2024 CTA L1 Auditing and Governance - Study Unit 9 - Audit Evidence

APPLIED AUDITING AND GOVERNANCE STUDY PACK – MODULE 1 2024 CTA 1
CHARTERED ACCOUNTANTS ACADEMY
AUDITING DEPARTMENT
CERTIFICATE OF THEORY IN ACCOUNTING
STUDY UNIT 9 - AUDIT EVIDENCE - (TEST OF CONTROLS, SUBSTANTIVE

PROCEDURES & SAMPLING)
261 © Property of CAA Learning Media 2024

TABLE OF CONTENTS PAGE
Contents
1. INTRODUCTION ................................................................................................................................. 264
2. Objective of audit evidence .............................................................................................................. 264
3. Scope ................................................................................................................................................. 265
4. Study material ................................................................................................................................... 266
5. Competence Framework expectation .............................................................................................. 266
6. Examination possibilities................................................................................................................... 267
7. Assumed Knowledge ......................................................................................................................... 267
8. Integration ........................................................................................................................................ 267
9. Course notes ..................................................................................................................................... 268
9.1. Background to audit evidence and audit procedures ................................................................. 268
9.2. TEST OF CONTROLS ...................................................................................................................... 266
9.2.1. Identifying key controls – ISA 315 A73 .................................................................................... 266
9.2.2. Identifying key controls: internal vs. external audit ............................................................... 267
9.2.3. Designing test of controls ........................................................................................................ 268
9.2.4. Placing reliance on controls tested in the previous audits – ISA 330 par 14.......................... 269
10. SUBSTANTIVE AUDIT PROCEDURES ............................................................................................. 270
10.1. When should substantive procedure be performed? – ISA 330 par 18 ................................. 270
10.2. Nature, Timing and Extent: ISA 330 par 6 ............................................................................... 270
10.3. Direction of testing ................................................................................................................... 271
10.4. Formulating a substantive procedure ..................................................................................... 272
10.5. Distinction between tests of controls and substantive procedures for transactions ............ 272
10.6. Designing substantive procedures in the exam: ..................................................................... 273
10.7. Integration with accounting: ................................................................................................... 277
10.8. Common students’ omissions .................................................................................................. 278
10.9. The use of CAATs in audit procedures: .................................................................................... 280
10.10. Using system CAATs to test controls: ...................................................................................... 281
10.11. Data CAATs (“Audit retrieval software”) ................................................................................. 281
10.11.1. Using data CAATs to perform substantive testing .............................................................. 281

11. ISA 540: AUDIT SAMPLING ........................................................................................................... 285

11.1. Key Definitions (ISA 540 par 5) ................................................................................................ 285
11.2. Gathering Audit Evidence: To sample or not?......................................................................... 287
11.3. Sample sizes (par 7 and A10-A11)............................................................................................ 288
11.4. Examples of factors influencing sample size for tests of details: ISA 530 Appendix 3 .......... 289
11.5. Sample selection Methods ....................................................................................................... 290
12. QUESTION: TEST OF CONTROLS AND SUBSTANTIVE PROCEDURES ........................................... 292

1. INTRODUCTION
This is the third phase of the audit process. This phase focuses on gathering audit evidence
through the use of tests of controls and substantive audit procedures. This is crucial to the audit
as the auditor will use the audit evidence obtained in order to formulate his opinion on the fair
presentation of the financial statements.
It will become clear that the auditor will obtain audit evidence by performing audit procedures
which includes:
▪ Risk assessment procedures; and
▪ Further audit procedures
o Tests of controls
o Substantive procedures including tests of detail and substantive analytical (analytics
or analytical proecures)
2. Objective of audit evidence

After studying this study unit, you should be able to:
▪ explain the principles that underlie the obtaining of audit evidence (ISA 500);
▪ assess audit risk at the assertion level for individual classes of transactions, account balances,
disclosures and design an appropriate response to address the risks identified (refer to
previous study unit)
▪ design audit procedures to gather audit evidence to respond to risks of misstatement
identified in practical situations, with regard to classes of transactions, account balances, as
well as the disclosures thereof;
▪ evaluate the audit documentation requirements per ISA 230;
▪ discuss the importance and reliability of external documents obtained by the auditor and
their relevance as audit evidence; and
▪ Discuss how to approach the audit of specific areas and apply concepts and principles to a
given practical situation.
▪ Formulate the tests of controls to be performed in assessing the operating effectiveness of
the control environment.
▪ Discuss your concerns with regards to the tests of controls relating to the timing/ period of
testing, the direction of testing, the extent of testing and planning of tests of controls.
▪ Identify the types of substantive procedures that should be performed for each of the
business cycles.
▪ Critically analyse CAATs and discuss how and when to make use of CAATs.

▪ Differentiate between system-orientated CAATs and data-orientated CAATs

▪ Formulate audit procedures through the use of CAATs and /or evaluate audit procedures
performed through the use of CAATs.
▪ Understanding various types of sampling techniques.
3. Scope
ISA 230: Audit documentation
ISA 240: The auditor’s responsibilities relating to fraud in an audit of financial statements.
ISA 250: Consideration of laws and regulations in an audit of financial statements
ISA 260: Communication with those charged with governance
ISA 265: Communicating Deficiencies in Internal Control to those charged with Governance
and Management
ISA 300: Planning an audit of financial statements
ISA 315: Identifying and assessing the risk of material misstatement through understanding
the entity and its environment (revised).
ISA 330: The auditor’s responses to assessed risks
ISA 402: Audit considerations relating to an entity using a service organisation
ISA 500: Audit evidence
ISA 501: Audit evidence – specific considerations for selected items
ISA 505: External confirmations
ISA 510: Initial audit engagements – opening balances
ISA 520: Analytical procedures
ISA 530: Audit sampling
ISA 540: Auditing accounting estimates, including fair value accounting estimates, and related
disclosures
ISA 550: Related parties
ISA 580: Written representations

ISA 600: Special considerations – Audits of group financial statements (including the work of
component auditors)
ISA 610: Using the work of internal auditors
ISA 620: Using the work of an auditor’s expert
ISA710: Comparative information – Corresponding figures and comparative financial
statements
4. Study material
• International Standards on Auditing
• International Financial Reporting Standards covered in FAR
• CAA Applied Auditing and Governance AUD 401/2 Module 1 & 2
• Auditing notes
5. Competence Framework expectation

IV-2.6 Designs effective and efficient procedures based on the engagement’s scope and the
assessed risks – Level 2
For a given set of circumstances, decides on –
• the form, extent and quality of evidence required to support the assurance report
• the most efficient testing procedures (e.g., tests of control and/or substantive tests of
detail / analytical procedures) to obtain the evidence
• the need to make use of others (experts, internal auditors, other auditors) or the need
to use computer assisted audit techniques to gather evidence
• Communicates the plan to appropriate key stakeholders (including those charged with
governance)
Designs and documents appropriate programmes of engagement procedures based on the
above considerations
Is alert to changes in circumstances not considered in the design of the engagement
procedures and adjusts the procedures appropriately
IV-2.7 Performs the work plan - Level 2
Performs the procedures specified in the programme (e.g. analytical review of expenses) with
due care and an objective state of mind
Applies an appropriate level of professional scepticism, remaining alert to the possibility of
fraud and non-compliance with laws and regulations
Understand the need to supervise and review work of junior staff

Modifies the work plan as necessary
IV-2.8 Documents the work performed and its results Level 2
Prepares documentation with sufficient detail to support the nature, timing and extent of the
further audit procedures performed and the results of the procedures
For each procedure performed, ensures that the documentation provides a clear link to
significant findings or issues that arose during the engagement
Evaluates the overall adequacy of documentation
6. Examination possibilities
• Can be required to describe auditing procedures
• Can be required to review the completeness of auditing procedures carried out
7. Assumed Knowledge
The following is assumed knowledge which you should already have at CTA level.
• IFRS covered and assumed in FAR
• Risk assessment
• Responding to identified audit risks
• Audit sampling
8. Integration
This topic can be integrated with risk assessments procedures.

