Audit procedures

Chapter learning objectives

When you have completed this chapter you will be able to:

• explain the purpose of substantive procedures in relation to financial statements assertion

• explain the substantive procedures used in auditing each balance, and
• tabulate those substantive procedures in a work program, for the following areas:
- inventories
- receivables
- payables
- bank and cash
- non current assets
- non current liabilities
- accounting estimates
• explain the use of computer assisted audit techniques in the context of an audit
• discuss and provide relevant examples of the use of test data and audit software for the
transaction cycles and balance sheet items
• discuss the use of computers in relation to the administration of the audit
• discuss and provide examples of how analytical procedures are used as substantive
procedures
• computer and interpret key ratios used in analytical procedures
• discuss the problems associated with the audit of accounting estimates
• discuss the extent to which auditors are able to rely on the work of experts and internal audit
• discuss the audit considerations relating to entities using service organizations
• discuss why auditors rely on the work of others
• explain the extent to which reference to the work of others can be made in audit reports
 AUDIT

PROCEDURES

WORKING PAPERS RECEIVABLES

ANALYTICA L
PROCEDURES INVENTORIES

NON-CURRENT
THE WORK
OF OTHERSS
CAAT PAYABLE
R
LIABILITIE
K

O
F

O AND CASH
BANK
T
H
E
R
S

ACCOUNTING

ESTIMATES
1 General principle

A word of warning: Chapter 9 dealt with the principles of audit evidence. This chapter deals with
how those principles are applied.

In the sections that follow, we will examine a number of specific audit areas and deal with how
these are usually tested. You may be tempted to learn these by heart. Whatever you do,

DO NOT DO THES!!!!

The audit of any item is based on:

• the risk of misstatement
• the nature of the item
• the assertion you ate testing.

The examiner is not stupid. He or she knows that auditing is a matter of professional skill and
judgment. If you can answer an exam question simply by learning a few pages of a book, it is not
a very good test of whether you are a competent auditor.

So the questions may not ask about standard situations and you will have to apply your
knowledge to the demands of the question.

Things you always have to do

Nevertheless, there are some things which, one way or another, will always apply (and which, if
you mention them, will gain you marks):
• understand the system
• analytical procedures
• document

Things you will always have to consider

What are you being asked to test?

• A transaction or event that took place during the year.

• An account balance at the period end.
• Presentation or disclosure.

What is the nature of the item you ate testing?

• Asset
• Liability
• Revenue
• Expense
What assertion(s) are you testing?

• Existence
• Occurrence
• Valuation
• Cut-off, etc.

Things you may have to do

• If you rely on controls, you will have to test them.

• Management representations are required for some items by ISA 580 and by a number of
other ISA S.
• If there are high volumes of transactions, consider using computer assisted audit techniques
(CAATS).

2 Analytical procedures

Planning- Risk assessment- compulsory

(ISA520 )
Substantive – not compulsory per ISA520 ,
WHY? but usually an effective and efficient
means of gathering evidence
Review- Final check that the figures
make sense- compulsory (ISA520 )
Efficient
Effective

Set out the figures

Calculate rations/compute trends/ proof in
HOW?
total/ make comparisons
Investigate anomalies
Corroborate answers to enquiries
Why do they?

Analytical Procedures as substantive evidence

ISA 520 states that analytical procedures must be used at the planning stage to identify risks, and
at the completion stage of the audit as a final review of the FS.

They may also be used at the substantive stage when the auditor is auditing the draft financial
statements.

Analytical procedures are not just the comparison of one year with another AP’s can be used in
the following ways:

• Ratio analysis
• Trend analysis
• Proof in total

In order to use analytical procedures the following process should be followed:

• Create your own expectation of what you think the figure should be
• Compare your expectation to the actual figure
• Investigate any significant differences

- Example 1 – create an expectation of payroll costs for the year by taking last year’s
cost and inflating for pay rise and change in staff numbers- proof in total.

- Example 2 – calculate the receivables day ratio and compare it with prior year and
credit terms given to customers. If the figure is higher than expected it may indicate
overstatement of receivables – ratio analysis.

- Example Text
Expandable 3 – plot monthly sales data for the prior year and plot against the current
year and investigate any unusual trends. You would expect the business to follow the
same pattern month on month especially if they have a seasonal business – trend
analysis.
Analytical procedures are useful as they are a way of addressing several FS
assertions at once and you are essentially auditing a whole balance at once to
- ifExample
see 4 – using the client’s depreciation policy, re-compute the expected
it is reasonable.
depreciation charge and compare it with the actual depreciation charge. If there is a
Yousignificant
can use themdifference it should
to corroborate be investigated
other – proof
audit evidence in total.
obtained. By using
analytical procedures you identify unusual items that can then be further
investigated to ensure that a misstatement doesn’t exist in the balance.

In order to use analytical procedures effectively you need to be able to create

an expectation. If will be difficult to create an expectation if changes haven’t
been planned for. If the changes were planned, we can compare actual with
the forecast. However, there is no point comparing actual with prior year
since it bears no relation to the current year.

It will also be difficult to use analytical procedures if there have been lots of
one-off events in the year as there will be nothing to compare them with.
The ratios

GROSS PROFIT%
PROFITABILITY NET PROFIT%

RECEIVABLES DAYS
EFFICIENCY INVENTORY TURNOVER
PAYABLES DAYS

CURRENT RATIO
LIQUIDITY QUICK RATIO
GEARING

RETURN RETURN ON CAPITAL

EMPLOYED (ROCE)

Expandable Text
Gross margin
Gross profit / Sales revenue * 100%

Purpose

For most business – main exceptions are consultancies and some businesses in
the service sector – the margin between sales revenue and cost of sales is what
generates the profits the business needs to pay the wages, service any debt and
eventually pay dividends to shareholders.

The lower the margin, the greater the volume of sales revenue needed

Net margin

Profit before tax / Sales revenue * 100%

Purpose

Profit before tax is what is left after all costs and at its simplest enables
dividends to be paid to shareholders.

It is also what enables the business to grow from its own resources.

Receivables days

Receivables / Sales revenue * 365

Purpose

Indicates how quickly or slowly the business is generating cash by collecting it

in from its customers.

Deterioration may be an indication of disputes with customers or non-

recoverability of, and therefore overstatement, of receivables.

