SUBSTANTIVE PROCEDURES

 Acquisition of Subsidiary
 Allowance for Doubtful Debts (AfDD)
 Accounts Payable
 Accounts Receivable
 Cash and Bank Balances
 Debentures
 Deferred Revenue
 Development Costs
 Expense Accruals
 Financial Instruments
 Going Concern
 Intangibles
 Inventory
 Long Term Loans
 Manufacturing Variances
 Other Liabilities
 PPE
 Purchases
 Share Capital

Acquisition of Subsidiary
Summary of the accounting theory as it relates to the business combination (not required for the solution):

IFRS 3 in respect to the acquisition of a going concern business:

 IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g.
an acquisition or merger). Such business combinations are accounted for using the 'acquisition method',
which generally requires assets acquired and liabilities assumed to be measured at their fair values at the
acquisition date.
 “Business” = An integrated set of activities and assets that is capable of being conducted and managed for
the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly
to investors or other owners, members or participants. (three elements – Inputs, Processes, Outputs)
 Steps in applying the acquisition method are: [IFRS 3.5]
 Identification of the 'acquirer'
 Determination of the 'acquisition date'
 Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquiree
 Recognition and measurement of goodwill or a gain from a bargain purchase
 Measurement of assets and liabilities at correct fair value (i.t.o. IFRS 3 and IFRS 13) at the correct date (i.e.
acquisition date i.t.o. IFRS 3)
 All assets and liabilities included (including those not recognised on the business’ AFS (e.g. contingent
liabilities)
 Consideration calculated correctly (excluding any consideration paid for reasons other than the acquisition
of the business (e.g. pre-existing relationships)
 Any contingent consideration is estimated considering all the circumstances at acquisition. If 12 month
accounting is used – only at acquisition considerations are included (i.e. if discovered after acquisition date,
 but existed at acquisition date – include. If discovered after acquisition date and not existing at acquisition
date – not included)
 Goodwill/bargain purchase gain calculated correct considering all of the above

Substantive Procedures:

The once-off transaction does not lend itself to analytical review procedures in the form of ratios
and trend analysis.

 Obtain a schedule of all assets and liabilities acquired (including contingent liabilities).
- Inspect for all separately identifiable assets and liabilities
 Enquire with the management (of both businesses, but especially the subsidiary) as to the
existence of any contingent liabilities or non-capitalised assets such as brands (internally
generated intangible assets) .
 Obtain a management representation letter related to the existence, rights and valuation on
goodwill
 Cast the calculation of goodwill for arithmetic accuracy
 Inspect the latest audited annual financial statements of the subsidiary to determine the net
assets acquired.
 Inspect the board minutes to determine whether or not the transaction was authorized
 Obtain the underlying legal contracts of sale and inspect that they are signed by both parties,
using the contract for the following:
 Determine whether the nature of the agreement constitutes a business combination as
per IFRS 3.
 Determine the acquisition date.
 Determine (also through enquiry with the subsidiary) whether there is any contingent
consideration in the acquisition.
 Determine (also through enquiry with the subsidiary) any special terms and conditions of
purchase and the transaction value/price.
 Agree the purchase price to payment in the parent company’s bank statement. (easy)
 Obtain external confirmation for the market values of assets and liabilities acquired (at
acquisition date).
 If an expert is required for the valuation of an asset or liability, consider the skills, experience,
assumptions used and nature of work performed (as per ISA 500 or ISA 620). (3/4 marks)
 Assess the reasonability and consistency of methodology (in terms of IFRS 13 and IFRS 3) for
determining the market values.
 Recalculate the goodwill recognised (2/3 marks)
“Obtain managements calculation of goodwill and do the following”
- Enquire with management as to basis of the preparation and any material inputs and
assumption.
- Reperform the goodwill calculation.
 Audit the purchase agreement = contract. (3 marks)
 Consult the opinion of a tax expert for the purposes of the tax consequences of the acquisition.

Allowance for Doubtful Debts

1. Perform subsequent events tests by inspecting if accounts have been subsequently settled by
reviewing the trade receivables ledger and receipts in the cash book
2. Enquire of management as to the credit terms offered to customers and list all trade receivables
which are long overdue
3. Inspect correspondence with lawyers for evidence of customers inability to pay
4. Enquire of management how they determine allowance for doubtful debts
a) Assess reasonableness of their assumptions
b) Re-perform the calculation
5. General
a) Agree the balance to the general ledger and trial balance
b) Perform ARP’s and follow up any abnormalities
i. Compare the current allowance to prior years
ii. Compare the current ratio of AfDD to TR to prior years
iii. Compare the current year BD ratio to prior years
iv. Compare the current year TR payment period to prior years
c) Enquire if credit insurance exists that and if so whether it satisfactorily covers any potential
bad debts
d) Obtain a management rep letter dealing with the recoverability of TR and adequacy of AfDD
e) Review any concentration of credit risk to a particular group, customer or geographical
segments