9. Course notes
9.1. Background to audit evidence and audit procedures

An audit is performed in order to express an opinion on the fair presentation of the Annual
Financial Statements. However, to be able to express this opinion, the auditor must obtain audit
evidence. Therefore, to obtain audit evidence, the auditor must perform audit procedures.
So what does ISA 500 say about audit evidence:
In Paragraph 4, it states that: “The objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base the auditor’s opinion”.
Based on the objective above, let us take a closer look at the difference between audit evidence
and audit procedures.
Audit Evidence Audit evidence is sufficient appropriate information obtained by the

auditor to assist in arriving at the audit opinion.
It consists of e.g.
▪ Source documents.
▪ Accounting records underlying the financial statements.
▪ Corroborating information from other sources.
▪ Reports from auditor’s or management’s experts,
Sufficient audit evidence refers to:
▪ The quantity of evidence (Refer to ISA 500 par. 5 for the complete
definition).
▪ The auditor’s assessment of the risk of material misstatement at the
planning phase will affect the quantity of the evidence to be
obtained, i.e. the riskier an account, the more evidence will be
required and vice versa.
▪ E.g. If you have a sample size of 30 items to test from a population
of 100 items, the audit evidence would not be sufficient if you have
only obtained audit evidence for 15 items.
Appropriateness of audit evidence refers to:
▪ The quality of audit evidence, that is its relevance and reliability
(Refer to ISA 500 par. 5 for the complete definition).
▪ Relevance: The evidence obtained must be relevant to the assertion
that is being tested (Refer to ISA 500 par. A27-A30). i.e. Selecting
purchase invoices and following it through to the accounting
records will provide audit evidence concerning the completeness
assertion, but provides no audit evidence concerning the

occurrence assertion.
▪ Reliability: Refers to the source and nature of the audit evidence
(Refer to ISA 500 par. A31-A33 for a discussion on the reliability of
audit evidence) .i.e. Evidence developed by the auditor is more
persuasive and reliable as opposed to evidence provided by the
client.
Audit procedures Are those actions performed by the auditor in order to obtain audit
evidence?
Audit procedures consists of:
▪ Risk Assessment Procedures (performed during the planning
phase).
▪ Further Audit Procedures which comprise of:
o Tests of controls; and
o Substantive procedures including tests of details and
substantive analytical procedures.
In order to obtain the audit evidence, audit procedures are performed using the following (as
set out in ISA 500 par A14 to A25):

Procedure What does the procedure involve i.to ISA 500 Example of risk assessment Example of test of control Example of substantive
to obtain procedure procedures
audit
evidence
(ISA 500)
Inspection Examination of records or documents Inspect the internal control Inspect the bank reconciliation Inspect a sample of the vehicles
(internal and/or external). This could be in manual of the company in order to for the signature of the financial selected from the asset register
paper form, electronic form, other media, obtain an understanding of manager as evidence of review. to confirm the existence of the
physical examination of an asset internal controls relevant to the vehicles.
audit.
Observation Consists of looking at a process or Observe the entity’s operations Observe the financial manager Observation is not ideal as a
procedure being performed by others with regards to production in performing a comparison substantive procedure.
(ISA 500 par. A17). order to obtain an understanding between the actual expenses for
of the nature of the entity and its the month versus the budgeted
operations. figures.
External Audit evidence obtained by the auditor as a Not a risk assessment procedure. Not ideal as a test of control. Obtain an external confirmation
confirmation direct written response to the auditor from from the bank confirming the
(Also refer to a third party (in hard copy, electronically or bank balance at a certain date
ISA 505) other medium) (ISA 500 par. A18). (e.g. year-end).
Recalculation Checking the mathematical accuracy of Not a risk assessment procedure. Not ideal as a test of control. Recalculate the electronic
documents or records (manually or debtor’s file to verify the
electronically) (ISA 500 par. A19). mathematical accuracy thereof
Reperformance The auditor independently executes a Not a risk assessment procedure. Reperform the ageing of the Reperform the bank
procedure or control that was originally accounts receivable and reconciliation in order to confirm
performed as part of the entity’s internal compare it to the ageing that the bank balance stated in
control (ISA 500 par. A20). performed by management. the financial statements at year-
end is valued correctly.
Analytical Evaluations of financial information through Perform analytical procedures on Not ideal as a test of control. Perform analytical procedures
procedures analysis of plausible relationships among both the financial statements e.g. com- on sales by comparing the trend
(Also refer to financial and non-financial data. Also pare the current year’s financial analysis of the sales figure on a
ISA 500) encompass investigations as is necessary of statements to that of the prior monthly basis.
identified fluctuations or relationships that year, in order to obtain an under-
are consistent with other relevant standing of the entity’s financial
information or that differ from expected performance for the year.
values by a significant amount (ISA 500 P21)
Inquiry Seeking information of knowledgeable Inquire from the financial Inquire from the financial Inquire from the financial
persons, both financial and non-financial, manager what the entity’s manager what controls he/she director how the fire in the
within the entity or outside the entity. selection and application of performs on a monthly basis factory impacted on the

accounting policies are and if with regards to the bank impairment of inventory
these have changed since the reconciliations. items.
prior year.

APPLIED AUDITING AND GOVERNANCE STUDY PACK – MODULE 1 2024 CTA LEVEL 1
9.2. TEST OF CONTROLS
ISA 315 requires the auditor to obtain an understanding of the accounting system and related
internal controls. This requirement by the ISA is very important as it not only allows the
auditor to be able to identify and assess the risk of material misstatement at the client, but it
also allows the auditor to make a preliminary assessment of the operating effectiveness of
controls.
Assuming that the auditor concludes that there is an expectation that controls are operating
effectively at the planning phase, the auditor can then design further audit procedures based
on tests of controls in order to obtain audit evidence.
ISA 330 paragraph 8 states that an auditor shall design and perform test of controls where:
▪ The auditors assessment of risk at the assertion level includes an expectation that the
controls are operating effectively or
▪ Substantive procedures alone cannot provide sufficient appropriate audit evidence, i.e.
the entity conducts its business using IT and no physical documents are maintained.
The operating effectiveness of a control consists of two components:
1. Design: The control can Prevent, Detect and Correct material misstatement.(this is
determined at the planning stage)
2. Implementation: The control exists and the entity is using it. (this is determined through
test of controls)
9.2.1. Identifying key controls – ISA 315 A73
A key control is one that will independently result in the prevention or detection of fraud or
error.
These are those upon which the auditor will place reliance when testing controls.
Key controls would generally be those related to:

▪ Authorising documents with a signature;
▪ Checking documents for authorisation or accuracy and signing as evidence of this;
▪ Agreeing documents to one another;
▪ Performing sequence checks on documents;
▪ Any of the overall (SCRUM) controls listed in the detailed controls section; and
▪ Any of the computerised controls listed in the detailed controls section.

The following are not key controls:
▪ Sending documents or information from one function/stage to another;
▪ Preparing documents; and
▪ Sequentially numbering documents – the actual control is performing the sequence
check.
9.2.2. Identifying key controls: internal vs. external audit
Students should note that external auditors would be identifying key controls in order to place
reliance on them in verifying the audit assertions whereas internal auditors would be more
concerned with determining whether the internal control objectives were being met.
As a result of the significant overlap between the transactional assertions and the integrity
objectives, we would expect the key controls identified by the internal and external auditors
to be largely identical. However, the difference between occurrence assertion and the validity
objective creates differences in focus.
When identifying key controls an external auditor would focus on controls designed to
ensure that all recorded transactions were genuine. They would not, however, place reliance
on controls designed to ensure that all transactions were in accordance with management
policy as this is irrelevant to occurrence assertion. Therefore, the external auditor would
regard controls related to the authorisation of transactions as key controls. The internal
auditor, however, would regard authorisation controls as key controls because they meet the
validity objective.
1. Students should read the required carefully to determine whether they have been asked
to identify all the key controls or only those related to a specified control objective.
2. Students should also read the scenario to determine whether they are asked to identify
they key controls from the perspective of the internal auditor or from that of the external
auditor.
3. Students should write out the key controls as fully as they are in the scenario. Simply
writing “authorisation for sales”, for example, would not be sufficient, whereas
“management authorises sales over the credit limit” would be.
Exam tip!!!!