NB Care needs to be taken where the profile of sales revenue is inconsistent

from year to year. Where there are high sales at the end of the year, debtor days
would be expected to be higher than for a similar company or another year
where sales occurred earlier in the year and tailed off towards the year end.
Payables days
Payables / Purchases * 365

Purpose
To show how long the company is taking to pay suppliers.

May be indicative of cash-flow problems, or, extended credit terms taken.

Inventory turnover

Inventory / Cost of sales * 365

(How many days worth of cost of sales are tied up in inventory.)

Or

Cost of sales / Inventory

(How many times the year end inventory could have been sold in the year.)

Purpose

To show how much the business has invested in its inventory.

Slower inventory turnover may indicate excessive inventory holdings, over

optimistic valuation or building up inventory for the launch of a new product.

The current ratio

Current assets / Current liabilities

Purpose

Indicates the business’ ability to settle its current liabilities.

The quick ratio

Current assets – inventory / Current liabilities

Purpose

A refinement of the current ratio, which eliminates less liquid assets, inventory,
from the equation.

Leverage or gearing
 Share capital + reserves / Borrowings
Or
Borrowings / Share capital + reserves + borrowings x 100

Purpose

To show the relative reliance of the business on external or internal sources of

finances.

Businesses with higher leverage are usually regarded as more risky – greater
danger of being financially overstretched, but the opportunity of greater rewards
for individual shareholders.

Return on capital employed (ROCE)

Profit before interest and fax / share capital + reserves + borrowings

Purpose

Is the business giving sufficient return compared with other possible

investments?
ROCE is a useful measure for a large diversified group that can switch where it
invests its funds. It is of less use for a small, owner- managed business where
choice of investment is limeade

How are analytical procedures used?

Calculating the ratios is just the start. Analytical procedures are audit procedure in their own right,
designed t enable the auditor to reduce the risk of coming to the wrong opinion about the financial
statements.
This means that the auditor needs to use analytical procedures to identify anomalies in the figures,
which may indicate problems.
To do this, the auditor will make comparisons:
• between the current year and previous year(s)
• between actual figures and budgets, forecasts or client’s expectations
• with similar companies

Analytical procedures as substantive procedures

ISA 520 states that the auditor may use analytical procedures as substantive procedures.
The suitability or this approach depends on four factors:
• The suitability of using substantive analytical procedures given the assertions.
• The reliability of precision possible.
• The amount of variation which is acceptable.
Some examples
1. Suitability
 - Analytical procedures are clearly unsuitable for-testing the – existence of inventories
– to do this you need to go and count the items on the shelves in the warehouse.
- Analytical procedures may bell be suitable for testing the value – of labor carried
forward in inventory – by comparing direct labor costs for the year with value in
inventory, in the context or the costs of raw materials and overheads in inventory.
2. Reliability

- If controls over sales order processing are weak, it will – probably be necessary to
rely on tests of details rather than analytical procedures.
3. Precision

- There is likely to be greater consistency in gross margins over – time than in

discretionary expenditure like advertising or R&D.
4. Acceptable variation

- Variations in sales revenue, which may have a minor impact – on the results for the
year, will be regarded differ entity from receivables, which, if uncollectible will have
a proportionately greater impact.
Expandable Test
(1) Viola Ltd has sales revenue of $1m and a gross margin of 35%.
What is the value of its cost of sales?
(2) French Horn Ltd has sales revenue of $3m and receivables of
$500.000. Calculate its receivables period.
(3) Obtain Ltd has inventories of $1m at the beginning of the year and
$2m at the end of the year and purchases of $9m for the year.
Calculate its inventory turnover period.
Solution
(1) Viola Ltd has Sales revenue of £650,000
£1m and a gross margin of 35%.
what is the value of its cost of sales?
(2) French Horn Ltd has sales 61 days
revenue of £3m and Debtors of
£500,000. Calculate its debtor’s
period.
(3) Obtain Ltd has stocks of £1m at 91 days
the beginning of the year and £2m Stock turns over four time in the
for the end of the year and purchases year.
of £9m for the year. Calculate its Purchases + opening stock less
stock turn period. closing stock = cost of sales = £8m
1.25 x 365 = 91 days

3 The audit of receivables PEOPLE WHO

OWE US MONEY
Trade: Are
(Trade andthey
loangoing to pay
and
Receivables,
Trade: fairly
Ask them etc.)soon?
Prepayments: Did we make the
(circularization)
payment?
See if they pay (after)
WHAT ARE THEY? Is it accounted
Review ageing for in the
PEOPLE correct
WHOVerify
Prepayments: period?
OWE payment
i.e.
US SERVICESis theinvoices,
Review calculation
etc.
correct?
(Prepayments)
for cut-off
KEY
PROCEDURES
QUESTIONS
Receivables circularization

Purpose:

• Direct third part confirmation to give evidence of existence and valuation.

Advantages:

• In dependent evidence.
• External evidence
• Relatively efficient (It successful)

Disadvantage
• Those circularized may not reply
Method

• Select sample of receivables to be circularized.

• Inform client of interred list of those to be circularized.
• Consider implications if client objects to any of the accounts selected being circularized.
• Record names and amounts circularized.
• Record replies received and consider implications of accounts not agreed.
• For non-replies perform alternative procedures (see below)

Expandable Text
Example of wording of an accounts receivable confirmation letter
Note. This letter is an example of Positive confirmation – we think you owe
this much, please confirm – which is usually used for circularizing receivables.
Negative confirmations – please tell us if you owe our client any money and
how much – are of less sue in this context.

Typed on client’s letterhead

Customer Ltd

Customer’s address

Date of circularization

Dear Sirs

As part of their normal audit procedures we have been requested by our

auditors, Auditor & co, to ask you to confirm the balance on your account with
us at Year End Date.

The balance on your account as shown by our records is shown below.

After comparing this with your records will you please be kind enough to
Sing of confirmation below and return a copy of them in the enclosed
Prepaid envelope. We shall be grateful if you would do this even if the
Account has since been settled. If the balance is not in agreement with
Your records, will you please note on the space provided.
Please note that this request is made for audit purposes only and has no
Further significance. Remittances should be sent to us in the normal way.

Your kind co-operation in this matter will be greatly appreciated.

Yours faithfully

Chief Accountant

Auditor & Co

Auditor’s address

Dear Sirs

We confirm that, except as noted below, a balance of $xxxxx

Was owing by us to client Limited at Year End Date.

