
made in respect of the claim
- Review the correspondence with the lawyer or with the permission of the client contact the
lawyer to obtain confirmation regarding the claim to assess whether a provision should be
recognized and whether the amount of the provision is material
- Review the correspondence or discuss with lawyer the likelihood and amount of other
potential future claims
- If evidence indicates that it is only possible that the claim will be successful, inspect the
financial statements for contingent liability disclosures to ensure compliance with IAS 37.
- Obtain written representation from the management confirming their view that they have
obligation at the year end in respect of the claim and that it is appropriate to include a
provision

Substantive Analytical Procedures for Revenue

- Compare the overall level of revenue against the prior years and discuss the reasons for the
9.4% increase with management and agree to the supporting documentation
 - Compare the overall level of revenue with the budget for the year and investigate any
significant fluctuations
- Obtain a schedule of sales for the year disaggregated into the eight main product lines and
compare this to the prior year break down and budget to understand what impact the new
products have had on revenue. For any unusual movements, discuss with management
- Obtain a schedule of sales for the year analysed for the existing 13 stores. Compare this to
the prior year and discuss any unusual movements / fluctuations with management
- Calculate gross profit margin for Pacific Co and compare this to the prior year and
investigate any significant fluctuations

Auditor’s Report:

- The financial statements contain a provision for legal claims of $0.5 million, however, audit
wok has identified that the provision should be $0.8 million. Hence the provision is
understated and profits overstated by $0.5m.
- The error of $0.3m represent 7.3% of profit before tax and 0.66% of revenue, hence is a
material matter
- If the finance director refuses to increase the provision, the audit opinion will be modified
due to material misstatement. As provision is understated and the error is material but not
pervasive, a qualified opinion would be necessary
- A basis for qualified opinion paragraph would be needed subsequent to the opinion
paragraph and would explain the material misstatement in relation to the understated
provision for legal claims and effect on the financial statement. The opinion para will be
qualified ‘except for’

From Book:

Substantive procedures for Revenue:

- Cast a break down of revenue and agree to the general ledger, trial balance and draft
financial statements
- Compare the overall level of revenue with prior year/budget and investigate any significant
fluctuations
- Obtain a breakdown of sales analyzed by month and compare this to the prior year/month.
Investigate any significant fluctuations

Bank Loan Substantive Procedures:

- Obtain a breakdown of all loans outstanding at the year-end, cast to verify arithmetical
accuracy and agree the total to the financial statement
- Agree the balances outstanding to the bank confirmation letter
- Inspect the bank confirmation letter for any loans listed that have not been included in the
financial statements
- Inspect the bank confirmation letter for details of any security over assets and agree the
disclosure in the financial statements; Presentation
- Inspect financial statement for disclosures of interest rates and split of the loan between
current and non-current; allocation, classification and presentation
- Recalculate the split between current and non-current liabilities
- Inspect the loan agreement for restrictive covenants and determine the effect of any
covenant breaches. If loan covenant have been breached the loan may become repayable
immediately and should therefore be included in non-current liabilities
 - Inspect the bank ledger account for loan repayment made
- For the related finance cost in the statement of profit and loss recalculate the interest
charge and any interest accrual in accordance with terms within the loan agreement to
ensure mathematical accuracy

Development Cost:

- Obtain a breakdown of capitalized cost, cast for mathematical accuracy and agree to the
amount included in the financial statements
- For a sample of costs included in the breakdown, agree the amount to invoice or timesheets
- Inspect board minutes for any discussions relating to the intended sale or use of asset
- Discuss details of the project with project manager or management to evaluate compliance
with IAS 38 criteria
- Inspect project plans and other documentation to evaluate compliance with IAS 38 criteria
- Inspect budgets to confirm financial feasibility
- Review the financial statement disclosures in the draft financial statements to ensure
compliance with IAS 38

Other Intangible Assets:

- Inspect purchase documentation for the company name and the cost of purchased
intangible assets
- Inspect specialist valuation report and agree to the amount included in the general ledger
and the financial statements

Amortization:

- Inspect the budget forecast for the next few years to ascertain the period over which
economic benefits are expected to be generated and compare with the amortization policy
to assess reasonableness of the amortization policy
- Recalculate the amortization charge to verify arithmetical accuracy
- For intangibles such as license, inspect the license agreement to confirm the amortization
period corresponds to the license period

Inventory:

- Inspect GRNs and GDNs around the years end to ensure cut off. Goods received before the
year end should be included in the inventory listing while goods received after year end
should not be included in the closing inventory. Similarly, goods dispatched before the year
end should not be included within inventory whereas goods dispatched should be included
in the year end balance
- Review purchase invoices and post year end sales invoices to ascertain if net realizable value
is above cost or if an adjustment is required
- Calculate and compare inventory holding period with the prior year to identify slow-moving
inventory which needs to be written down to the lower of cost and net realizable value
- Inspect purchase invoices for the name of client to confirm rights and obligations
- Review the disclosures in the financial statements to ensure compliance with applicable
financial reporting framework.

Work-in-progress (WIP)
 - Obtain a schedule itemizing the jobs included in WIP at the year end, cast it and agree the
total to the general ledger and draft financial statements
- Agree a sample of items from the schedule to the inventory count records to confirm
existence
- Agree cost to supporting documentation such as supplier’s invoice and payroll records
- For overheads absorbed in the WIP valuation discuss the absorption method used with
management and assess its reasonableness
- Discuss with the production manager how the percentage of completion has been
determined at the year end and agree the stage of completion to the inventory records
- Confirm the net realizable value is greater than cost by comparing the contract price with
the WIP value plus costs to complete

Standard Cost:

- Obtain a break down 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 to
reflect current costs
- Inspect the variance account and assess the level of variance for reasonableness. Discuss
with management any significant variances arising

Receivables:

- Obtain a list of individual customers with balances outstanding at the year end, cast this and
agree it to the trade receivables account
- Circularize confirmation letter to a sample of receivables
- Where no response received, perform alternative procedures such as after date cash testing
and inspection of sales invoices and GDNs relating to the receivables
- When replies received they should be reconciled to the client’s receivables records and any
differences such as cash or goods in transit should be investigated further

Prepayments:

- Inspect bank statements and bank ledger account to ensure payment has been made before
the year end; existence
- Recalculate the amount prepaid to confirm mathematical accuracy; valuation
- Compare prepayments with prior year to identify any missing items or any new prepayment
which requires further testing.

Payables and Accruals

- Obtain a list of individual suppliers at the year end, cast to verify arithmetical accuracy and
agree to the general ledger and financial statements; completeness, classification,
presentation
- Reconcile the total list of individual suppliers with the trade payables account; completeness
- Obtain a supplier statement and reconcile these to the list of individual supplier balances.
Investigate any reconciling items; existence, valuation, rights and obligation
- Inspect after-date payments, if relate to the current year then follow through to the
individual supplier’s account or accruals listing; completeness
- Inspect invoices received after the year end in respect of goods delivered before the year
end and trace through to the accruals listing; completeness
 - Enquire management of their process for identifying goods received but not invoiced and
ensure it is reasonable; completeness
- Select a sample of goods received notes immediately before the year end and follow
through to the inclusion in the year-end individual supplier’s account or accruals listing;
completeness of payables and cut-off of purchases
- Select a sample of payable balances and perform trade payables’ circularization, follow up
any non-replies and any reconciling items between the balance confirmed and individual
supplier’s account; completeness and existence
- Inspect the list of suppliers for any debit balances or any significant amount and discuss with
management
- Compare the list of individual suppliers and accruals with prior year and list to identify any
significant omissions
- Calculate trade payable payment period and compare to the prior year, investigate any
significant differences

Accruals:

- Obtain a list of accruals from the client and cast it to the confirm mathematical accuracy and
agree to the general ledger and financial statements; completeness, classification
- Recalculate a sample of accrued costs by reference to contracts and payment schedules (e.g.
loan interest)
- Inspect invoices received post year end to confirm the amount and assess whether the
accrual is reasonable
- Compare the accruals this year with last year to identify any missing items or unusual
fluctuation in amount and discuss this with management