The timing of tests of controls depends on the auditors intended reliance of those controls
(ISA 330 par 11). The auditor should perform tests of controls to obtain sufficient appropriate
audit evidence that the controls were operating effectively at relevant times during the period
under review. If the auditor tests controls at a particular time, the auditor only obtains
evidence that the controls operated effectively at that time. However, if the auditor tests
controls throughout the period under review, the auditor obtains audit evidence about the
effectiveness of the operation of the controls throughout that period.
Important Principle
If the system of controls at the client is operating effectively, it provides reasonable assurance
to the auditor that the totals and balances produced by the system are free from material
misstatement.
Remember the auditor ultimately gives an opinion as to whether the financial statements are
free from material misstatement. In this scenario, the auditor will still perform substantive
testing; however, it will mainly comprise of analytical review procedures.
9.2.3. Designing test of controls

A properly worded test of control should address the following:
How This is the verb that describes the action to the performed. You will find
these verbs (audit procedures) in ISA 500 par A14 to A25.
The following audit procedures will most likely be used when testing a
control:
▪ Inspection: A good example is the inspection of purchase order for
evidence of a signature as authorisation.
▪ Observation: An example is when the auditor observes the inventory
count control activities. Another example is observing a person
entering his/her user ID and password. This is not the best audit
procedure as there are certain inherent limitations.
▪ Reperformance: Reperforming the monthly bank reconciliation to
confirm that the internal control of balancing the cash book and the
balance per the bank statement has been properly carried out is an
example.
▪ Inquiry: On its own, inquiry is not considered to be sufficient and
therefore can be used in addition to other audit procedures
(mentioned above).
What – Here you should make reference to the source document (e.g. the
Source of purchase order on which the signature is made) and/or the action
evidence (control) being performed (e.g. the password being entered by the
employee to gain access to the system).

Why – This describes the reason for performing a test of control. Here you state
evidence the reason/objective of the procedures you are performing. What do you
expected to want to achieve through the specific test of control or identify the
be obtained evidence you want to obtain?
▪ The auditor can only perform tests of controls, where there is an expectation that controls
are operating effectively.
▪ Thus for a control to be operating effectively it means that:
o A control is strong (It prevents, detects and corrects material misstatement)
o A control actually exists (You cannot test a control that is not there)
▪ Then what about a control that does exist, but is seen to be weak, do we test such
controls?
o The answer is no, because by testing controls we are obtaining audit evidence and
based on our understanding of audit evidence, then it is clear that such evidence
would not be appropriate.
Exam tip!!!
9.2.4. Placing reliance on controls tested in the previous audits – ISA 330 par 14
An auditor can place reliance on the results of test of control procedures and results from
previous audits on the condition the following are met:
i. The control has not changed since they were last tested;
ii. The control is not a control that mitigates a significant risk; and
iii. The control should be tested at least once every third year.

10. SUBSTANTIVE AUDIT PROCEDURES
What is a substantive procedure?

Paragraph 4 of ISA 330 defines a substantive procedure as:
“An audit procedure designed to detect material misstatement in the financial statements at
the assertion level”
Substantive procedures comprise:

▪ Tests of details (of transactions, balances and disclosures) and
▪ Substantive analytical procedures.
Looking at the aspects of the definition:

1. material misstatement:
▪ The ultimate aim of the auditor is to express an opinion as to the fair
presentation of the financial statements.
▪ Thus to express this opinion, the auditor must perform audit procedures (in
this case substantive procedures) to obtain audit evidence to determine
whether the amounts and disclosures in the financial statements are free from
material misstatement.
▪ What gives rise to misstatements:
o Noncompliance with IFRS, Companies and Other Business Entities Act
or tax legislation resulting from error or fraud.
10.1. When should substantive procedure be performed? – ISA 330 par 18
An auditor will always perform substantive procedures on an audit. This is irrespective of

whether the auditor decides to perform test of controls or not.
Assuming the auditor decides to test controls, the auditor will still be required to perform
substantive procedures which will most probably consist of analytical review procedures.
Where the auditor decides not to test controls, the auditor will then perform substantive
procedures which will consist of tests of details and analytical review procedures.
10.2. Nature, Timing and Extent: ISA 330 par 6
Nature (ISA 330 par A9 to A10)

For detecting material misstatement at assertion level, include:
a) analytical procedures – for large volumes that tend to be predictable over time; and

b) Tests of details – of all assertions for material classes of transactions, account balances
and disclosure (ISA 330 par 18).
Timing (ISA 330 par A11 to A14)
Refers to when audit procedures are performed or the period or date at which audit evidence
applies.
▪ When substantive procedures are performed at an interim date, the auditor should
perform further substantive procedures or substantive procedures combined with
tests of controls to cover the remaining period that provide a reasonable basis for
extending the audit conclusions from the interim date to the date at the end of the
period under review (ISA 330 par 22 and 23 and A54 to A58).
Extent (ISA 330 par A15 to A16)

Refers to the quantity of a specific audit procedure to be performed, for example, a sample
size for substantive procedures or the number of observations of a control activity.
▪ The greater the risk of material misstatement, the greater the extent of the
substantive procedures. It is necessary to increase the extent of substantive
procedures if the tests on internal controls show unsatisfactory results.
10.3. Direction of testing

In order to test the occurrence and completeness of a transaction, the auditor traces the
transaction from one document to the other. However, the “direction” in which he traces
depends on which assertion is being tested:
1. When testing occurrence of the transaction the auditor is seeking evidence that all
items that ended up in the financial statements actually occurred. A sample is
therefore selected from the accounting records and traced all the way back through
the series of documents to the first document.
2. When testing completeness, however, the auditor wishes to determine whether all
the transactions ended up in the financial statements. A sample is therefore selected
from the first document and traced to the financial statements.

10.4. Formulating a substantive procedure

a substantive procedure should address the following:
How - verb This is the verb that describes the action to the performed. You will find
these verbs (audit procedures) in ISA 500 par A14 to A25.
The following audit procedures are likely to be used when testing an

account balance or class of transactions substantively:
▪ Inspection: An example is the inspection of a bank confirmation in
order to confirm that the balance on the confirmation agrees with the
balance as per the financial records.
▪ External confirmation: Obtaining debtors‟ confirmation letters is a
good example of an external confirmation.
▪ Recalculation: An example of this audit procedure is recalculating a
schedule obtained from management setting out e.g. debtors‟
balances. This can be done manually or electronically through the use
of CAATs. It is done to verify the mathematical accuracy of the
schedule.
▪ Reperforming: Reperforming the calculation of a provision is an
example of reperformance. This does not only entail casting the
calculation but re-doing the calculation taking into account all
assumptions and methods used by management.
▪ Analytical procedures: Comparing expenses incurred to budgeted
expenses on a month-to-month and year-to-year basis is a good
example of analytical procedures.
▪ Inquiry: An example is enquiry from the financial manager on how a
certain provision was calculated and obtaining an understanding of the
assumptions used.
What A reference should be made to the relevant and reliable source(s) of
evidence.
Why – audit This explains the reason for performing the substantive procedures. Here
evidence you will make reference to the relevant assertion being addressed by the
expected to substantive procedures.
be gathered Example: Recalculate (HOW) the bank reconciliation (WHAT) by casting
(HOW) this reconciliation (WHAT) in order to ensure the mathematical
accuracy thereof (WHY).
10.5. Distinction between tests of controls and substantive procedures for

transactions
Because routine transactions are often subject to strict internal controls, the auditor will often
decide to place reliance on these controls and to perform tests of controls. The tests of
controls and substantive procedures performed on these routine transactions are very
similar. However, the difference between them is the intention the auditor has when
performing them.
Tests of controls are performed with the intention of determining whether controls operated
effectively throughout the period upon which the auditor wishes to rely on them. The auditor
therefore compares what should be done according to management to what has been done.
If controls have not been operating (i.e. staff has not done what they should have done) then
the auditor will not be able to place reliance on these controls and will have to perform
additional substantive procedures.
Substantive procedures, on the other hand, are performed in order to identify any
misstatements (fraud or error) and quantify them in order to determine whether or not they
are material. If material misstatements are detected then the auditor will need to modify the
audit report.
10.6. Designing substantive procedures in the exam:
The following process should be used when designing substantive procedures:

1. Read the required carefully to determine whether you are required to design
procedures to obtain evidence over all assertions or only over some of the assertions.
2. Read the required and the scenario to determine whether any of the procedures have
been scoped out/already done.
3. Consider the IFRS requirements applicable to the balance or transaction.
4. Based on the IFRS requirements and the scenario, identify the significant risks to each
of the assertions you have been asked to address.
5. Design procedures to address the significant risks.
The following may serve as a guideline of the kinds of procedure that can be used (but
remember that you will need to apply these to the scenario and the required):
Assertion Procedures
Substantive procedures over classes of transactions
Occurrence ▪ Select a sample from the accounting records and trace through to the
first document (e.g. select a sample from the sales journal and trace
to the sales invoice, , delivery note and sales order);
▪ For sampled documents, inspect for signature by a client
representative; and
▪ For sampled documents, inspect that it is made out in the client’s
name.