Accounts Payable
1. General
a. Consider the adequacy of the system and the results of any tests of controls
b. Obtained a management representation letter confirming that all liabilities have been
accrued for
c. Reconcile the closing balance of accounts payable to the trial balance, lead schedule and
financial statements
d. Obtain the accounts payable control account at year end and agree it to the accounts payable
listing
e. Obtain prior year audited closing balance and agree it with the current year opening balance
to determine overall consistency in accounting
2. Completeness
a. Review minutes of meetings for any evidence of unrecorded liabilities
b. Discuss the possibility of any unrecorded liabilities with management
c. Obtain the year end accounts payable listing
i. Ensure that all major suppliers from the prior year are included
1. Obtain explanations and follow up any omissions from the listing
ii. Cast the accounts payable listing to prove the total(arithmetic accuracy)
d. Review bank statements after year end and ensure payments are either
i. Included on outstanding cheque list
ii. Accrued for at year end
e. Perform cut-off procedures
i. Select a sample of goods received notes at and around year end and trace them to the
financial statements to ensure that they are recorded in the correct period
 ii. Obtain last good received note number from the inventory count documentation
iii. Review the processed invoices for the first week of June and reconcile details to the
good received notes to ensure that goods were received in the new year
iv. Review any invoices still to be processed for any goods received in May
v. Reconcile supplier statements for major suppliers to AP listing in order to determine
whether there are any outstanding invoices that need to be processed
f. Review orders from the past 3 months and ensure orders have either been paid or are
included on the accounts payable listing
3. Rights and obligations and existence
a. Positive circularization performed where creditor statements are not received
i. Investigate creditor differences
ii. Reconcile creditor differences to the financial statements
b. Select a sample of invoices from the purchases journal and trace them back to the actual
invoice, goods received note and order form
c. Agree the transactions to bank statements or account payable listing
4. Valuation
a. Select material balances from the accounts payable listing and perform the following audit
procedures
i. Recalculate the individual balances and agree to the listing
ii. Reperform the reconciliations between the supplier statements and the accounts
payable listing
iii. Review the reasonability of discounts
5. Presentation and disclosure
a. Inter-company or group balances are accurate and appropriately disclosed
6. Analytical Review Procedures
a. Perform analytical review procedures and investigate any abnormalities
i. Compare the creditors settlement period to prior years
ii. Compare trade payables balance to prior years

Accounts Receivable
Substantive Tests – Accounts Receivable

1. General Procedures
a. Consider the adequacy sales system and the result of any test of controls
b. Management rep letter confirming
i. Accounts receivable exists, are completely and accurately recorded
c. Inspect adjusting journal entries and ensure they reconcile with the accounting records
and relate to the correct period
i. Evaluate the materiality of any differences
d. Obtain the accounts receivable schedule
i. Reconcile the year end schedule to the receivable subledger and control account
ii. Reperform the casting on the schedule and recalculate a sample of individual
accounts receivable balances
e. Ensure the presentation in the financial statements is correct
2. Completeness
 a. Perform cut-off procedures on sales and receipts transactions and associated returns at
year end
i. Select a sample delivery notes at and around year end and inspect financial
statements to ensure they are recorded in the correct period
ii. Perform sequence check using the last delivery note number for the year to
ensure all sales recorded in the correct period
b. Select a sample of delivery notes and invoices and trace them to the financial statements
to ensure they have all been recorded
3. Existence and rights and obligations
a. Examine unsettled accounts receivable to ensure that customers are not fictitious
b. Perform a circularization (positive => agree/disagree; negative => disagree) of a sample of
balances
i. Inspect remittance advices received from customers
ii. Reconcile accounts receivable balances to remittance advice
c. Enquire and inspect correspondence concerning possible cession/pledge of receivables
i. Obtain a bank certificate to establish whether accounts receivable are pledged as
security
ii. Inspect minutes of meetings
d. Select a sample of large individual account receivable balances and agree amounts to
invoices and signed delivery notes
e. Agree a sample of credit sales from the AR to bank receipts after year end
4. Valuation
a. Enquire of management of the credit terms offered to clients
i. Obtain a debtors age analysis
1. Reperform calculations to ensure that the age analysis is accurate
2. Reconcile to the accounts receivable control account
3. Reconcile long overdue balances with their corresponding invoices to
ensure that debtors exist
4. Determine whether debtors with long overdue accounts are able to pay
their debts
5. Enquire of management why they have not written off long overdue
accounts
ii. Recalculate the discounts given to clients
b. Scrutinize correspondence with lawyers for evidence of customers inability to pay
c. Enquire if credit risk insurance exists and whether or not any such cover adequately covers
potential bad debts
d. Enquire of management and staff concerning any disputes with customers and any
pending credit notes
e. Enquire of management of the policies for making allowances and determine whether the
allowances are adequate
i. Reperform the calculations of the allowances to ensure arithmetical accuracy
5. Analytical review procedures
a. Perform analytical reviews and investigate abnormalities
b. Calculate credit notes as a percentage of gross sales and compare to the prior year
c. Compare bad debts as a percentage of gross sales with previous year
 d. Compare the debtors repayment period to the previous year
e. Compare ageing categories as a percentage of accounts receivable with the prior year
f. Compare allowances for doubtful debts as a percentage of accounts receivable with the
prior year
g. Calculate the acid ratio in order to determine whether there have been changes in
relationships
h. Compare the current year accounts receivable balance to the prior year and ensure the
change is reasonable
i. Calculate trade receivables as a percentage of total sales and compare to the prior year