Name of company or Individual Customer Ltd

Signed

Position held

Details of differences if any

Other evidence in relation to account receivable

• Obtain a list of the individual balances from the receivables ledger,
check the cast and agree the total to the trade receivables figure in the
draft financial statements
• Ensure that balances have been correctly extracted from the receivables ledger
• Obtain a list of credit balances in the receivables ledger and obtain explanation form
management
• Agree brought forward figures to last year’s audit file

Recoverability/Provision for doubtful debts [Valuation]

• Discuss the assumptions underlying the general provision with management to

ensure reasonable
• Recalculate the provision based on management’s assumptions and agree to
the figure in the financial statements
 • Compare the prior year provision to the amounts actually written off as bad in
the year to test how accurate management usually are in estimation possible
bad debts
• Obtain a list of aged receivables and investigate the recoverability of any old
balances
• Check whether receivables have paid after the year-end to ensure
recoverability
• Where overdue receivables have not paid, trace the balances to the provision
for doubtful debts, where the balances are not included in the provision
discuss with management the basis on which they believe the debtor to be
recoverable

Presentation and disclosure

• Check that the figures disclosed in the financial statement agree to the audited
figures

Analytical review

• Calculate the trade receivables collection period and compare to last year to
assess reasonableness

Cut-off

• Select a sample of GDN’s immediately prior to the year-end and immediately

after the year end and ensure that they have been recorded in the correct period.
• For prepayments review relevant invoices to check calculation of prepayment
and ensure that payment has actually been made by agreeing it to the bank statements.

Income statement entries related to accounts receivable

Check positing and validity of:

• bad debt write offs
• movements on bad debt provision
• Recoveries from receivables previously written off..

Ensure doubtful receivables and recoveries identified from other audit work are
property reflected in the income statement
4 The audit of inventories
Overview

INVENTORIES

WHAT AREKEY QUESTONS

THEY PROCEDURES
Are the quantities correct?
Is the Valuation correct?
RAW MATERIALS FINISHED GOODS WORK IN PROGRESS
 The audit of inventories is usually regarded as one of the higher risk areas of the
audit:
• It is usually crucial to assurance about an entity’s profit.
• It is may be complex.
• It is usually subject to a degree of estimation
They can also be very varied, e.g.:
• Sheep or cows on a farm
• Jewellery
• The costs of developing a computer game
• Cars
• Food and drink
• Chemicals
• petrol
• That’s probably enough to be going on with!

How are inventories valued?

INVENTORIES

KEY PRINCIPLE
 VLUED AT THE
LOWER ANDCOST
AND
NET REALISABLE
VALUE (NRV)

Finished goods and raw materials

FINISHED GOODS AND

RAW MATERIALS

OBJECTS ON
THESE CAN BE CONSIDERATIONS
SHELVES, IN BINS,
COUNTED, MEASURED, PRICING
IN CUPBOARDS IN
WEIGHEX, ETC. OBSOLESCENCE
SHOPS, WAREHUSERS,
SALEABILITY

DAMAGE

NET REALISABLE

VALUE

MATERIALS CONTENT

WORK IN PROGRESS

WORK IN PROGRESS

CONSIDERATOINS:
PARTLY-COMPLETED THESE CAN BE STAGE OF COMPLETIC
PARTLY-COMPLETED
OBJECTS AT THESE CAN
CONUTED BE
AND COSTSTO
MAJOR CONTRACTS-
WORKSTATION, ON INSPECTED
ESTIMATES ANDOF
MADE COMPLETION
ROADS,
THE BULIDINGS,
FACTORY FLOOR, ESTIMATES
STAGE OFBE MADE FO
COMPLETION NET REALISABLE
UNAMORTISED COSTS CANNOT COUNTED, CONSIDERATIONS:
VALUE
SHIPS,
OR AIRCRAFT,
STORED ETC
AWATIONG
OF DEVLOPING STAGE FO COMPLETION
BUT VERIFIED SALEABILITY
COMPLETION OR MATERIALS CONTEN
SOFTWARE, BOOKS FROM INVOICES, AMORTISATION POLIC
LABOUR CONTENT
RECORDED MUSIC EXPERT OPINIONS
TIMESHEETS, ETC.
SOUGHT OVERHEAD CONTEN
Assertions again

ASERTIONS PROCEDREU

EXISTENCE CONFIRMATION

COMPLETENESS STOCK COUNT

RIGHTS AND OBSOLESCENCE

OBLIGATIONS
VALUATION CONFIRMATION
PRICING
ASERTIONS
NRV
REVIEW
TESTS
TESTS
The Inventory count
Principles
• The inventory count is a’ one off. It is a single opportunity to establish what is and what is
not in inventory.
• Because of the crucial impact of inventory levels on the results for the year, it must other be
tested both for existence and completeness, (For most other areas the emphasis is likely to be on
one or other of these assertions rather than both.)
• Inventory can consist of almost anything with different properties (see the list above). It can
therefore be quite complex and so needs to be well organized by the client. The auditor needs to
be equally well organized to ensure that sufficient, appropriate evidence is gathered.
• It is the client’s responsibility to establish the establish the correct value of the inventory. The
auditor’s job is to form an opinion as to the whether that value is materially correct or not. It is
therefore not the auditor’s responsibly to count the inventory, only to check that it has been done
correctly.
Procedures
• Obtain clients’ instructions for the count and review them:
- for obvious flaws
- to ensure that the logistics for the audit team have been thought through
- to obtain awareness of where the most material or otherwise risky inventory lines are
to be found.
• Observe the count as it proceeds to ensure:
- the client’s instructions are being followed
- everything is counted and recorded
- there is no risk of anything being included more than once
 - evidence of damaged or slow moving inventory is being recorded
- cut-off is observed – no dispatches or deliveries occur while the count is taking place,
and there is no movement of inventory within the client’s premises which may
confuse the count.
- inventory sheets (or whatever method is used to record the count – hand head
devices, barcode readers, etc.) are properly controlled.
• Conduct test counts on a suitably random basis whilst gearing the rests towards material items:
- Existence – it will be necessary to check from the client’s inventory records to your
test date, so you need to ensure that you record sufficient details so the location and
the items to be able to trace them later.
- Completeness – you will need to be able to trace the items from your counts, into the
client’s inventory records and will therefore need to record sufficient details to enable
you to do this.
Note: These aspects of the count are crucial – the auditor needs to know in advance:
- the details of the inventory
- how the inventory will be recorded in the client’s system.
• Record cut-off in formations:
- the lasts goods received record of the year
- the last dispatch record of the year.
Audit procedures at the final audit stage
• Obtain a list showing each individual line of inventories categorized between finished goods,
W/P and raw maternal. Cast and agree the total to the inventories figures in the financial
abatements.
Presentation and disclosure
• Check that the figures disclosed in the financial statements agree to the audited figures and the
inventories have been correctly analyses between finished goods, raw materials and work in
progress.
Valuation
• Trace some items of inventory in the inventory sheets back to original purchase invoices to
agree the cost.
• Trace the same items of inventory to the provision for slow – moving inventory or discuss with
management why these have not been provided for
Ensure that inventory is stated in the accounts at the lower of cost and net realizable value.