Completeness ▪ Select a sample of first documents and trace to the accounting

records (e.g. select a sample of sales orders and trace to the delivery
note, sales invoice and sales journal); and
▪ For sample of documents selected, inspect for sequential numbering.
Cut-off ▪ For goods, obtain the last delivery note/goods received note of the
year and note its number.
o Select a sample from before and after year-end and inspect
the accounts to verify that they have been recorded in the
correct accounting period.
Accuracy ▪ For the sample of documents selected:
o Inspect for prices/rates used and agree these to
contracts/authorised price lists etc.
▪ Reperform calculations of VAT, deductions and totals (be specific);
and
▪ For any transactions taking place beyond normal credit terms,
reperform calculation of present value at the date of the transaction.
Classification ▪ When tracing sample of transactions to the accounts, inspect that
these have been correctly classified.(e.g current assets, non-current
liability).
Analytical ▪ Calculate the gross profit percentage and compare to budget and
procedures prior year;
▪ Compare total value of transactions for the year and compare to
budget and actual and
▪ Enquire of management regarding any significant differences.
General ▪ Consider the adequacy of the system for generating financial
procedures information;
▪ Inspect minutes of meeting of board of directors and management
for pertinent information;
▪ Enquire from management about any models and assumptions used
(be specific based on scenario) and consider the appropriateness
thereof; and
▪ Obtain a signed and dated management representation letter
regarding all assertions.
Assertion Procedures
Substantive procedures over year-end balances
Existence ▪ Select a sample of assets and inspect them for physical existence;
▪ Obtain third-party confirmations regarding the existence of
intangible/financial assets;
▪ Obtain third-party confirmations regarding the existence of
liabilities;
▪ Verify that intangible/financial assets meet the IFRS recognition
criteria by inspecting supporting documentation (e.g. contracts,
technical feasibility studies, minutes of meetings etc.) or by enquiry
of an expert;
▪Inspect documents that support the existence of liabilities (e.g.

contracts);
▪ Inspect bank statements for subsequent receipt or payment of
financial assets and liabilities; and
▪ Enquire of a legal expert regarding the existence of obligation for
liabilities.
Rights and ▪ Enquire of management whether any assets are leased/pledged as
obligations security/held on behalf of others;
▪ Obtain confirmation from the bank that no assets are pledged as
security;
▪ Enquire of management whether debtors have been factored;
▪ Inspect contracts for terms and conditions; and
▪ Inspect registration documents (e.g. title deeds, share certificates
etc.) to verify that they are in the client’s name.
Valuation ▪ Inspect documents (invoices, contracts, etc.) to verify the cost of
assets;
▪ Inspect costing schedule to verify that transport costs, import duties,
installation costs etc. have been included in the cost of assets:
▪ Inspect supporting documents to verify that these costs have been
included at the correct amounts;
▪ For imported assets, obtain bank confirmation of spot rates on date
of acquisition;
▪ For self-constructed and imported assets, reperform calculations of
cost in dollars;
▪ Enquire of management regarding any models and assumptions used
in determining allowances or in valuing assets/liabilities:
▪ Inspect any documents that support these assumptions (e.g. market
data);
▪ Inspect documents that support the market value or net realisable
value of assets;
▪ Reperform calculations of allowances (such as depreciation and
allowance for doubtful debts) using management assumptions;
▪ Enquire of an expert regarding the valuation of assets and liabilities;
▪ Inspect physical condition of assets for any evidence of damage;
▪ Reperform calculation of fair value/net realisable value/recoverable
amount; and
▪ Reperform calculation of impairment:
o Inspect general ledger to verify that impairments have been
correctly accounted for.
Assertion Procedure
Completeness ▪ Inspect the general ledger to identify any items that meet the asset
recognition criteria but that have been erroneously expensed (e.g.
import duties);

▪ Inspect the bank statement for any unexplained payments and

enquire of management of whether these amounts are for items that
should be recognised as assets; and
▪ Select a sample of tangible assets from the factory or warehouse
floor and inspect the accounting records to verify that they are
included.
Presentation ▪ Inspect the financial statements to verify that assets or liabilities are
and disclosure correctly disclosed.
Analytical ▪ Balances can be compared to prior year; and
Review ▪ Ratios can be calculated and compared to prior-year and industry
procedures norms.
General ▪ Obtain a schedule of movements in the balance;
procedures ▪ Agree the opening balance to prior-year financial statements (where
an opening balance existed);
▪ Agree the closing balance to the general ledger, trial balance and
draft financial statements;
▪ Reperform the arithmetic accuracy of the schedule;
▪ Obtain a management representation letter; and
▪ Consider whether the tax treatment of the balance is appropriate.

10.7. Integration with accounting:

In answering questions concerning audit procedures, always consider whether any specific
procedures should be performed to ensure compliance with a particular accounting
statement (IFRS).

Example:
Let us assume that we have to audit Investment Property (IAS40).

▪ IAS 40 provides us with the Recognition and Measurement requirements.
▪ Keep in mind that the auditor must obtain audit evidence regarding the assertions related to
Investment property (Existence, Valuation, Completeness and Rights).
▪ Recognition Criteria
o Tells us when we can record the Investment property.
o If the recognition criterion is met and investment property is not recorded, the risk will
increase for the completeness assertion.
o If the recognition criterion is not met and investment property is recorded, the risk will
increase for the existence and valuation assertion.
▪ Measurement Criteria
o Tells us at what value should investment property be recorded at
o It provides us with the initial recognition and subsequent measurement criteria.
o For initial recognition, if investment property is not recorded at cost, the risk will
increase for the valuation assertion.
o Similarly if the subsequent measurement criterion (depreciation, revaluation, fair value
etc.) is not complied with, this will also increase the risk for the valuation assertion.
10.8. Common students’ omissions

Candidates often tend to leave out the following issues. Useful memory aids are “the 3 S's”,
“the 4 A's”, “MEAT” and “CRAP?”
The 3 S’ ▪ Schedule – Obtaining a schedule from the client (typically for year-end
balances).
▪ Sample – Selecting a sample and how the sample is to be selected.
Typical samples would be:
I. A random sample for a test of controls;
II. A sample biased towards high monetaryvalues for verifying assets;
and
III. A sample including all known major suppliers for accounts payable.
▪ System – Considering the system (general observations concerning the
system are unlikely to be relevant for transactions work as your solution
should include details of tests of controls. This issue is, however, very
relevant for 1 mark when doing year end work, for example, when

auditing accounts receivable, one would, as a minimum, “review audit

working papers for tests of controls to provide evidence for the
completeness assertion on sales and accounts receivable". One might
also review tests of controls directed at the other assertions and reduce
year-end substantive work accordingly.
The 4 A’s ▪ Accounting issues;
▪ Analytical review procedures (pertinent to both transactions and
balances);
▪ Arithmetical accuracy (also pertinent to both transactions and
balances); and
▪ Allowances – such as allowances for obsolete inventory, doubtful debts,
etc. A year-end test, but also relevant to transactions work in that
reversing entries such as credit notes apply.
MEAT ▪ Management accounting. One should realise that things like standard
costing could affect the valuation of the inventory
▪ Experts. Do you need an expert to assist with the audit work? What kind
of expert? Refer to ISA 620.
▪ Adjustment. Have you checked any adjusting entries? Consider the
possibility that an adjusting entry has not been passed. This then
becomes an audit difference and the audit procedure is to evaluate any
unadjusted audit differences.
▪ Tax. Often you can also gather one or two additional marks by auditing
the tax aspects of the item under audit. Refer to illustrations section of
these notes for examples.
CRAP ▪ Cut off – a year end test, but the corresponding transactions procedure
is to check that an entry is recorded in the correct period.
▪ Management representation letter: You must remember that it should
be signed and you should also state why it is needed. If you do not state
why it is needed, NO marks will be awarded.
▪ Agree the total of individual balances to the control account and to the
financial statements. (This would be for year-end work. In regard to
transactions work, check an entry all the way to the posting to the
general ledger.)
▪ Present value – Did you reperform any necessary present value
computations and did you review the reasonability of the discount rate
used?
Common pitfalls:
1. When asked to “describe audit procedures”, candidates tend to use terms such as “ensure
that”, “look at”, “ascertain”. Note that none of these terms describes a procedure. You
should notice the frequency with which the authors use more descriptive terms such as

