Substantive procedures – Receivables

 Obtain the receivables ledger listing, cast it, and compare it with the trail balance/receivable
ledger control account.
 Review the prior year aged receivable ledger listing and for the significant customers
compare it with current year and prior year balances. Discuss with management any missing
receivables or significantly lower balances.
 Review the post year-end cash receipts and follow through to year-end receivable balances.
 Review the correspondence with customers to know the balances which are in disputes or
unlikely to be paid and discuss with management.
 Recalculate the allowance for receivables and compare it with potentially irrecoverable
balance to agree if the allowance is adequate.
 Review a sample of goods dispatched notes from pre-year end, agree to the sales invoice
and to the inclusion in year-end receivable.
 Review board minutes to assess if the management has any significant doubts over
recoverability of trade receivables.
 Review the receivable ledger for any credit balance and discuss with management whether
they should be classified as payables.

Substantive procedures – Sales Revenue

 Obtain a breakdown of sales revenue, cast it, and agree it with trial balance, general ledger,
and draft financial statements.
 Compare the overall level of revenue with prior year/budget and investigate any significant
fluctuations.
 Perform a proof-in-total calculations for revenue by taking prior year revenue and increasing
it with three products launched in February 20X5 and price rise in line with inflation from
September 20X4 and any known factors. Compare this expectation with the actual revenue
and investigate any significant fluctuations.
 Calculate the gross profit margin and compare it with prior year and discuss any fluctuations
with the management.
 Review a sample of credit notes and follow these through original invoices and confirm that
invoices have been completely removed from the sales revenue.
 Review the goods dispatched notes pre year end, agree to the sales invoices and to the
inclusion in sales balance in general ledger and sales daybook to confirm the completeness
of revenue.
 Review the goods dispatched notes both pre and post year end and agree it with the correct
accounting period to ensure that the cut-off period has been correctly applied.
 For the online sales generated in the final week of prior year end and where goods are
dispatched post year end, confirm that the any sales proceeds are recorded as deferred
income rather than revenue.
 Select a sample of sales invoices to wholesale customers and agree the sales price with the
price list or customer master data file information, confirming whether the price was pre or
post the price increases to confirm the accuracy of sales invoices.
Audit procedures - before the inventory count

 Review the prior year audit file to identify whether there are any particular warehouse in
which significant inventory issues arouses last year.
 Discuss with management whether there are any warehouses that are new, or any
significant changes occurs this year in the inventory items or any significant control issues
occur in any of the warehouses.
 Decide which of the six warehouses the audit team members should attend, making this
decision considering materiality and risk of each site.
 Obtain a copy of the proposed inventory count instructions, review it to identify any
significant control deficiencies and if there are any, discuss these with management prior
inventory count.
 Discuss with management whether any warehouses contain third party inventory and what
procedures are in place to ensure that these are excluded from inventory count.

Audit procedures – Inventory count during the year end

 Observe the count of Spinach Co to ensure whether the inventory count instructions are
being followed correctly.
 Observe the count to ensure the procedures for identifying any damaged goods and
segregating them are being operated correctly and inspect the inventory for the evidence of
any damaged or slow-moving goods.
 Observe the procedures for identifying the third-party inventories are being operating
correctly and review completed inventory count sheets to confirm no third-party inventory
is included.
 Obtain a copy of completed inventory count sheets for the follow up testing at the final
audit.
 Obtain copies of goods dispatched notes (GDNs) and goods received notes (GRNs) at 31 July
and request copies of GDNs and GRNs at 1 Aug to perform the cut-off procedures as at the
year end.

Audit procedures – Issue of new share

 Review the board minutes to confirm the number of additional shares issued and issue price.
 Inspect whether the issue of shares is permitted by reviewing the regulatory constitution
agreement.
 Review the bank statement and cash book to confirm the evidence of cash received form
share issue.
 Where the cash received is less than $4.3 million, confirm that it is treated as called up share
capital but not paid in the financial statements.
 Agree the issue of new shares to the share register.
 Recalculate the split of cash between the share capital and premium on shares and agree
this to the recorded balances in the share capital and premium accounts.
 Ensure that the new share issue has been properly disclosed in the draft financial statements
and are in line with relevant accounting standards and local legislations.
Substantive procedures – Development expenditures (Intangible assets)