Analytical review
• Calculate inventory turnover and compare to last year to assess reasonableness
• Calculate gross profit percentage and compare to prior year to assess reasonableness
Cut-off
• Select a sample of GRN’s from immediately prior to the year end and included in year – end
payables, and ensure that the goods are not included in year-end inventories and that the invoice
was raised in the correct period.
Year end counts and continuous inventory systems
The procedures suggested about apply to all inventory counts whether as a one-off year and
exercise or where inventory is counted on a rolling basis throughout the year.
The objective is the same:
 • To know what the client has inventory system, where a theoretical book inventory and
inventory figure’ is always known; there are booth advantages and disadvantages for the auditor.
Advantages
• The auditor is less time constrained and can pick and choose particular locations and inventory
lines at any time to ensure the system is working properly.
• Slow moving and damaged inventory should be identified and adjusted for in the client’s
records on a continuous basis therefore the inventory valuation should be more reliable
Disadvantages
• The auditor will need to gain sufficient evidence that the system operates correctly at all time,
not just at the time of the count.
• Additional procedures will need to be devised to ensure that the year end inventory figure is
reliable, even though it may not have been counted at that date.
Inventory held at third parties
• Where the client has inventory at locations not visited by the auditor, the auditor normally
obtains confirmation of the quantities, value and condition from the holder. The auditor needs to
consider whether the holder is sufficiently independent to be able to provide relevant, reliable
evidence.
• As with confirmations from receivables, the auditor requests details from the party holding the
inventory on behalf of the client to confirm its existence.
• The confirmation request will be sent by the client to those parties identified with by the client.
• Problems can occur if the third party uses a different description to that of the client and as
always, a response is not guaranteed.
Other audit evidence about inventory
• For specialize inventory-livestock, property, food in restaurants. significant work in progress-it
will be necessary to obtain evidence
• The auditor deeds to obtain evidence of the value of the inventory.
- Cost information can be obtained from invoices and price lists.
- The costs of manufactured inventory can be obtained from invoices and costing
records.
- The opinion of independent experts may be obtained.

Test your understanding 1

1. State three things the auditor should consider when
reviewing a client’s instruction for the inventory count.
2. How would you test inventories for existence?
3. How would you test inventory for completeness?
4. Saxophone Ltd runs a petrol filling station. How would you test he quantities or
Petrol in inventory?
5. Flute Ltd makes large machines out of very heavy lumps of
Steel. How would you assess its inventory of sheet and bar
Steel?
6. Piccolo Ltd has a sheep farming business. How would you verify the number of
Animals it owns at the year end?

PEOPLE WE OWE FOR INVOICE

GOODS AND SERVICES

DO WE REALLY
STATEMENT
OWE THIS?
RECONCILEATIN
(EXSTENCE)

PEOPLE
ARE THERE ANYWE OWE(COMPLETENESS)
MORE? FOR GOODS AND
CONFIRMATION
WHAT
KEY
PROCEDURES
QUESTIONS
ARE THEY? TAXES OWED
PEOPLE
– PAYE,
WE’VEVAT
BORROWED
& CORPORATIN
FROM TAX
ISSERVICES
IT
REVIEW NOT
DEALTPOST YET
WITHYEAR INVOICED
IN THE
END
RIGHT (ACCRUALS)
PATMENTS
PERIOD?(CUT-
AND
Principles
• The main thrust of the testing of payables is usually to test for completeness.
• The testing for existence, valuation, etc, is still important
, but the major consideration, is for the auditor to gain assurance that all liabilities, rights and
obligations or the payables we know about is relatively straightforward.
You therefore have to think of the best indication that additional liabilities may exit. if as
result of this, none are revealed, the testing of the values, rights and obligations of the payables we
know about is relatively straightforward.
Possible indicators of additional liabilities
Does the list of payables at her year end?
• Include all the major suppliers the client dealt with during the year?
• Include all significant suppliers from the equivalent list last year?
• Include all expected accruals? Rent, utilities, telephone, etc,
• Include expected sources of financing for non-current assets? Leasing, hire purchase,
mortgages, etc.
• Include all expected tax balance? Profits/corporation tax, payroll taxes, sales taxes, etc.
• Include all suppliers revealed by are view of payments after the year end?
• Include all suppliers revealed by a review of unpaid invoices at and after the year end?
Supplier statement reconciliations
For those suppliers’ balances selected for testing:
• obtain supplier statements at the balance sheet date
• compare with balance according to the client’s records
• seed explanation for main explanation for differences:
(1) Timing differences:
- Invoices not yet received by the client.
- Payments not yet received by the supplier.
- Returns and credit notes not yet appearing on the supplier’s

(2) Errors
- Supplier errors that will remain as part of the reconciliation until the supplier corrects
them.
- Client errors, which the client needs to adjust.
Note. It is possible that there are administrative reasons at the client for some of the
differences:
• Goods received accrual-invoices received but not yet processed – perhaps
awaiting authorization, or perhaps ‘Mary does the postings on Tuesdays’ which means that
invoices arriving between Wednesday and Monday are know about but not yet entered on the
system.
• Goods received accrual- the client accrues for all goods received but does
not post to the purchase ledger until the invoice is received.
• Cheques in the drawer-not a good idea to have signed cheques lying around,
but sometime for relatively short periods there may be a delay in sending out the cheque.
Sometimes, with system with automated payment runs, the accounts staffs do not know how
to prevent can be quite substantial for lone periods. This a very bad idea, raises questions
about the assumption the amounts are material, will mean the amounts will have to be added
back to both bank and payables.
Suggested layout for a supplier’s statement reconciliation
Supplier’s statement year end date
Reconciliation
Supplier Limited $ $
Balance per supplier statement xxxx
Less:
Returns/credit notes not yet cred- xx
ited
Payment not yet received by sup- xx
plier
xx

xx

balance per purchase ledger xxx These figures

Invoices not yet posted xxx should be the
Goods received not invoiced xxx same!