Cash and Cash Balances

1. Obtain a schedule of cash balances
a. Re-perform calculations to ensure arithmetical accuracy
b. Re-perform the cash count and agree it to the schedule
2. Obtain a bank confirmation confirming bank account balance
3. Obtain the bank reconciliation
a. Ensure all outstanding cheques are reflected

Debentures
1. Accuracy
a. Obtain schedule of interest payments
i. Re-perform calculations to ensure arithmetic accuracy
1. Total = Number of debentures x interest
2. Inspect individual amounts to ensure that paid correct amount
2. Occurrence
a. Inspect minutes to meetings to ensure issuing of debenture was authorised
b. Reconcile receipts to bank statement

Deferred Revenue (accuracy, completeness)

1. Obtain or prepare a schedule/calculation of deferred revenue from management.
2. Review the audit work on the sales system to ensure that the system provides reliable
information.
3. Inspect the contract to ensure that it has been signed by both parties, as well as by checking for
any material terms and conditions & the names of both parties.
4. Select a sample of items per the schedules.
5. Trace the sample to the relevant sales invoices / maintenance contracts, checking the dates of
the contracts and the amounts involved.
6. Inspect the relevant invoice(s), payment(s) to bank statement to ensure that the contract has
been invoiced and payment has been received.
7. Select a sample of items from the sales invoices / maintenance contracts and trace the sample to
the schedule to check completeness.
8. By reference to the dates and amounts, re-perform the client’s computation of the amount to be
deferred
9. Assess the reasonability of management’s calculation in terms of the requirements of IFRS 15:
  Enquire with management as to whether IAS 18 or IFRS 15 is applied for revenue.
 Assess the reasonability of management’s split between the two performance obligations of
sale of goods and maintenance/service agreement.
 Assess the reasonability of the allocation of stand-alone transaction prices to each
performance obligation using the terms of the contract.
 For the maintenance/service element of the sale:
o Inspect service schedules and billings sent for work performed to date.
o Re-perform the accruing of revenue on a time basis or based on services performed in
terms of IFRS15.
o Compare actual expenditure to date to budgets and investigate any variances.
10. Perform a specific analytical review by comparing the following to the previous year and the
budget:
 The deferred amount as a percentage of revenue;
 Trends in the amount deferred against trends in revenue.
 An estimate of the deferral by reference to monthly revenues.
 Agree the analytical review schedules to the sales records.
 Investigate any fluctuations by discussion with management.
“discuss any abnormal differences with management. Corroborate the explanations
received by management by inspecting supporting documentation like … contracts”
11. Check the final balance to ensure that VAT is excluded (R)
12. Perform analytical reviews comparing information from year to year.
 Number of members.
 Total amount received in advance.
 Average amount per member.
 Cards issued vs. members
Investigate any anomalies or abnormal amounts.