“confirm”, “inspect” and “reperform”. As far as possible, your sentences should

commence with an “action word” such as “inspect”, “reperform” and “enquire”.
2. When faced with auditing an accounting issue, candidates tend to list the requirements
of the applicable IFRS/IAS Statement. As is illustrated above, you should rather describe
a procedure that gathers evidence concerning compliance with the accounting statement.
3. Candidates often use too many generic phrases such as “inspect the supporting
documents” or “perform analytical reviews”. You should note how the authors refer to
specific documents such as invoices, reconciliations, title deeds, etc. In regard to
analytical reviews, you should note in the tutorials how the authors give examples,
describe specific review procedures.
4. Students use “confirm by inspection”, which is inappropriate as it implies a mix of two

procedures – “Confirmation, implying written confirmation from a third party”, and
“Inspection” implying inspection of the related document.
5. Concerning provisions/allowances, candidates often fail to cover all of the issues. Students
should consider all the models, assumptions, inputs and calculations used to determine
these amounts. They should then design procedures to test all of these. They should also
perform analytical review procedures on the allowances.
6. The procedures referred to under "common student omissions" are frequently lacking.
10.9. The use of CAATs in audit procedures:

There are two types of Computer Aided Audit Technique (CAAT) available to the auditor.
These can be used when performing audit procedures in a computerised environment:
1. Systems oriented CAATs (used mainly for testing controls); and
2. Data oriented CAATS (used mainly in performing substantive procedures).
Systems CAATs:
Two types of systems CAAT can be used: test data and embedded techniques.
• Test data can be used to process a set of data through the computer system and evaluate
the output at a given point in time. It is used to test automated computer controls. The
auditor inputs valid and invalid data into the system and verifies that the system has
correctly dealt with it by, for example, blocking invalid data. Test data is easy to use but
can only be used to verify that controls were operating on the date of testing, not the
whole year.

• Embedded techniques are audit software routines embedded into the client’s software.
They are similar to data CAATs, but instead of taking place at a specific date they feed data
through the client’s system on a continual basis. This has the benefit of testing the entire
accounting period.
10.10. Using system CAATs to test controls:

When designing systems CAATs to test automated controls, students should follow the
following procedure:
• Identify the inputs that will be entered into the system, e.g. overtime hours;
• Identify what input data would be valid and what data would be invalid. For example,
overtime hours greater than the maximum overtime allowed would be invalid data; and
• State that you would run both valid and invalid data through the client’s system and
compare the output to the expected output. You would expect valid data to be processed
properly and invalid data to be rejected or to appear on an exception report.
Note: students should be specific when describing valid and invalid detail, and should state
exactly what would constitute “invalid data”.
Exam tip!!!
10.11. Data CAATs (“Audit retrieval software”)
Data CAATs are computer programmes that manipulate the computerised data on a client’s
system. Data CAATS can be used to do the following:
a) Compute or recalculate amounts;
b) Generate exception reports (i.e. identify data that meets certain “error” criteria);
c) Compare data in different files;
d) Calculate ratios for use in analytical review procedures;
e) Select random samples of items to be audited;
f) Select exceptional or material items; and
g) Reconstruct audit trails for inspection.
10.11.1. Using data CAATs to perform substantive testing

When students are asked how they would use CAATs in performing audit procedures, they
should do the following:

▪ Consider what procedures they would normally do for the given balance or
transaction;
▪ Consider whether CAATs can be used to do these procedures instead;
▪ If so, state what the CAAT will do and how you will use the output;
▪ Consider whether you have used all the basic CAAT functions listed in the overview
above. If not, design a procedure using these; and
▪ If the question includes a list of data fields stored on the system, ensure that the CAAT
has retrieved data from all relevant fields.
An example of how you would apply this thought process for inventory is shown below:
Assertion Outline of “Normal” audit Use of CAATs

procedures.
Existence Attend inventory count and Sort the data into high and low value items and
perform test counts. select samples for test counts.
Select a sample of transactions processed to
the inventory records for inspection of
documentation.
Ownership Enquiry CAAT cannot help
Accuracy Agree cost to invoices Select a sample of purchase transactions for
inspection of invoices.
Check calculation of cost and CAAT cannot do this
casts of inventory records.
Valuation Select slow moving items and Select items with no movement for xx months.
investigate
Compare cost to selling price and Print out details of all items where cost exceeds
check NRV. selling price.
Completen Check sequence of transactions. CAAT can do this.
ess
Perform test counts from the CAAT cannot do this.
floor.
Presentatio Reperform CAAT cannot do this.
n and
disclosure
Other “C” Cut-off Select sample of transactions around the year-
“standard end.
procedures
:
“R” Obtain representation CAAT cannot do this
“A” Agree to general ledger Calculate total of inventories
“A” Check arithmetic CAAT did this already
“A” Analytical review Compare balances to prior periods

Review inventory records for abnormal items

such as negative prices, negative quantities,
missing fields, etc.

Exam tip!!!
Students often make the following errors:

▪ Describing both systems and data CAATs when asked how they would use “audit retrieval
software” (a form of data CAAT); and
▪ Not giving enough detail with regards to exception reports. Students must state exactly
what error criteria they would identify, e.g. duplicate invoice numbers. (Refer to section of
internal control systems for examples of exception reports.)

11. ISA 540: AUDIT SAMPLING

Introduction
The objective of the auditor when using audit sampling, is to provide a reasonable basis for
the auditor to draw conclusions about the population from which the sample is selected. (ISA
530 par 4). Auditing standards recognize and permit both statistical and non-statistical
methods of audit sampling.
In practice technological advances have reduced the number of times auditors need to apply
sampling techniques to gather audit evidence due to the following:
1. Development of well controlled, automated accounting systems; and
2. Advent of powerful PC audit software to download and examine client data.
However, technology will never eliminate the need for auditors to rely on sampling to some
degree because:
▪ Many control processes require human involvement.
▪ Many testing procedures require the auditor to physically examine an asset.
▪ In many cases auditors are required to obtain and examine evidence from third
parties.
11.1. Key Definitions (ISA 540 par 5)

Audit sampling The application of audit procedures to less than 100% of items
(sampling) within a population of audit relevance such that all sampling units
have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire
population.
Population The entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions. E.g. the accounts
receivable balance of $200,000 will be the population.
Sampling risk The risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were
subjected to the same audit procedure. Sampling risk can lead to
two types of erroneous conclusions:
(i) In the case of test of controls, that controls are more
effective than they actually are, or in the case of test of
details, that a material misstatement does not exist when in
actual fact it does. The auditor is primarily concerned with
this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate
audit opinion.
(ii) In the case of a test of controls, that controls are less
effective than they actually are, or in the case of a test of

details, that a material misstatement exists when in fact it

does not. This type of erroneous conclusion affects audit
efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
Sampling Unit The individual items constituting a population. Sampling units

might be physical items (for example, checks listed on deposit slips,
sales invoices or monetary units (for example $ value).
Statistical sampling An approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results,
including measurement of sampling risk.
Therefore, a sampling approach that does not have the above
characteristics is considered non-statistical sampling.
Stratification The process of dividing a population into subpopulations, each of

which is a group of sampling units which have similar characteristics
(often monetary value).
Tolerable A monetary amount set by the auditor in respect of which the
misstatement auditor seeks to obtain an appropriate level of assurance that the
monetary amount set by the auditor is not exceeded by the actual
misstatement in the population. Tolerable misstatement is the
application of performance materiality to a particular sampling
procedure and it may be the same amount or an amount lower than
performance materiality.
This is only applied when performing test of detail procedures.

Tolerable rate of A rate of deviation from prescribed internal control procedures set
deviation by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the
population.
As you can see tolerable rate of deviation is only applied when an

auditor is performing test of control procedures.

11.2. Gathering Audit Evidence: To sample or not?

Relationship between Evidence Types and Audit Sampling
Audit Sampling
Type of Evidence Commonly Used
Inspection of tangible assets Yes
Inspection of records or documents Yes
Reperformance Yes
Recalculation Yes
Confirmation Yes
Analytical procedures No
Scanning No
Inquiry No
Observation No
Examples
• Inspection of tangible assets. Auditors typically attend the client’s year-end inventory
count. When there are a large number of items in inventory, the auditor will select a
sample to physically inspect and count.
• Inspection of records or documents. Certain controls may require the matching of
documents. The activity may take place many times a day. The auditor may gather
evidence on the effectiveness of the control by testing a sample of the document
packages.
• Confirmation. Rather than confirm all customer account receivable balances, the
auditor may select a sample of customers.