Reconciled balance xxx

 Expandable Text
Tuba Ltd

You are auditing the payables of Tuba Ltd and have found that the balance according to
Tuba’s purchase ledger does not agree to the statement from its supplier Trombone Ltd

The following is relevant:

$
Balance per Tuba Ltd’s purchase ledger 350
Balance per Trombone Ltd’s statement 1.500
Invoices in file on purchase ledger clerks’ desk awaiting 150
Posting
Goods returned by Tuba to Trombone in last week of the year. 200
not yet reflected on Trombone’s statement
Value of goods from Trombone received by Tuba’s goods 50
Inwards department and invoiced by trombone on the very
last day of the year (invoices are sent by mail)
Payment by cheque sent by mail by Tuba to Tuba to Trombone on the 753

What is the correct figure for the balance between Tuba and Trombone that
should form part of Tuba’s payables figure in its financial statements?

Solution

Trombone Ltd statement reconciliation

Balance per supplier statement £ £
Less:
1.500
Returns/credit notes yet credited 200
Payment notes not yet received by supplier 750

Agreed balance 950

550

Balance per purchase ledger 350

Invoices not yet posted 150
Goods received not invoiced 50

Reconciled balance 550

Accounts payable and accruals-other evidence

 • Obtain a list of the individual balance from the payables ledger, check the cast and agree the
total to the trade payables figure in the draft financial statements
• ensure that balances have been correctly extracted from the payables ledger
• Obtain a list of debit balances in the payables ledger and obtain explanation from
management
• Agree brought forward figures to last year’s audit file

Presentation and disclosure

• Check that the figures disclose in the financial statement agree to the audited figures

Existence

• Circularize a sample of trade payables to confirm the balance at the end of the year [this is
not a usual audit test, and is more or less the same format as for receivables confirmations except
that negative confirmations are more acceptable]

Completeness

• Investigate any supplier names that were shown on last year’s payables listing but do not
have a balance showing in this year’s list of balances
• Review after date invoices and payments and ensure they have been provided for at the year-
end as appropriate
• Analytical review
• Calculate the trade payables payment period and compare to last year to assess
reasonableness

Cut-off
• Select a sample of GRN’s immediately prior to the year end and included in year-end
payables, and ensure that the goods are included in year-end inventories

Accruals

• Review relevant invoices when received after the balance sheet date, If none are received,
compare with previous periods.
• Obtain the list of accruals from the client; cast it to confirm arithmetical accuracy.
• Agree the figure per the schedule to the general ledger and financial statement.
• Agree the calculation of the accrual by reference to supporting documentation e.g. previous
period invoice

Tax balances

• Corporation/Profits taxes – agree computations.

• Payroll taxes – agree to payroll records.
Overdrafts, loans, etc.

• Agree to bank confirmations.

Leases, hire purchase creditors

• Agree details to underlying agreement.

Income statement entries related to accounts payable

• Accruals will have a direct impact on the income statement accounts they relate to – ensure
the postings have been put through correctly and any opening accruals have been properly
reversed.
• Some accruals may themselves lead to additional accruals, e.g. accrued bonuses payable to
directors and staff, may lead to additional employer’s social security charges.
• Fro all interest bearing accounts, overdrafts, etc, ensure the correct accrual in made for
interest payable.

6 The audit of bank cash

BANK AND CASH

SSERTIONS PROCEDURES

EXISTENCE

RIGHTS AND
OBLIGATIONS BANK LETTER
BANK
RECONCILIATION
CASH COUNT
VALUATION

COMPLETENESS
The bank letter (bank confirmation reports)

• Direct confirmation of bank balances gives the auditor independent, third-party evidence.
• The format of the letter is usually standard and agreed between the banking and auditing
professions.
• Issues covered are

- the client’s name

- the confirmation date
- balances on all bank accounts held
- any documents or other assets held for safekeeping
- details of any security given
- details of any confinements – guarantees, forward currency purchases or sales, letters
of credit.

• The auditor needs the client to give the bank authorization to disclose the necessary
information .(In some jurisdictions such disclosures are illegal so bank letters cannot be used at
all)
• Ensure that all banks that the client deals with are circularized.
• When items on the bank letter are dealt with, tick them off and cross-reference to the relevant
paper to make if easy to see that there are no outstanding items. The balances for each bank
account should be agreed to the relevant bank reconciliation at the year end; interest changes
should be agreed to the interest expense account in the general ledger; details of loans should be
agreed to the disclosure in the balance sheet to ensure if is correctly classified into the current
and non current elements.

Bank and cash – other evidence

• Obtain a list of all bank accounts, cast balances and bank loans and overdrafts and agree to
totals to figures included in current assets and current liabilities in the financial statements
• Obtain a copy of the client’s bank reconciliation, cast and agree the balances to the cash book
and bank letter
• Trace all outstanding lodgments and unperfected chouse to pre-year-end cash book and bank
statements
• Ensure all accounts in the bank certificate are included in the financial statements
• Count the petty cash in the cash tin at the end of the year and agree the totals to the balance
included in the financial statements
 • Note. It is vital for an auditor conducting a cash count to do so in the presence of a member
of the client’s staff and to obtain a signature for the amounts handed back into the client’s
custody.
• Where there are multiple cash balances-a number of tills in a department store, etc. – It is
important to ensure amounts cannot be moved between tills and that proper cut – off procedures
are in place

Income statement and other account entries related to bank and cash

• Clearly, bank loans, overdrafts and bank deposits all have interest implications.
• The bank letter may reveal details of security, borrowings and contingent liabilities which
need to be disclosed in the financial statements.

7 The audit of tangible non-current assets

NON-CURREN TASSET

ASSERTIONS PROCEDURES

EXSTENCE PHYSICAL INSPECTION

REVIEW LIKELY ACCOUTS FOR

COMPLETENESS MISPOSTINGS

INSPECT TITLE DEEDS,ETC.

RIGHTS AND INSPECT PURCHASE CONTRACTS

OBLIGATONS
INSPECT INVOICES, ETC.

RECALCULATE DEPRECIATION
CHARGE
VALUATION CONFIRM
CONSIDER
VALUATIN
IMPAIRMENT
WITH EXPERT
Existence

• Select a sample of the non-current asset register and physically inspect them.