Development Costs
1. General
a. Consider whether or not the system provides a reliable basis for the allocation of costs
b. Inspect the minutes to board meetings to ensure that expenditure is authorised
c. Obtain a management representation letter referring to the fair presentation of
research and development costs
d. Consider the use of an expert
e. Agree amount reported to amounts in bank statements
2. Obtain a schedule of the expenditure capitalised
a. Re-perform the casts and cross-casts
b. Reperform calculations on supporting documentation to ensure the accuracy of the
amounts capitalised
i. Payroll records for salaries and wages
ii. Time records for evidence that employees actually worked on the project and
the number of hours spent working
iii. Fixed asset register for depreciation
iv. Invoices for a sample of materials and services consumed
 c. Perform cut-off procedures to ensure that the costs are recoded in the correct period
i. Select a sample of invoices from around and at year end and ensure they were
recorded in the correct period
d. Inspect the expenditure included in the schedule and ensure that none of it relates to
research costs
- For items that do not meet asset definition -“expenditure doesn’t meet asset definition (AS
PER IAS…) and should be expensed. Corroborate with management and put in the schedule
for unadjusted misstatements” (2 marks)
3. Enquire of technical personnel concerning the appropriateness of the allocation of materials,
services and other directly related costs
4. Enquire of management as to how they allocate overheads
a. Assess the appropriateness of the allocation
b. Re-perform the calculations related to the allocation of costs
i. Materials and services
ii. Labour hours and time rates
(Obtain time sheets and agree number of hours worked to calculation)
(Obtain employment contract and inspect for applicable payment rates)
iii. Overhead allocation
5. Enquire of management as to the policy for amortisation of development costs
a. “Assess the reasonableness of the policy by” (NB= need to describe the basis to form
judgement or else it’s an arbitrary assumption)
- Useful life of the assets – comparison to other assets in the industry
- Residual value – comparison to the market price as quoted in the market for similar
second hand markets
b. Re-perform the amortisation calculation
6. Obtain a schedule of future economic benefits of the project
a. Re-perform the calculation of the value in use
b. Compare carrying value of the project to the recoverable amount
c. Inspects accounting documents to ensure that impairments were recorded when it was
necessary
7. Perform analytical review procedures and follow up on any abnormalities
a. Actual costs against budgeted
b. Actual costs to prior year
8. Inspect the financial statements to ensure that the presentation and disclosure is appropriate
a. Accounting policy
b. Amortization method and rates

Expense Accruals
1. Completeness
a) Compare the accruals list to the previous year and investigate any unusual or missing
items
b) Review cash book payments for the period after the year-end and check items to be
accrued to the list
c) Enquire management and staff concerning any possible accruals
d) Review general ledger expense accounts for missing items which may require accrual
 e) Review all long term agreements (insurance, leases, pension schemes, royalties, etc.) to
determine whether provision has been made for all accruals
2. Cut Off
a) Obtain last goods received note (GRN) number from inventory count documentation
b) Select a sample of GRNs and trace the details to the relevant supplier invoices
c) Trace the invoices to the purchase records to ensure that the transaction are recorded in
the correct period
d) Review the processed invoices for the period after year-end and check details to the
related invoices to ensure that goods were received in the new year
e) Similarly, review any invoices still to be processed for any goods received in the last
month of the year
f) Review year end reconciliations for major suppliers to supplier statements for any
outstanding invoices which may require accrual

Financial Instruments
1. General
 Obtain schedules of the balances subject to audit.
 Agree these schedules to the accounting records, trial balance etc.
 Selection of samples
 Check all adjusting entries relating to these balances.
 Consider the materiality of audit differences arising from unprocessed adjustments.
 Consider the competence of the staff involved and the adequacy of the accounting systems
and related controls as a basis for the preparation of this information.
 Obtain detailed representations from management, including reference to:
o Fair values of open positions
o Impairment of financial assets

2. Existence, Rights and Obligations

 Obtain written confirmations from counter parties setting out details of all open positions
at year end.
 Inspect correspondence for any changes in the terms and conditions.
 Inspect contracts / obtain confirmations to ascertain the exact nature of the rights and
obligations under the contracts.
3. Fair Values
 Where applicable, agree market values of the positions to supporting documentation.
 Where an active market does not exist, obtain the client’s valuation models for
determining the fair values of the positions
 Assess the assumptions (commercial, economic and financial) used in the valuation
models.
 Check the detail per the valuation model to the contract terms.
 Consider the appropriateness of discount rates used and whether or not appropriate risk
premiums are included.
o Detail – Compare to benchmark rates? Market rate? Use an expert?
 Where future cash flows form the basis of the estimates:
 o Consider whether previous projections have been reliable;
o Check the arithmetical accuracy of the projections; and
o Perform analytical reviews of the projections.
 Re-perform the computations of the valuations, including present value calculations.
 Consider using an independent valuation model/ a Broker’s Quote/ a Pricing Service or an
expert to assess the model and its assumptions.
When using an expert, consider his/her/their;
o Independence / objectivity;
o Qualifications, reputation and experience;
o Assumptions used; and
o Results of the work.
 Where a contract is “in the money”, consider impairment of the financial instruments in
the light of credit risk and the issuer of the instruments’ ability to honour the contract

Further Example – Tutorial 13.1 (Specific Asset = “Carbon Credits Asset”)

1. Obtain a schedule detailing the breakdown of the carbon credits recognised as an asset.
2. Obtain written confirmations from any carbon investment funds from whom Pleasers purchased
carbon credits (with client permission).
 When obtaining confirmations, request confirmation of all investments / open positions.
3. Inspect the relevant contracts for the terms and conditions and price payable.
4. Inspect these contracts for proper authorisation – minutes if necessary.
5. Inspect the bank statements / other evidence of payment for payments made for the purchase
of carbon credits.
6. Obtain advice from an expert in the valuation of carbon credits:
 Where the use of the work of an expert is required, consider the qualifications, experience
and objectivity of the person(s) responsible.
7. Assess the fair value of the carbon credits:
 Obtain the current market values for carbon credits from an independent source
(investment house or carbon development asset manager)
 Recalculate the total value of carbon credits based on current market values and compare
to management’s calculation.
8. Alternatively, request financial models computing the future benefits.
 Consider the assumptions of management in the recognition of carbon credits.
 Recalculate the value of carbon credits based on management’s assumptions. Follow up on
any differences.
 Obtain evidence to justify the appropriateness of the discount rates used.
 Additional detail: Analytical review of model, consideration of the accuracy of any previous
models, consideration of new developments after year end.
9. Review the accounting records and contract files to ensure that all investments in carbon credits
are accounted for, including any contingencies and commitments.