11.3. Sample sizes (par 7 and A10-A11)

Ordinarily the level of sampling risk that the auditor is willing to accept affects the sample size
required. For example, the lower the risk the auditor is willing to accept, the greater the
sample size will need to be. In practice sample sizes are affected by the following:
1. The desired level of assurance in the results (or confidence level)
Confidence level is the complement of sampling risk. The auditor may set sampling risk
for a particular sampling application at 5 per cent, which results in a confidence level of
95 per cent.
2. Acceptable defect rate (or tolerable rate of deviation or tolerable misstatement)
Once the desired confidence level is established, the sample size is determined largely by
how much the tolerable rate of deviation/misstatement exceeds expected error.
3. The historical defect rate (or expected error).
Exam tip: Sample size quantifies the number of items the auditor will test from the entire
population
Examples of factors influencing sample size for tests of controls: ISA 530 Appendix 2
Factor Effect on Explanation

sample size
An increase in the extent to Increase The more assurance the auditor intends to
which the auditor’s risk obtain from the operating effectiveness of
assessment takes into controls, the lower the auditor’s assessment
account relevant controls. of the risk of material misstatement will be,
and the larger the sample size will need to be
when the auditor performs tests of controls.
An increase in the tolerable Decrease The lower the tolerable rate of deviation, the
rate of deviation larger the sample size needs to be.
An increase in the expected Increase The higher the expected rate of deviation, the
rate of deviation of the larger the sample size needs to be so that the
population to be tested auditor is in a position to make a reasonable
estimate of the actual rate of deviation.
An increase in the auditor’s Increase The greater the level of assurance that the
desired confidence level that auditor desires that the results of the sample
the tolerable rate of are in fact indicative of the actual incidence of
deviation is not exceeded by deviation in the population, the larger the
the actual rate of deviation sample size needs to be.
in the population.
An increase in the number of Negligible For large populations, the actual size of the
sampling units in the effect population has little, if any, effect on sample
Population. size. For small populations however, audit
sampling may not be as efficient as
alternative means of obtaining sufficient
appropriate audit evidence.

11.4. Examples of factors influencing sample size for tests of details: ISA 530
Appendix 3
Factor Effect on Explanation
sample size
An increase in the auditor’s Increase The higher the auditor’s assessment of the
assessment of the risk of risk of material misstatement, the larger the
material misstatement sample size needs to be.
An increase in the use of Decrease The more the auditor is relying on other
other substantive substantive procedures (tests of details or
procedures directed at the substantive analytical procedures) to reduce
same assertion. to an acceptable level the detection risk
regarding a particular population, the less
assurance the auditor will require from
sampling and, therefore, the smaller the
sample size can be.
An increase in the auditor’s Increase The greater the level of assurance that the
desired level of assurance auditor requires that the results of the sample
(confidence level) that are in fact indicative of the actual amount of
tolerable misstatement is misstatement in the population, the larger
not exceeded by actual the sample size needs to be.
misstatement in the
population.
An increase in tolerable Decrease The lower the tolerable misstatement, the
misstatement larger the sample size needs to be.
An increase in the amount of Increase The greater the amount of misstatement the
misstatement the auditor auditor expects to find in the population, the
expects to find in the larger the sample size needs to be in order to
population make a reasonable estimate of the actual
amount of misstatement in the population.
The number of sampling Negligible For large populations, the actual size of the
units in the population effect population has little, if any, effect on sample
size.
However, when using monetary unit

sampling, an increase in the monetary value
of the population increases sample size,
unless this is offset by a proportional increase
in materiality for the financial statements as a
whole [and, if applicable, materiality level or
levels for particular classes of transactions,
account balances or disclosures].

11.5. Sample selection Methods

Once the sample size has been determined the next stage will now be selecting the actual
items to test. For example, if the population is made up of 500 items and the sample size for
testing has been determined to be 20, the auditor will now need to determine the method
to use in selecting these 20 items from the entire population.
The principal methods that are commonly used are as follows:
a) Random selection (applied through random number generators, for example random
number tables). Using this sample selection method every item in the population has the
same probability of being selected as every other sampling unit in the population.
b) Systematic selection, in which the number of sampling units in the population is divided
by the sample size to give a sampling interval, for example 50, and having determined a
starting point within the first 50, each 50th sampling unit thereafter is selected. Although
the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerized random number generator or random
number tables. When using systematic selection, the auditor would need to determine
that sampling units within the population are not structured in such a way that the
sampling interval corresponds with a particular pattern in the population.
c) Monetary Unit Sampling is a type of value-weighted selection in which sample sizes,
selection and evaluation results in a conclusion on monetary amounts.
d) Haphazard selection, in which the auditor selects the sample without following a
structured technique. Although no structured technique is used, the auditor would
nonetheless avoid any conscious bias or predictability (for example, avoiding difficult to
locate items, or always choosing or avoiding the first or last entries on a page) and thus
attempt to ensure that all items in the population have a chance of selection. Haphazard
selection is not appropriate when using statistical sampling.


12. QUESTION: TEST OF CONTROLS AND SUBSTANTIVE PROCEDURES
Delights Limited
Morar Audit Chartered Accountants (Morar Audit), a firm of registered auditors with offices
country-wide, have been the auditors of Davnan Delights Limited (“Davnan”) since the
company’s incorporation.
Davnan is listed on the ZSE and has been trading for the past 10 years. The company’s main
business is the sale of a variety of drinkable coffee products. Davnan’s strategy is to be the
leader in the instant coffee industry, selling their premium quality instant coffee products
nationally. Davnan’s instant coffee products are not made from any coffee concentrates, but
rather from freshly ground coffee beans, which are sourced from areas across the globe
where the world’s finest premium gourmet coffees are produced, as revered by coffee
connoisseurs.
Ms R Mahomed has recently been promoted from manager on this engagement to partner.
This will be her first engagement as a partner although she has much experience with Davnan.
The previous engagement partner, Barney Stinson, was requested by Morar to take leave–
while the firm decides an appropriate course of action. This request arose after Barney’s
affiliation to a questionable online dating site was publically revealed through an online
hacking attack. Unfortunately, Barney used a Morar Audit email address in his registration to
the site which the partners are concerned may have harmed the reputation of Morar Audit.
Overall materiality for the 2021audit of the Davnan group has been set at an amount of
$1.2 million, and performance materiality at an amount of $900 000.
The following information has been provided to you from the Morar Audit working papers:
Reference Working Papers
DD1 Obtaining an understanding of the entity and its environment
EB 23 Revenue and receivables process
EB30 Audit of trade receivables - Debtors circularisation
DD43 Inspect minutes of meetings

EB30 MORAR AUDIT

Working Paper and
Title: EB 30 – Audit of trade receivables - Debtors circularisation
Client: Davnan Delights Ltd Year End: 30-Sep-21
Prepared By: AB Candidate Date: 21-Nov-21
Reviewed By: R. Mahomed Date: 30- Nov-21
Procedures performed to obtain sample selection of debtors’ circularisation

1. Obtained the debtors detailed listing from the client.
2. Used Excel to filter the debtor’s value column for any amounts greater than half of
materiality level. This brought the number of debtors down from 9876 to just 127.
3. Used the 127 debtors which appeared on that list to populate the firm’s template for
“Request for Confirmation” with the appropriate amount owed by the debtor and sent
the Requests to the debtors.
Results from circularisation

1. The majority of debtors did reply – there were only 13 non-responses. I went back to my
Excel list and took the next 13 on the list to make up for these non-responses (all of which
did reply with confirmations).
2. Of the other 114 whom replied, most confirmed their balances per the confirmation
request.
3. Replies which were in disagreement with the amount per the listing revealed only small
differences ($12 325) which were explained by the client as payment timing issues.
4. As a sample was taken, all the small differences were accumulated and extrapolated to
determine the proposed correction required. The following workings were used to
calculate this amount:
Sample rate 1.29% = 127/9876
Net differences $12 325
Extrapolated $958 423 = net diff/sample rate
5. The proposed journal entry therefore, is the following:
Dr. Sales 958 423
Cr. Debtors 958 423
Conclusion:
If the client does not process the above correcting journal entry, then the debtors balance is
overstated by a material amount.