Completeness

• Select a sample of assets visible at the client premises and inspect the asset register to ensure
they are included.
• Examine the repairs and maintenance accounts in the general ledger for large and unusual
items that maybe capital in nature.
Valuation

• Reperform depreciation calculations by:

- selecting a sample of assets from the register and recalculation the charge for the year
- recasting the list of individual asset depreciation charges
- agreeing the total charge to the financial statement.
• Alternatively, agree this year’s charge as reasonable by taking last year’s charge and
amending it for additions, disposals, revaluations, changes in method or policy, etc. Compare the
predicted charge for the year with the actual charge, and seek explanations for any material
differences.
• Assess depreciation policies for reasonableness by:
- comparing methods used with prior year
- comparing methods used with similar cooperies
- analysing the recent trend of profits and losses on asset disposals.
• It any assets have been revalued during the year:
- agree new valuation to valuer’s report
- verify that all similar assets have also been revalued
- reperform depreciation calculation to verify that charge is based on new carrying
value.
 • When physically inspecting assets, take note of their condition and usage in case of
impairment.
• For a sample of assets, agree cost to purchase invoice (or other relevant documentation )
ensuring all relevant cost have been included.
• If any assets have been constructed by the company, obtain analysis of costs incurred and
agree to supporting documentation (timesheets, materials invoices, etc.)

Rights and Obligations

• For a sample of recorded assets, obtain and inspect ownership documentation:

- title deeds for properties
- registration documents for vehicles
- insurance documents may also help to verify ownership (and asset values).
• Where assets are leased, inspect the lease document to assess whether the lease is operating
or finance (if the latter, the asset should be include be included on the company’s balance sheet).

Disclosure

• Agree opening balance with prior year financial statement s.

• Compare depreciation rates in use with those disclosed.
• For revalued assets, ensure appropriate disclosures made (e.g. name of value, revaluation
policy).
• Agree breakdown of assets between classes with the general ledger account totals.

8 The audit of non-current liabilities

NON-CURRENT
LIABILITIES

ASSERTIONS PROCEDURES

EXISTENCE

RIGHTS AND BANK LETTER

OBLIGATIONS LENDER’STATEMENTST
S

BACK TO BACK WITH

VALUATION RELATED ASSETS
REVIEW PAYMENTS TO
POSSIBLE LENDERS
REVIEW MINUTES, ETC.
COMPLETENESS
 AND
CHECK CALCULATIONS
OF INTEREST

Loan payable

• Agree loan balance to the loan statement.

• Agree interest payments to the loan agreement and the bank statements.
• Analyse relevant disclosures of interest rates, amounts due (e.g. between current and non-
current payables) to ensure complete and accurate.
• Recalculate the interest accrual to ensure arithmetical accuracy.

Provisions and contingencies

Provisions are a form of payable where the amount or timing of payment is uncertain. As
such they are harder to audit.
Where the likelihood of payment is only possible, rather than probable, no amounts will be
entered in the accounts. however, the matter (contingent liability) must
be adequately disclosed.
• Discuss the matter giving rise to the provision with the client to verify whether an obligation
exists.
• Obtain confirmation from the clients lawyers as to the possible outcome and probability of
having to make a payment.
• Review subsequent events. By the time the final audit is taking place the matter may have
been settled.
• Obtain a latter of representation from the client as the matter is one of judgment and
uncertainty. For more on representation letters see chapter 11.

Test your understanding?

(1) How would you verify that all unperfected cheques are included on a
client’s bank reconciliation?
(2) State two things that might be included one a bank letter besides the
balances on a client’s accounts.
(3) How would you test the rights and obligations assertion for a freehold
property?
 (4) How would you test the completeness of a client’s hire purchase and
leasing liabilities?

9 Relying on the work of other

RELYING ON THE WORK OF OTHERS

EXPERTS – E.G. SURVEYORS

VALUERS, SPECIALISED
STOCK CHECKERS
WHO DO WE MEAN?
INTERNAL AUDIT
SERVICE ORGANISATIONS

WE NEED:
NO DELEGATION OF • SUFFICIE?
RESPONSIBILITY • APPROPRIATE AUDIT
EVIDENCE

COMPETERNCE
INDEPENDENCE
CONSIDERATIONS
OBJECTIVITY

REFERENCE IN
AUDIT REPORT? NO

Why rely on the work of other people?

• Auditor may need to rely on the work of others. (The ISAs stress the need for auditors to
consult with others in appropriate circumstances.)
• Auditors may choose to rely on the work of others because they fine if effective and efficient
to do so.

The need to consult others

Auditors do not need to be experts in all aspects of their clients’ business.

Where they are unable to form an opinion without expert help the auditors will need to consult.
Examples are:
• property valuations
• construction work in progress
• specialist inventory – livestock, food and drink in the restaurant trade, technically complex
inventory.
• actuarial valuations for pension schemes.
Choosing to consult others

Because of the circumstances at a particular client, it may be effective and efficient for the
auditor to rely on the work of others. Examples are:
• internal audit (see below)
• confirmation from external holders of the client’s inventory
• another firm of auditors for assurance on an overseas branch or subsidiary
• service organizations (see below)

What attributes do these other people need?

ISA 620 Using the Work of an Expert states that the auditor should obtain sufficient and appropriate
evidence that the work of the expert is adequate for the purpose of the audit.

In making this assessment the external auditor must assess the expert’s:

• independence and objectivity

• competence – consider:
- qualifications
- experience.
For example, the auditor might inspect a valuation report to provide evidence of a revaluation of
land and building. However, this report might be have been produced by a qualified value who is a
close friend or relative of one of the directors.
The auditor will have to decide whether:
• the value is sufficiently independent
• the report provide is reliable or not.

Relying on internal audit

• Internal audit forms a part of the client’s system of internal control.
• It may well therefore reduce control risk.
• The auditor will take this into consideration when planning audit procedures and reduced
levels of substantive testing may therefore be appropriate.

The auditor cannot devolve responsibility for the audit opinion onto the internal audit
department.

ISA 610 Considering the work of Internal Audit states that be fore relying on the work of
internal audit, the external auditor must first assess the internal audit function with regard to:
• The objectivity and technical competence of the internal audit staff
• Whether the internal audit function is carried out with due professional care
• The effect of any constraints or those charged with governance.