Going Concern
1. If management has not performed a going concern assessment request them to do so
2. Obtain a cash flow forecast for the year
 a. Evaluate the validity of the assumptions (commercial, economic and financial) under
which the forecasts have been prepared
b. Compare previous forecasts to actual results to determine whether previous forecasts
have been reliable
c. Re-perform the arithmetical accuracy of the cash flow forecast
d. Consider the competence/reliability of the person that prepared the forecast
e. Perform analytical reviews on the forecasts
3. Obtain the latest financial information
a. Inspect the accounts in order to determine whether there have been any significant
changes
b. Review the operating results to establish whether or not the company has returned to
profitability
c. Consider the correlation between the forecasts for the new year and the actual
performance to date
d. Review financial statements and consider the company’s ability to honor their
commitments
4. Review subsequent events
5. Inspect minutes and correspondence with legal advisors for any adverse events after the
accounting date
6. Obtain a management representation letter concerning the going concern assumption and
whether or not the company is able to achieve its forecasts
7. Confirm the availability of banking facilities with the company’s bankers and loan creditors i.e.
Inspect correspondence with the bank to assess the likelihood of continued bank support
8. By enquiry and review of supplier accounts, form an opinion as to whether the company’s
suppliers will continue to provide financial support
9. Evaluate management plans
a. Is it a genuine plan
i. Authorised
ii. Going to be implemented
b. Will it work
i. Good idea
ii. Legal
c. Obtain more credit
i. Obtain written confirmation from financers
ii. Assess financial stability of financiers
d. New product line
i. Review market research results
ii. Inspect orders received from customers
iii. Inspect internal budgets and production schedules
iv. Inspect minutes of meetings
1. Directors approval
2. Technical/production team
3. Sales team
v. Reperform computations concerning profitability of the new products
e. Subordination agreement
 i. Valid
1. Inspect the written document for
a. Date
b. Signature on behalf of the creditor
c. Signature on behalf of the debtor
d.
2. Review the wording of the agreement to determine that value was received
by the holding company
a. Validate reason
3. Inspect document to ensure all legal formalities have been complied with
4. Consider the ability and intention of the creditor to comply with the
agreement
a. Solvency of the creditor
ii. Accurate
1. Review the amount in the subordination agreement and agree it to the
amount in the FS
iii. Complete
1. Consider whether the agreement relates to a debt of sufficient size
iv. Inspect the AFS to ensure that the subordination is suitably described in the SoFP and
explained in the notes

Intangibles
1. Goodwill
a. Cut-off
i. Capitalized in year of acquisition
b. Valuation
i. Impairment as with PPE
ii. Amortization as with PPE
2. Patents
a. Existence
i. Inspect patent
1. Seal of the registrar
2. In clients name
3. Still in force (20 years)
ii. Inspect renewal form for registrar’s stamp
b. Valuation
i. Cost = registration fees + patent agent fees
3. Trademarks
a. Existence
i. Inspect certificate of registration
1. To ensure trademark it still in force
b. Valuation
i. Registration fees + design costs
ii. Impairment
 iii. Amortization