 Obtain a schedule of cost capitalized within the intangible assets, cast it, and compare it with
trail balance, general ledger, and draft financial statements.
 Select a sample of capitalized costs and agree it with invoices, payroll records and other
supporting documentation to ensure that the amount is correct, and costs related to the
project.
 Discuss with directors the decision to capitalize cost from 1st November 20X4 onwards and
ensure that it meets all the required condition of capitalization in IAS 38.
 Obtain a breakdown of the nature of the cost being capitalized to ensure that the research
costs have not been included. If included request management to remove these costs and
include in profit or loss.
 Select a sample of cost recorded as research and development expenditures and agree them
to the supporting documentation to confirm the date of expenditure to ensure that costs are
allocated correctly.
 Discuss with directors, the rationale for useful life and assess its reasonableness and agree to
the supporting documentation.
 Recalculate the amortization charge and confirm that the cost relates to the period from 1 st
August to 31 July 20X5.
 Ensure that the capitalized cost is disclosed in the draft financial statements and is in
accordance with the IAS 38 standards and local legislations.

Substantive procedures – Land and building Revaluation (non-current assets)

 Obtain a schedule of all land buildings, cast it, and agree it with trail balance and financial
statements.
 Consider the competence and capability of valuer through enquiring their qualifications,
membership of professional body and experience in valuing these types of assets.
 Review the assumptions and methods used by the valuer and assess its reasonableness and
compliance with IAS 16.
 Recalculate the revaluation surplus and confirm that it is recorded completely in revaluation
surplus account.
 Recalculate the depreciation charge and confirm that the assets revalued at 1 st January 20X4,
depreciation is based on value of asset before valuation and costs after valuation on a pro-
rated basis.
 Select a sample of land and building and physically verify the assets to confirm its existence.
 Ensure that the revaluation of land & buildings is properly disclosed in draft financial
statement and confirm that they comply with IAS 16.

Audit procedures if customers do not respond or if difference in balance occur:

 For the non-response from the Nile Co, with the client’s permission, the team should
arrange a follow-up request to customer.
 If customer still does not respond, with the client’s permission, arrange a telephone call with
the customer and ask if they are able to respond in writing to the confirmation request.
 If still there is no response, auditor should perform alternative audit procedures to confirm
the receivable balance at the year end such as detailed checking of balances through post
year end cash receipts and relevant sales invoices and goods dispatched notes.
 For the response from Congo Co, the auditor should investigate the difference of $11,000
and identify whether this relate to the timing difference or are there any error in accounts of
client’s records.
 For the timing difference such as cash in transit, review the post year end cash receipts from
the cash day book.
 For the goods in transit, review the goods dispatched notes just before the pre year end.
 Receivable ledger should be reviewed to identify any mis-postings as this could be the
reason for the difference with Congo Co.

Provision and receivable arising from the sale of defective goods

 Review the correspondence with Kalama Kids Co and establish the details of the claim
to assess whether a present obligation as a result of a past event has occurred.
 Review correspondence with Thames Co, the supplier of the hoverboards, to assess
whether they accept liability for the defect.
 Review correspondence with Danube Co’s legal advisers or, with the client’s
permission, contact the legal advisers to obtain their view as to the probability of either
the legal claim from the customer and the request for reimbursement from the supplier
being successful as well as any likely amounts to be paid or received.
 Discuss with management/enquire of the legal adviser as to whether any other
customers of Danube Co have experienced problems with sales of hoverboards and
therefore the likelihood of any potential future claims.
 Review board minutes to establish whether the directors believe that either claim will
be successful or not.
 Review the post year-end cash book to assess whether any payments have been made
to the customer or cash received from the supplier and compare with the amounts
recognised in the financial statements.
 Discuss with management why they have included a receivable for the claim against the
supplier as this is possibly a contingent asset and should only be recognised as an asset
if the receipt of cash is virtually certain. Consider the reasonableness of the proposed
treatment.
 Obtain a written representation confirming management’s view that the lawsuit by
Kalama Kids Co is likely to be successful and the claim against Thames Co is virtually
certain and hence a provision and a receivable are required to be included.
 Review the adequacy of the disclosures of the lawsuit and supplier claim in the draft
financial statements to ensure they are in accordance with IAS 37.