If the function is assessed and is fond not to be sufficiently independent of the management
structure of the staff are not suitably qualified and trained, there is no point in the external
auditor going to the trouble of assessing the work that has been performer by the functions
during the year as it will not be considered reliable enough for external audit purposes.
However, if the internal audit functions have beet assessed as reliable, the specific work should
be evaluated to ascertain its adequacy. The external auditor must consider whether.
• the work is properly supervised, reviewed and documented
• the persons performing the work have relevant experience and training
• sufficient and appropriate evidence has beet obtained
• the conclusions made have been acted on by management.

It the auditor assesses both the function and the specific work to be reliable and adequate, the
work will be relied on and reduced levels of testing will be performed.

Service organizations
The client may outsource certain functions to another company – a service organization, e.g.
• payroll
• receivable collection
• the entire finance function
• internal audit.

Advantages from the auditor’s point of view

• The independence of the service organization may give increased reliability to the evidence
obtained.
• Less detailed work may therefore be required.

Other considerations

• The auditor will need to be confident of the reliability and the independence of the service
organization.
• It the audit firm provides some of these services itself – e.g. bookkeeping or payroll services
– it will need to ensure that if can maintain its own in dependence and objectivity as auditor.

Reference to the work of others in the audit report

It is the auditor’s responsibility to obtain sufficient and appropriate audit evidence in order to
arrive at the correct audit opinion.

Therefore, no reference should be made in the audit report to the use of others during the audit.

It the auditors cannot satisfy themselves that the work of others is sufficiently reliable then the
auditor must find another means of obtaining the required level of comfort.
They cannot pass the blame onto another party.

10 Accounting estimates E.G.

• INVENTORY PROVISIONS
• DEPRECIATION PATES
• ACCRUED REVENUE
POTENTIAL
ACCOUNTING FOR MATERIAL
ESTIMATES
• DEFERRED TAX
MISSTATEMENT?
• LOSSES FROM LAWSUITS
SIGNIFICANT RISK?
• LOSSES ON
SUFFICIENT?
CONSTRUCTION CONTRACTS
EXCESSIVE?
WHAT
KEY
PROCEDURES
QUESTIONS
ARE THEY?
• WARRANTY CLAIMS
 Accounting estimates are of particular concern to the auditor as by their nature there may not
be any physical evidence to support them. the are subjective and judgmental and the reform prone to
management bias. Lf the directors wish to manipulate the accounts in any way, accounting estimates
are the easy way for them to do this. The auditor must take care when auditing estimates to ensure
this has not been the case.

Procedures used by the auditor in respect of estimates are:

• Discuss with management their process for calculating the estimate and assess whether this
appears reasonable.
• For estimates such as provisions it may be possible to obtain an independent expert opinion
for example correspondence from lawyers regarding a legal provisions or a surveyor’s report for
evidence or an environmental provision.
• Reviews subsequent events, for example if there is appending legal case with a legal
provision at the balance sheet date, the case may have been settled by the time of the audit and
therefore will provide evidence as to whether the provision was reasonably stated. An accrual
can be compared with the actual invoice if the invoice has been received by the client by the time
of the audit.

11 Computer assisted audit techniques (CAATs)

COMPUTER ASSISTED
TECHNIQUES (CAATs)
CALCULATING
SORTING
FILTERING
WHAT
REPORTING
AUDIT ARE
COMPUTER
LIVE TEST DATE DEAD EXCEPTOINS
SOFTWARE
GOOD AT
 The use of a computer to either perform, be tested or to assist the auditors in carrying gout
theirs audit procedures.
Whit so many accounting systems now held on computer, the assurance provider may wish
to make use of CAAT’s. There are two types of CAAT’s
(1) Audit software
(2) Test date

Auditing around the computer?

This term means that the

‘internal’ software of the
computer is not documented or
audited by the auditor, but the
inputs to the computer are
agreed to the expected outputs’
to the computer.
Where errors are found it
maybe difficult or even
impossible to determine why
Audit outcome
those errors have occurred.

It amendments cannot be
Increase the AUDIT made, there is an increased
RISK Why? likelihood of audit qualifica-
tions.
The actual computer files Since controls are being
and programs are NOT tested, all discrepancies
TESTED. between predicted and actual
Therefore no DIRECT resolved and documented,
evidence that the programs irrespective of financial
are working as documented amounts involved.
Audit software

Description
This is software specifically designed for audit purpose, there are a number of off-the –shelf
packages available, or the auditor could have a that the figures themselves are correct. It can the re
fore carry out a whole range of substantive procedure, across all sorts of different date.
Example of what audit software can do include:
Extract a sample according to specified criteria
- Random
- Over a certain amount
- Below a certain amount
- At certain date
• Calculate ratios and select those outside the criteria
• Check calculations (for example additions)
• Prepare reports (budget v actual)
• Produce letters to send out to customers suppliers
• Follow items through a computerized system

Package programmers are generally designed to:

• read computer files
• select information
• perform calculates
• create date files, and
• print reports in a format specified by the auditor

Test date
The assurance provider supervises the process of running date through the clients system. To
do this the auditor would have to
• Note controls in the clients system
 • Decide upon the test date
It maybe processed during a normal production run ( “live” test date) or during a special run at a
point in time outside the normal cycle (“dead” test date), either with real date or dummy date.
• Run the test date
• Compare results with those expected
• Conclude on whether controls are Operating properly

Through test date. This is date generated by the auditor in order to test the systems, professing
logic, calculations and controls, to ensure that the controls within the system are operating
properly.

An auditor would take a transactions through a system, testing the systems limits. So you would
have “normal” transactions and invalid transactions to test that the system work, It the results
are positive that means the auditor can rely on the system and have more confidence that the
output is accurate.

What are the benefits of CAATs?

Benefits / Advantages Examples

CAATs force the auditor to rely on programmed Credit limits within a system can
controls during the audit. sometimes it may be the only be changed by the accountant,
only way to test controls within a computer A computer assisted check will test
system, therefore enables the auditor to test that this is the case.
program controls

Using CAAT’s enables the auditors to comply

with ISA of obtaining appropriate audit evidence
increasing the overall confidence for the audit
opinion

Large number of items can be tested quickly and Checking the depreciation charged
accurately on each asset would be quicker with
a computer assisted program than
manually

CAAT’s test original document instead of print Actual wages will be tested instead
outs, therefore the authenticity of the document is of paper copies.
more valid this way.
 Example of use or audit tests
After initial set up costs, using CAAT’s are likely
to be cost effective, as the same audit software (1) Calculation checks
can be used each year as long as the system (2) reviewing lists of old or
doesn’t changed outstanding items and
inverting items and investing
those specifically
(3) Detecting for unreasonable
items
(4) Detecting violation of the
system rules
(5) New analysis
(6) Completeness checks
(7) Selects samples
(8) Identifying exception
reporting facilities

Allow the results from using ACCT’s to be It the two sources of evidence agree
compared with traditional testing. then this too will increase the overall
audit confidence

What are the weaknesses, or problems with ACCT’s, and how can they be resolved?