Inventory
1. Valuation
a. NRV
i. Discuss slow moving items with management
ii. Trace information obtained at the inventory count on damaged, slow moving
and obsolete inventories to records of inventory write-downs
iii. Judge the reasonableness of inventory write downs
iv. Inspect current invoices to determine whether selling prices of inventories are in
excess of cost
v. Judge appropriateness of realisable values used in calculations and the
completion and selling costs by inspecting sales invoices at year end
vi. Ensure that where NRV is lower than cost that the inventory has been written
down
vii. Recalculate the NRV of a sample of inventories from the inventory listing
viii. Reconcile the cost of purchased inventory with the authorised price list
b. General
i. Decide whether inventories are fairly valued in accordance with IFRS and
consistent with company policy
ii. Obtain a management representation letter stating that inventory valuation and
measurement is appropriate
iii. Reconcile the inventory listing balance to the general ledger and the financial
statements
2. Accuracy
a. Purchased inventory
i. Agree the recorded cost prices to suppliers invoices
ii. Examining the more recent invoices and compare to the cost of the inventory to
ensure the client is maintaining inventory cost amounts on a FIFO basis
b. Manufactured inventories
i. Raw materials
1. Reconcile the quantity of raw materials used for each product to
product specifications and authorised component requisitions
2. Agree the cost of raw materials transferred to WIP with the costs as per
the supplier invoices
ii. Labour costs
1. Reconcile the hours worked to the time sheets and the labour rates to
the wage records
2. Compare unit labour costs with those used in the costing of inventories
in the previous year and obtain explanations for any unexpected
changes
iii. Overhead costs
1. Reconcile to costing records and supporting documentation, to establish
that costs relate to the manufacturing process
 2. Compare unit costs with those used for costing of inventories in prior
years and obtain explanations for any unexpected changes
3. Inspect the overhead absorption policy and ensure it is consistent with
the previous year
4. Consider the appropriateness of the determination of normal capacity
iv. WIP
1. Enquire of management how they determine the stage of completion
and assess its reasonableness
2. Obtain the stage of completion from the inventory count sheets and
reperform the calculation of cost
c. General
i. Ensure that all amounts are net of VAT if the client is a VAT vendor
ii. Recalculate the totals in the time sheets and other documents to ensure
accuracy
3. Completeness
a. Select a sample from the stock sheets and trace it to the accounting records
4. Presentation and disclosure
a. Inspect AFS to
i. Ensure different categories are disclosed
ii. Ensure accounting policy is disclosed
5. ARP
a. Inventory turnover rates
b. Gross profit percentage

Long Term Loans

1. Repayment of loan
a. Inspect cheque that was made to repay the loan
i. Was it crossed
ii. Was it made to the correct payee
b. With the clients permission write to the lender asking him to confirm that
i. That the amount was paid
c. Trace payments made to the bank statement
d. Ensure repayments have been recorded in the correct period
2. New loan
a. Examine the memorandum and articles of association for the company’s capacity to take
out loans
i. Are there limits on boards borrowing powers
1. Was this limit exceeded
b. Examine the directors minutes
i. Authorising the loan
c. Obtain a copy of the loan agreement
i. Agree amount of the loan
ii. Inspect the agreement for the directors signatures
iii. Inspect the agreement for the lenders signature
iv. Agree the details in the agreement to the financial statements note
1. Interest, unsecured, etc.
 v. Inspect the date to ensure that the liability was incurred in the current period
vi. Establish details of any security
d. With the clients permission write to the bank and ask them to confirm the amount
outstanding
e. Inspect bank stamped deposit slip for the receipt of the loan
f. Agree balances to the general ledger and trial balance
3. Old loans
a. Obtain a listing of prior year’s liabilities
i. Follow up on any amounts that are not on the new listing
4. General
a. Enquire of management if there are any unrecorded liabilities
b. Obtain a management representation letter
c. Perform analytical review procedures
d. Agree o/b to prior year closing balance
e. Obtain the loan agreement
- Recalculate the amortized cost calculation
- Assess the reasonability of the interest rate BY comparing it to a
comparable debt market (NB – need to say how we’re assessing
reasonability)
-

5. Presentation and disclosure

a. Inspect financial statements to ensure that long term liabilities are presented fairly

Manufacturing Variances
1. Check the arithmetical accuracy of the variances
2. Review variances from month to month to establish trends
3. Enquire of management regarding the reasons for the variance s
4. Substantiate the reasons given by inspection of management reports and enquiry of relevant
personnel
5. Labour variances:
a) Substantiate the reasons given for the labour expense variance by checking details to
payrolls
b) Substantiate the reasons given for the labour efficiency variance by comparing budgeted
and actual production and inspecting production records to substantiate these figures
c) Consider the probability that the 2 variances off-set each other (e.g. more expensive
staff may be more productive) and review the trends in expenditure to substantiate this
6. Consider the consistency and appropriateness of the basis used for the apportioning of variances
into inventory
7. Reperform the calculations of the apportionment of variances into inventory, ensuring that
variances are apportioned in regard to the months in which they occurred so that inventory is
valued on a basis which approximates actual cost on a FIFO basis
8. Trace inventory adjustment to final inventory summary and lead schedule
Other Liabilities
1. Receiver of Revenue
a. Agree opening balance on ledger account to prior year work papers (V)
b. Identify provisional payments and recalculate the amounts (V)
c. Select sample of receipts for provisional payments and assessments paid during
the year, and recalculate them (V)
d. Confirm under/over provision for previous years taken into account – agree with
assessments (E, C)
e. Recalculate current year calculation and classification of journal entry (V, P&D)
f. Cast ledger account and agree to closing balance in draft financial statements (V)
g. Confirm VAT liability correctly accrued by recalculating, and agreeing to VAT
declarations (C, V, E)
2. Provision for Warranty Claims
a. Obtain and discuss basis of determination from management (V)
b. Assess whether basis consistent with previous year (V)
c. Confirm that amount provided is reasonable (V)
i. Identify actual claims processed post year end and compare with
provision
ii. Identify claims processed with previous year's provision to assess basis is
reasonable
d. Compare turnover for current and previous years and assess adequacy of
provision (ARP)
e. Enquire of trends with claims from technical personnel (ARP)