Required:
a) In relation to the audit procedures of Davnan Delights Ltd performed in working paper
EB30 – Audit of trade receivables - Debtors circularisation; prepare a note addressed to
the audit staff member AB Candidate covering the following:
i. What initial and other procedures are necessary after obtaining the detailed listing
from the client, but before actually making the sample selection? Explain why each
procedure is necessary linking to underlying assertions where appropriate. (6 marks)
ii. Explain why the sample selection used for the debtors’ circularisation is inappropriate.
(5 marks)
iii. Suggest a more efficient method of testing, as compared to debtors circularisations,
to obtain audit evidence over the existence of the debtors balance of Davnan Delights,
explaining why this method is preferable. (4 marks)
iv. Explain whether the conclusions of the testing and the proposed correcting journal
entry are appropriate. (5 marks)
Solution:
PART E (i)
Additional Procedure
1 Cast the listing to confirm that the total is mathematically accurate. This will ensure 1
that the list being used for the sample selection is accurate (Accuracy).
2 Agree the total of the listing obtained to the total Debtors balance per the Financial 1
Statements. This will confirm that the listing being used is a complete record of all
debtors (completeness)
3 Extract a listing of any debtors which might have negative balances (‘unusual items’). 1
This will ensure that the listing being used is made up of only debtors and not
creditors, ensuring the correct classification of individual accounts.
4 Request a debtors ageing listing from the client and agree the total to the debtors 1
listing. This will assist in selecting long-outstanding debtors in the sample.
5 Perform an analytical test of the count of debtors as compared to the previous year. 1
This will aid in gaining evidence over both completeness and existence of the debtors
on the listing (depending on the outcome of the test).
6 Perform an analytical test of each debtors balance as compared to the previous year. 1
This will provide information about valuation and completeness of the individual
balances.
7 Perform an analytical test of the ratio of the total debtors’ balance to the total sales 1
compared to prior years. This will provide evidence over all assertions – dependent
on the outcome of the test.
8 Discussions with management about the movements noted above. This will address 1
all the assertions relevant as above.
POSSIBLE 8
MAXIMUM 6

PART E (ii)
Why the sample selection made for debtors circularization is inappropriate?
1 The sample selection was made by identifying high value items – which were 1
above the half of the materiality level – this seems to be an arbitrary level
chosen.
2 To use such a large number (as the testing threshold) would likely increase 1
detection risk since there is a high likelihood that the aggregate misstatement
of those items not included in the sample could easily exceed the performance
materiality level.
3 No consideration was given to the marginal evidence obtained from testing 1
debtors beyond the top 10.
4 It appears that the debtors’ book is largely homogenous – thousands of low 1
value debtors – and yet the sampling approach was one of targeting items for
high value only which is not justifiable.
5 A statistical sample would have been necessary to test the remaining 9700 1
debtors as these have been completely disregarded.
6 To perform a circularisation of 127 debtors is large audit effort – especially 1
considering there are much better methods of gaining the evidence over debtor
existence – as evidenced in part (iii).
7 No items were included in the sample to test for unpredictability, which 1
increases detection risk.
8 The only consideration was that of existence, identifying high value items in 1
order to gain maximum coverage over the balance, however in order to test
completeness as the secondary risk, some low/no value items should have also
been included in the sample.
POSSIBLE 8
MAXIMUM 5
PART E (iii)
Suggest a more efficient method of testing, explaining why this method is
preferable.
1 The business model of the client is one which is likely to give rise to many smaller 1
value debtors and it is likely that they will not confirm an outstanding balance so
the expectation of the response rate is likely to be low.
2 The debtors’ book probably represents the most recent month’s outstanding 1
amounts, and many debtors even have debit orders. This further reduces the
likelihood of a high response rate to a circularisation.
3 A better approach would have been to test the subsequent payments which are 1
likely to take place within a month of year end.

4 Not only will this be significantly easier, it would likely give evidence over both 1
existence and valuation of the entire receivable balance (unless a debtor owes
more than one month).
5 Since some debtors have debit orders, a procedure to test these balances would 1
therefore be a simple matter of matching the reference number at the end of the
month.
6 Testing debtors using predominantly analytical procedures would have been 1
appropriate since there is likely to be a very close correlation between the sales
amount and the total debtors’ value per month.
POSSIBLE 6
MAXIMUM 4
PART E (iv)
Explain why the conclusions and the proposed correcting JE are inappropriate.
1 It is inappropriate to replace non-responses with other items from the population 1
– effectively these non-responses have been disregarded. A further follow-up
should have been performed.
2 The comment in the working paper that “only 13 non-responses” indicates that 1
the trainee did not apply his mind – as this would amount to more than 10% of
the sample which is clearly not trivial.
3 The timing differences which were “explained by the client” have not been 1
documented appropriately, and it appears that no professional skepticism or
judgement was applied to these differences.
4 The journal entry uses the “net difference” and extrapolates that across the entire 1
population – this is not appropriate because the sample selection was not made
statistically.
5 The differences noted stem from high value debtors – yet these differences have 1
now been applied across the whole population, for which the individual balances
are significantly lower.
6 There should be no projection/extrapolation of errors within the sample selected. 1
The difference should be posted to the schedule of overs and unders at the actual
differences noted.
7 Other considerations are necessary for the balances relating to the remaining 1
homogenous population.
8 The conclusion that the debtors balance is overstated by a material amount is also 1
not factually correct as the overall level, which is used to determine the
materiality of errors in concluding the audit, is actually $1.2m.
POSSIBLE 8
MAXIMUM 5

Scenario Please refer to study unit C last question – GoodLife
Required Marks
d Describe the risks at assertion level in GoodLife’s financial statements for 17
the year ended 31 March 2021, evident from the information provided
in WP A-100 and the extract of the 2021 draft financial statements.
i. Medical and other equipment – 6 marks
ii. Bonds; - 3 marks
iii. Assets held for sale; and – 3 marks
iv. Inventory – 5 marks
f Describe the substantive procedures to be performed in respect of the 19
2018 audit of GoodLife for the following:
i. The valuation of the new MRI machine purchased from India; -
10 marks
ii. Asset held for sale; and – 5 marks
iii. Bond balances. – 4 marks
g (ii) With reference to the stock count instructions provided: 10
Describe the substantive procedures you would perform during
the stock count over GoodLife’s inventory balances. – 10 marks
Solution
d Describe the risks at assertion level in GoodLife’s financial statements Marks

for the year ended 31 March 2018, evident from the information
provided in WP A-100 and the extract of the 2018 draft financial
statements.
i. Medical and other equipment and FEC
There is risk that the Magnetic Resonance Imaging (MRI) scanning

machine purchased from India
• Was recognised in Goodlife books on a different date to when it 1
was loaded FOB (occurrence/rights). 1
• Cost that should be capitalised in terms of IFRSs will be not be
capitalised e.g. transport cost, insurance, import duty etc. 1
(valuation). 1
• Cost that should be expensed as per IFRSs will be capitalised e.g.
1
commissioning costs, VAT etc (valuation).
• Different spot rate to the one when the MRI was loaded FOB 1
might be used (valuation). 1
• The MRI might be damaged when received from India and
impairment as per IAS 36 might not have been provided for 1
(valuation).
• Different date from the one when the MRI was brought in use
might be used thereby leading to incorrect depreciation
(valuation).
• FEC might be wrongly classified as fair value hedge instead of
cash flow hedge (classification).
• FEC adjustments after the transaction date might be incorrectly
debited/credited to the FCTR (OCI) instead of being a profit or
loss adjustment (valuation).
• Foreign exchange gain/loss on the foreign creditor might be
calculated incorrectly (valuation).
Maximum 6
ii. Bonds
Due to complexities associated with financial instruments accounting

there is risk that –
• Bonds might be incorrectly classified for measurement purposes 1
as per IFRS 9.
• Incorrect effective interest rate might be used (valuation). 1
• No allowance for expected credit loss allowance (ECLA) will be 1
provided as per IFRS 9 (valuation).
• The interest income on the bonds may be recognised in the
1
incorrect period as date of interest payments may not
correspond with date of accrual.
Maximum 3
iii. Assets held for sale (AHFS)
The following risks arises –

• Depreciation on AHFS might be provided for the whole year 1
instead of up to 31 January 2018 (valuation).
• On date of classification the AHFS might not be derecognised 1
from IAS 16 (PPE)
- The AHFS might not have been recorded at the fair value less 1
cost to sale of $115 000 (valuation).
- Impairment loss of $45 000 ($160 000 - $115 000) might not
1
be raised (valuation).
• At year end –
- the AHFS might be recorded at its carrying amount ($160 000
less accumulated depreciation) instead of fair value less cost
to sale $108 784 (valuation).