Provisions and Contingent Liabilities:

- Obtain a breakdown of provisions, cast it and agree the figure to the financial statements;
accuracy and presentation
- Enquire with the directors or inspect relevant supporting documentation to confirm that a
present obligation exists at the year-end; rights and obligations
- Inspect relevant board minutes to ascertain whether payment is probable; existence
- Recalculate the liability and agree components of calculation to the supporting
documentation; completeness
- Inspect post year end bank statement to identify any payments have been made, compare
actual payments to the amount provided to assess whether the provision is reasonable;
valuation
- Review the financial statement disclosures of the provisions and contingent liabilities to
ensure compliance with IAS 37; presentation
- Obtain a written representation from the management that they believe the provision and
contingent liabilities are treated appropriately in the financial statements, are valued
appropriately and are complete

Warranty provision procedures:

- Obtain a breakdown of warranty provision and recalculate to verify arithmetical accuracy

- Enquire management the basis used for the provision and assess whether this is reasonable
- Compare previous year actual warranty cost with the amount provided to assess whether
management’s process is reasonable
 - Compare warranty claims post year end to the warranty provision at the year end to assess
whether the provision is adequate
- Review product returns and complaints to assess whether there is a need for a higher
provision then in previous years
- Calculate warranty cost/revenue and compare with prior year to assess whether the level of
provision is consistent with prior year. Discuss any change in proportion with management

Legal Provision:

- Inspect relevant board minutes to ascertain whether it is probable that the payment will be
made
- Obtain confirmation from lawyer about the likely outcome and probability of payment
- Inspect the correspondence received from the lawyer regarding the legal provision to assess
whether the provision should be recognized and if so, whether the amount of provision is
adequate
- Obtain a breakdown of cost to be provided and recalculate to ensure completeness
- Agree the components of the calculation to supporting documentation e.g.
- Inspect post year end bank statements to identify whether any payments have been made
and compare actual payments to the amount provided to assess whether the provision is
reasonable

Both Legal and Warranty:

- Obtain a written representation from management to confirm the adequacy and

reasonableness of the provision
- Review the financial statement disclosure to ensure compliance with IAS 37.

Share capital:

- Agree authorized share capital and face value disclosures to underlaying shareholding
agreements
- Inspect board minutes to verify the amount of shares capital issued during the year
- Inspect bank ledger account for evidence of cash receipts from share issues and ensure
amounts not yet received are correctly disclosed as share capital called up not paid in the
financial statements

Dividends:

- Inspect board minutes to agree dividends declared before the year end
- Inspect bank statement to agree dividend paid before the year end
- Inspect dividend warrants to agree dividend payments

Director’s Remuneration:

- Obtain and cast a schedule of directors’ remuneration and agree to the financial statement
disclosures
- Inspect the payroll records and agree the figure disclosed for the wages, bonuses and
pension contributions
- Inspect bank statement to verify the amount actually paid to the directors
- Inspect board minutes for discussion and approval of directors’ bonus announcements or
other additional remuneration
 - Obtain a written remuneration from directors that they have disclosed all directors’
remuneration to the auditor

Payroll:

- Agree the total wages and salaries expense per the payroll ledger account to the general
ledger and the financial statement; completeness and presentation
- Cast the monthly payroll listings to verify the accuracy of the payroll expense; accuracy
- Recalculate the gross and net pay for a sample of employees and agree it to the payroll
records; accuracy
- Recalculate the statutory deductions to ensure that current deductions for this year have
been included within the payroll expense
- Select a sample of joiners and leavers, agree their start/leaving date to support
documentation, recalculate to ensure that their last/first pay packet was accurately
calculated and recorded
- For salaries agree the total net pay per the payroll records to the bank transfer listing of
payments and to the bank ledger account
- For cash wages agree the total cash withdrawn for wage payments equates to the weekly
wages paid plus any surplus cash subsequently banked
- Agree the year-end tax liability to the payroll records and subsequent payment to the post
year end bank ledger account
- For a sample of individuals, agree the amount per the payroll listing to the personnel
records, and timesheets if applicable
- Analytical Procedures:
-