PPE
1. General
a. Obtain a schedule of production machinery setting out
i. Opening balances, additions, disposals and closing balance
ii. Agree the schedule to the fixed asset register
iii. Re-perform the casting and cross-casting of the schedule
b. Agree opening balance for cost and accumulated depreciation with prior years AFS
c. Obtain a management representation letter for all components making up the
production machinery account, including any estimates such as residual values and
useful lives
2. Additions
a. Occurrence
i. Inspect minutes to ensure that it was authorised
1. Compare actual amounts with the authorised amounts and enquire into
any significant differences
ii. Inspect purchase contract
1. Ensure it is in the clients name
 2. Ensure cost is the same as in the fixed asset register
3. Ensure that the purchase happened in the current period
iii. Trace the purchase from AFS to the bank statement/trade payables and
purchase order
b. Completeness
i. Trace the invoice/purchase order to the fixed asset register and financial
statements
c. Classification
i. Trace from the purchase order to the general ledger to ensure that the debit
was to the correct account
d. Accuracy
i. Inspect financial statements and ensure that the item is recorded net of VAT
e. Imports
i. Inspect the purchase agreement to ascertain when the risk and rewards
transferred
ii. Inspect bank documentation for the rate of exchange on the date at which the
risks and rewards transferred
1. Ensure this rate was used to determine the cost of the PPE
iii. Inspect supporting documentation to ensure that transport costs and import
duties were taken into account and done so correctly
iv. Examine bank statement for corroborative evidence that the transaction was in
order
f. Re-calculate any present value calculations to ensure accuracy
g. Construction of machinery
i. Obtain a schedule of the costs for construction of this asset
1. Compare the costs from the schedule to a sample of source documents
a. Labour to wage records
b. Materials to supplier invoices
c. Overhead should be recalculated
2. Ensure that all amounts included in the schedule relate to construction
of the PPE
3. Ensure the accounting policy regarding recovery of overheads and
capitalisation thereof is consistent with prior years
h. Servicing costs
i. Consider whether management has treated these costs correctly
1. Capitalised or expensed
2. Inspect supplier’s documentation to determine whether the correct
costs were taken into account
3. Disposals
a. Occurrence
i. Inspect minutes to ensure that it was authorised
1. Compare actual amounts with the authorised amounts and enquire into
any significant differences
ii. Inspect bank statement to conform proceeds received for sale
b. Obtain a schedule of production machinery disposed of during the year
i. Trace the sale from the asset register to the schedule to ensure that all disposals
are recorded
 ii. Re-perform the calculation of profit and loss on the disposal of the PPE in the
schedule
1. Agree the profit and loss in the schedule to the accounting records
c. Cut-off
i. Inspect signed delivery note for date of disposal to ensure within year end
d. Classification
i. Trace from documents to general ledger for credit to correct account
4. Closing balance
a. Completeness
i. Select machines from the production premise and trace to the fixed asset
register
ii. Review the repairs and maintenance account in the general ledger to ensure
that no amounts that should have been capitalised were expensed
iii. Inspect lease contracts and FAR to ensure all PPE under finance leases included
in balance
b. Existence
i. Review the fixed asset register and physically inspect a sample of items listed on
the fixed asset register
ii. Review the machinery account in the general ledger to ensure that no amounts
which should have been expensed were erroneously capitalised
c. Rights
i. Review bank documentation to establish whether or not plant is provided as
security for debt
ii. Enquire of management if any asset presented as machinery does not belong to
the company
1. For example leased items
iii. Purchase documents and title documents in the name of the client
1. Motor vehicle => vehicle registration
2. Land => deed title
d. Valuation
i. Depreciation
1. Enquire of management whether depreciation policy consistent with
last year
2. Recalculate computation on a basis consistent with the previous year
a. Consider whether the estimates are still reasonable
3. Enquire of management if there have been any changes in the estimates
a. If there has been a change recalculate depreciation on this new
basis to ensure accuracy
4. Obtain a representation letter stating that management has reassessed
useful life and residual values
a. Assess reasonableness of these estimates
5. Perform analytical review procedures to establish if there has been a
change in the prior year trends
6. Could obtain the services of an expert
ii. Impairment
1. Consider the physical condition of assets by inspecting condition of
production machinery
 a. Compare the carrying value per the fixed asset register with the
apparent values as determined from the inspection
i. Ensure the carrying amount does not exceed the
recoverable amount
2. For machinery that was written down, re-perform the computation
a. Assess the reasonableness of the write down
3. Discuss the possibility of further impairments with management due to
a. Market value decline
b. Plans to discontinue assets
c. Adverse changes to technological environment
4. Enquire of management of the impairment identification process
a. Assess assumptions made and methods used
iii. Revaluations
1. Enquire as to whether professionally qualified valuer was used
a. If not assess reasonableness
2. Revaluation surplus
a. Disclose correctly
i. Year of most recent valuation
ii. Basis used
iii. Name and qualification of valuer