- Impairment loss of $6 216 ($115 000 - $108 784) might not

be raised (valuation).
Maximum 3
iv. Inventories
Inventories –
• Might have been stolen since drugs are prone to theft 1
(existence/valuation).
• Medicines might have expired leading to inventories not 1
recorded at the lower of cost and net realisable value – NRV
1
(valuation).
• Cost to bring medicines sourced from India and South Africa to
its saleable state might not be capitalised to the cost of inventory
as per IAS 2(completeness/valuation)
• Inventory sourced from India and South Africa might be 1
- recorded at incorrect spot rate, 1
- recognised before loaded FOB (rights/occurrence), and 1
- (with respect to inventory in transit) might not be recorded
(completeness/valuation).
Maximum 5
Other Valid Risks 1
f Describe the substantive procedures to be performed in respect of the Marks

2018 audit of GoodLife for the following:
i. The valuation of the new MRI machine purchased from India; -
(10 marks)
ii. Asset held for sale; and – (5 marks)

iii. Bond balances. – (4 marks)
General (items (i)-(iii))
Obtain signed management letter confirming the correctness of the 1
assertions of all items in (i)-(iii).
Obtain schedules of items (i-iii and
• Inspect or scan the schedules for errors or unusual items (use 1
CAATs). 1
• Cast and cross cast the schedules to confirm mathematical
accuracy thereof. 1
• Agree the schedule to the general ledger, trial balance and
financial statements.
Perform analytical procedures

• Compare the assessed useful lives of the assets used in prior year
to the ones used in the current year and follow with management 1
on any major differences
• Compare this year`s amortisation/depreciation/interest received 1
on bonds to prior year.
1
• Follow up with management any misstatements or exception(s).
Obtain Goodlife`s accounting policies in respect of items (i – iii), inspect 1

current and prior year accounting policies and confirm that they have
been applied consistently.
i. The new MRI machine purchased from India – (valuation).
Obtain the invoices of the MRI from Indian supplier as well as list of 1
documents of all costs incurred to bring the MRI into the usable state.
Inspect the invoices and
• Compare/agree the costs on the invoices to the costs in the MRI 1
schedule to confirm costs
- were transferred at correct amounts, and 1
- incurred to bring MRI into usable condition e.g. transport cost 1
have been capitalised as per IAS 16
1
Inspect the bank account and confirm that the 100 million Indian Rupees
was paid to the Indian supplier. 1
Inspect the general journal for costs expensed that pertains to MRI
purchases and discuss with management to confirm if the costs should
be capitalised. 2
Obtain the spot rate from a reputable financial institution when the MRI
was loaded FOB (on the 1st of July 2017) and compare it to the one used
by the management in the schedule. 1
Reperform/recalculate the cost of MRI and the depreciation cost, and
• For depreciation – Discuss with management on the process they 1
follow when estimating useful life and residual value for
reasonableness. 1
• Agree/compare it to the management calculations
- Follow up any discrepancies with the management.
1
Discuss with the management the procedures they followed when
testing the MRI for impairment for reasonableness and bias. 1
Corroborate the above by inspecting the MRI for physical damage
(possible indications of impairment).
Maximum 10
ii. Asset held for sale; and
Discus with management how did they come up with the fair value less 1
cost to sell for reasonableness.

If a management expert has been used or if not, consider his or her 1

credentials and the possible need to hire an expert and do the following
so that reliance can be placed on either or both experts’ work;
• Discus with the expert about his/her qualifications and 1
experience,
• Enquire from any professional body that the expert belongs 1
about the expert`s qualifications and
1
• Review any work/book/article(s) that the expert has
1
done/written.
1
• Discuss with the expert if he/she is independent of Goodlife.
• Discuss key assumptions the expert used for reasonableness. 1
Reperform the impairment on the day the assets were classified as held
for sale and at year end and agree it to management`s schedule. 1
Inspect the profit or loss and confirm that the impairment loss has been
included.
Maximum 5
iii. Bond balances.
Inspect the bond certificate(s) and confirm

• That they are in the name of Goodlife. 1
• The terms of the bond e.g. maturity, coupon etc. 1
Inspect the bank statement and confirm that the payment was made to 1
RBZ in respect of bonds purchased (for new bonds).
Inspect the bank statements for the coupon received from RBZ. 1
Recalculate the
• effective interest rate and the bond balances 1
- and agree it to management`s schedule (follow up any
differences).
1
Discuss with management the process they follow when estimating ECLA
for reasonableness and evidence that Goodlife do provide for ECLA as
per IFRS 9.
Maximum 4
Other Valid Procedures 1
g (ii) With reference to the stock count instructions provided: Marks

Describe the substantive procedures you would perform during
the stock count over GoodLife’s inventory balances – (10
marks).
Describe the substantive procedures you would perform during the
stock count over GoodLife’s inventory balances.

Obtain the inventory schedule and

• Use CAATs to inspect it for errors e.g. items with negative cost 1
balance etc.
• Cast the schedule to test the accuracy thereof. 1
Perform analytical test as follows;

• Express inventory as a percentage of cost of sales and compare it 1
to the previous year.
• Follow up with the chief pharmacist any discrepancies. 1
• Also compare prior year and current year inventory balances and
discuss with management an major differences 1
Obtain the count instructions from the GoodLife’s chief pharmacist to 1

confirm that the count instructions do exist.
• Observe the team performing the stock counts and confirm that 1
they are following the count instructions.
• Enquire as to how stock movements during the day are 1
controlled and recorded in order to minimise the risk of error
related to omitting stock that arrives on the day and including
stock that was sold on the day.
1
• Also enquire how count staff ensure that boxes and containers
have the right contents.
On sample basis conduct physical inspection of inventory items for
damages/dust/expiry date and follow them to the inventory ledger and 1
confirm that they have been recorded at the lower of cost and net
realisable value (NRV).
Select a sample of inventory items in the pharmacy and follow them 1
through accounting records for completeness.
From the inventory ledger select a sample of items using codes and 1
inspect for them in the pharmacy for existence.
From the inventory schedule, use CAATs to identify items that have been 1
received for more than 6 months and follow them to the pharmacy and
discuss with the chief pharmacist on the provision of possible allowance
for obsolesce.
Agree the count sheets to the balance in the system and follow up any 1
discrepancies.
Discuss with the chief pharmacist on the processes they follow when 1
reconciling discrepancies between physical inventory and the balance in
the system for reasonableness.
Enquire the chief pharmacist of any inventory in transit he/she is aware 1
of and any inventory that was incumbered.
Maximum 10
Other Valid Procedures 1

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APPLIED AUDITING AND GOVERNANCE STUDY PACK – MODULE 1 2024 CTA 1

CHARTERED ACCOUNTANTS ACADEMY

CERTIFICATE OF THEORY IN ACCOUNTING

STUDY UNIT 9 - AUDIT EVIDENCE - (TEST OF CONTROLS, SUBSTANTIVE

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TABLE OF CONTENTS PAGE

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11. ISA 540: AUDIT SAMPLING ........................................................................................................... 285

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2. Objective of audit evidence

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▪ Differentiate between system-orientated CAATs and data-orientated CAATs

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5. Competence Framework expectation

Understand the need to supervise and review work of junior staff

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9.1. Background to audit evidence and audit procedures

So what does ISA 500 say about audit evidence:

Audit Evidence Audit evidence is sufficient appropriate information obtained by the

assertion, but provides no audit evidence concerning the

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9.2. TEST OF CONTROLS

The operating effectiveness of a control consists of two components:

9.2.1. Identifying key controls – ISA 315 A73

Key controls would generally be those related to:

▪ Any of the computerised controls listed in the detailed controls section.

9.2.2. Identifying key controls: internal vs. external audit

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9.2.3. Designing test of controls

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10. SUBSTANTIVE AUDIT PROCEDURES

What is a substantive procedure?

Substantive procedures comprise:

Looking at the aspects of the definition:

10.1. When should substantive procedure be performed? – ISA 330 par 18

An auditor will always perform substantive procedures on an audit. This is irrespective of

10.2. Nature, Timing and Extent: ISA 330 par 6

Nature (ISA 330 par A9 to A10)

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Extent (ISA 330 par A15 to A16)

10.3. Direction of testing

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10.4. Formulating a substantive procedure

The following audit procedures are likely to be used when testing an

10.5. Distinction between tests of controls and substantive procedures for

10.6. Designing substantive procedures in the exam:

The following process should be used when designing substantive procedures:

3. Consider the IFRS requirements applicable to the balance or transaction.

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Completeness ▪ Select a sample of first documents and trace to the accounting

▪Inspect documents that support the existence of liabilities (e.g.

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▪ Inspect the bank statement for any unexplained payments and

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10.7. Integration with accounting:

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Let us assume that we have to audit Investment Property (IAS40).