Weaknesses / problems Recommendations / resolve

Limitation Ensure you understand the system
CAAT’s will limited depending on how well the to assess whether audit software
computer system is integrated the better the use will be relevant for the company.
of CAAT’s, For example the invoices should be
computer generated and then processed through Need to assess whether there is a
the accounts system to feed in to the financial need for the audit software.
statements.
The existing system made do some of the
functions of the CAAT, for example highlight old
balances or obsolete inventory
Reliability Assess the reliability, document and
CAAT’s are only useful methods of testing it you then make a decision whether it’s
can rely on the system, so the auditor would have relevant to use audit software as
to assess the reliability first, before use. part of the evidence collected.
Cost A cost benefit analysis from the
It takes time to design CAAT’s tests therefore audit point of view should be
may not be cost effective if the auditor is dealing carried out prior to deciding to use
with a bespoke system, as there maybe a lot of the audit software.
set up costs. The reason for this is it takes time to
write specific test data or to program the audit
software to the needs of the client.
Lack of software documentation Shouldn’t use audit software until
It the company you are auditing can not confirm these have been identified? Hold
all system documentation is available, then the until this point.
auditors will be unable to do the tests effectively
due to lack of understanding
Change to clients systems A cost benefit analysis from the
It thee is a change in the accounting year or from audit point of view should be
the previous year then the audit software will carried out prior to deciding to use
have to be reset and designed, therefore may be the audit software. Or it you know
costly. there to be a change in the near
future hold the audit software until
that year.
Lack of directions and useless results The audit manager needs to be clear
Audit tests maybe done just because the auditors exactly what audit assertions are
have the facility to do them, therefore the output being tested, and what the expected
of results will either be inconclusive or not outputs are.
required. Therefore having an inefficient and
costly audit
Use of copy files To ensure the files are genuine
Clients tend to provide the auditors with copies of either the auditor should supervise
the system notes and any other relevant the copying or use the originals in
information. The problem here is do we know if the first place.
those are the actual files?
Test date – problems
Damage of computer system Ensure as auditors we understand
Because we are testing the limits or the system the system and have support if need
the dummy process may damage the computer be form software experts
system

Need to reverse or remove dummy Ensure there is a process for

transactions ensuring all dummy transactions are
Ideally test date should be run live if not possible cleared and the auditor has
then the dead test date needs to be used under discussed when they can use the
identical systems for it to be valid, and enough comp9uter and for what test
computer time should be provided. The specifically.
transactions may be incorrectly or incompletely
removed, leaving dummy date in a live system.

Examples of Test Date

Test Reason for the Test

Revenue
Input an order into the clients system The order should not be accepted, or should raise
that would cause a customer to a query whether you are sure you wish to
exceed their credit limit. proceed. It this happens then the auditors will
have confidence the system is working properly.
 Input a negative number of items on Ensures only positive quantities are accepted.
an order
Input incomplete customer details The system should not process the order unless
all information is completed
Input an excessive amount There are reasonable checks in the system to
identify possible input errors. A warning should
appear on the screen confirming the number
Input and invalid inventory code Ensures that the computer detects detects the
invalid code and presents an error message rather
than taking the nearest code and accepting it
Input of invalid details Ensures that no error are made for sipping and
payment
Purchases
Raise an order from a supplier not A query should be raised as to whether you want
on the preferred supplier list to proceed with this transaction
Process an order with an The system should reject the process altogether
unauthorized staff ID or send the request through to an appropriate
person for authorization
Payroll
Thy and set up a new employee up The system should reject the process altogether
on the payroll system using an of send the request through to an appropriate
unauthorized ID person for authorization

Make an excess change for example The system should have parameters in place to
increase someone’s salary by $ question this amount, and maybe reject it due to
1,000, 000 by someone authorized it being outside the normal range
Receivables
Cast the receivables ledger to ensure To ensure the completeness and accuracy or the
it agrees with the total on the items on the receivables control account
receivables control account
Compare the balances to the credit To check or violation of the system rules
limits to ensure they haven’t been
exceeded
Review the balances to ensure they To check for unreasonable items in the ledger
don’t exceed the total sales to that
customer
To review the receivable days on a To obtain new/ relevant statistical information
monthly basis and compare to year
To form receivable balances to show To select specific items for the audit test.
all material items and select
appropriate sampling for testing.
To produce and aged receivables To assist in the receivables valuation testing
analyst to assist with identifications
of irrecoverable receivables.
`
Test your understanding 3
Give examples of test using CAATs when dealing with orders received, goods
dispatched, and invoices raised?

12 Chapter summary

AUDIT PROCEDURES

WORKING
PAPERS RECEIVABLES

ANALYTICAL
PROCEDURES INVENTORIES

CAATs PAYABLES

THE WORK OF BANK AND

OTHER CASH

NON-CURRENT
ASSETS
NON-CURRENT
ACCOUNTING
LIABILITIES
ESTIMATES
 Test your understanding answers

Test your understanding 1

Test your understanding 2

1. How would you verify that all Review post-year-end bank statement to
unperfected cheques are included on a lest that all cheques drawn before year
client’s bank reconciliation? end but clearing after the balance sheet
 date are included on the reconciliation.
2. State 2 things which might be included Deeds and other documents or assets
on a bank letter besides the balances on a held.
client’s accounting. Guarantees.
Forward currency contracts
Bill of exchange and letters of credit.
3. How would you test the rights and Check title deeds and register of charges.
obligations assertion for a freehold
property?
4. How would you test the completeness For all assets acquired in the year review
or a client’s hire purchase and leasing correspondence to ensure there are no
liabilities? hire purchase or leasing liabilities in
relations to the asset.

Test your understanding 3

Solution

Orders
Place orders on the website using test data.

Goods dispatched
Programme audit software to select a sample of customer orders, obtain the GDN
number from each other and verify that each GDN number exists in the GDN file.

Invoice
Programme audit software to select a sample of GDNs, obtain the invoice number from
each order and verify that each invoice number exists in the invoice file.
(GDN – goods dispatch note)