Purchases
1. General
a. Reconciliations
i. Trace the invoice to the payment advice
ii. Cast the payment advice
iii. Agree the details on the payment advice to the signed cheque
b. Consider the adequacy of the purchases system and the results of any test of controls
2. Select a sample of major purchase transactions during the year from the accounts payable
records/purchases journal
a. Occurrence
i. Inspect the authorized order in support of the invoice and agree supplier’s name,
description and quantity of goods
ii. Ensure that the invoice is supported by a copy of a signed delivery note
b. Completeness
i. Trace a sample of order forms to GRN to the financial statements
c. Cut-off
i. Obtain the last 20 purchase journal entries before and after year end and agree
to GRN
 1. Inspect GRN to ensure that purchase recorded in the correct period
d. Accuracy
i. Reperform the casts and extensions of the invoice
ii. Recomputate the VAT amount
1. Where VAT is claimed ensure the validity of the Tax Invoice
e. Classification
i. Ensure that the invoice amount has been allocated to the correct account
f. Examine the cheque and ensure
i. The amount on the cheque agrees to the total of the related invoice
ii. The correct payee is on the cheque
iii. The cheque is properly crossed
iv. The cheque is signed by authorized signatories
v. The cheque has not been altered
vi. There are no questionable endorsements on the cheque
3. ARPs
a. Percentage change in purchases to prior years

Share Capital
 Obtain a schedule containing the opening balance, movements and closing balance
a. Re-perform calculations to ensure accuracy
b. Trace the opening balance to prior year working papers and AFS
c. Trace and agree the closing balance to the general ledger and trial balance
 Inspect board minutes for share issue resolution
 Obtain and inspect the prospectus for disclosure of the companies financials
 Agree cash received to B/Statement
 Inspect the journal entry that it was performed accordingly
 Occurrence
a. Inspect MOI to determine whether they have shares to issue
b. Inspect minutes of meetings to determine whether share issue was authorized
c. Agree register of shareholders to share capital account in the general ledger
d. Trace receipts of cash to bank statement
 Completeness
a. Enquire from management whether all equity transactions have been recorded
 Cut-off
 a. Inspect documents for dates within year end
 Accuracy
a. Re-perform calculations as per authorised issue price
b. Re-calculate the value of the business by discounting the future free cashflows by
discounting @ company’s cost of capital
 Dividend payments
a. Inspect minutes to meeting to ensure dividends authorised
b. Obtain schedule of dividend payments
- Cast list
- Agree total to share register and control account in general ledger
- Re-perform calculations to ensure accuracy
1. In total cash payments records
2. Individual accounts
- Examine paid cheques or transfers
1. Date
2. Payee
3. Crossing
4. Amount
 General Tips & Gems
 ‘Cut Off’ – there’s no such thing as CUT OFF for an account balance but cut off is still relevant
- COMPLETENESS – recognized too late
- EXISTENCE – recognized too early
“select a sample of (documents) and inspect for 1) before Y/E 2) After
Y/E”

 Whenever there’s a CONTRACT (purchase agreement, loan, acquisition, material sale)

“Obtain (CONTRACT) and inspect for the following”
- Date of acquisition.
- Date of transfer of ownership.
- Signature of representatives of both parties.
- The names of both parties.
- Contingent purchase price.
 TESTS OF DETAIL APPROACH – Use what’s given in the scenario and audit everything that’s
given TOP  DOWN
1) IFRS complexity in scenario
2) Need to consciously think of ‘material’ risks (driven by ASSERTIONS)
- Revenue = occurrence, accuracy
- Liability = completeness, accuracy
- PPE = valuation
 “REPORTABLE IRREGULARITY” is within the scope of the substantives
- Has caused/likely to cause a material financial loss to the entity
- Is fraudulent or amounts to theft
- Breach in fiduciary duty
 ARPs
- Always need to corroborate and follow up on any abnormal differences
- “Discuss any abnormal differences with management. Corroborate the
explanations received from management by inspecting supporting
documents…. Like maintenance contracts”

 When using an EXPERT, consider his/her/their;

o Independence / objectivity;
o Qualifications, reputation and experience;
o Assumptions used; and
o Results of their work

 DOCUMENTS
o External documents provide stronger audit evidence therefore
Acquisition = invoice
Sale = Goods delivery note (& signature thereof)