Substantive procedures on payroll expense

 Cast a sample of payroll records to confirm completeness and accuracy and agree the total
wages and salaries expense per the payroll system to the trial balance.
 Recalculate the gross and net pay figures for a sample of employees and agree to the payroll
records.
 For a sample of wage payments, agree the total net pay per the payroll records to the bank
transfer listing and to the cash book.
 Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay
increase/bonuses. Compare this to the actual wages and salaries expense in the financial
statements and investigate any significant differences.
 Compare the total payroll figure this year to the prior year, identify any significant
differences, and discuss with management.
 Review monthly payroll charges, compare this to the prior year and budgets and discuss any
significant differences with management.
 Calculate overtime costs as a percentage of total wages. Compare this to the prior year and
discuss any significant differences with management.
 Agree a sample of individual wages and salaries per the payroll to personnel records and
records of hours worked per the clocking-in system.
 Reperform the calculation of statutory deductions and agree to supporting documentation
to confirm whether correct deductions for this year have been made in the payroll.
 Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate their first/last salary to ensure it is accurate.
 Recalculate holiday pay for a sample of employees and agree to holiday records and daily
rate applied.
 Select a sample of employees from HR records and agree salaries per HR records to the
payroll records to confirm the accuracy of the payroll expense.
 Agree the payroll control account reconciliation to accounting records and investigate any
differences.

Inventory of Vego Dog

 Obtain and cast the inventory listing of Vego Dog products and agree the total cost of
$2·4m to inventory records.
 Agree the quantity of Vego Dog products shown as held at the year end to the year-end
inventory count records.
 Request a breakdown of the cost calculation of each unit of this product and discuss
with management how the standard cost was derived.
 Recalculate the cost calculations to confirm that the quantity multiplied by the standard
cost is $2·4m.
 For a sample of finished goods items, obtain standard cost cards and agree:
− raw material costs to recent purchase invoices.
− labour costs to time sheets or wage records.
− overheads allocated to invoices and that they are of a production nature.
 Compare sales prices over time to establish if the price has been reduced because of
falling demand to determine whether an allowance is required.
 Compare actual sales units per month to budgeted sales per month from before and
after the year end to establish how much lower actual sales are than expected and
discuss with management.
 Select a sample of items included in inventory of Vego Dog and review post year-end
sales invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment
is required.

Receivable due from Ellah Co

 Review correspondence with Ellah Co to establish if there was a discussion about

payment difficulties and whether Ellah Co intends to fully settle the outstanding
amount.
 Review the age of the outstanding debt with Ellah Co and discuss the circumstances
with the credit controller to establish if it has exceeded the agreed credit terms and
consider if an allowance is required.
 Review post year-end receipts from Ellah Co to establish how much of the debt
was recovered by the audit completion date and to assess how much of the year-
end balance remains outstanding.
 Inspect board minutes to identify whether there are any significant concerns in
relation to payments by Ellah Co.
 Discuss with management of Purrfect Co why no allowance has been made in
respect of this debt and assess the justification.

Contamination – legal claims

 Review customer correspondence to establish the details of the claims and the
amounts being claimed.
 Review correspondence with Purrfect Co’s lawyers or, with the client’s
permission, contact the lawyers to establish the likely outcome of the customer
claims made to date.
 Discuss with the lawyers the likelihood and amount of potential future claims.
 Inspect board minutes to establish details of the circumstances of the
contamination and to ascertain management’s view as to the likelihood that
the existing claims will be successful and the extent of possible future claims.
 Compare levels of returns and claims to date against sales volumes of the
product to assess the potential level of future claims.
 Review post-year end payments for damage settlements and compare with
any amounts provided at the year end to assess the reasonableness of the
provision.
 Obtain written representations from management that there have been no
other contamination incidents and no other product liability claims of which
management are aware and for which provision may be required.
 Review the draft financial statements to establish that the legal claims have
been appropriately provided for or disclosed in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

Substantive procedures for Vega Vista Co’s income

 Obtain a schedule of all Vega Vista Co’s income and cast to confirm
completeness and accuracy of the balance and agree to the trial balance.
 Compare the individual categories of income of festival ticket sales, sundry
sales and donations against prior years and investigate any significant
differences.
 For the annual festival, construct a proof-in-total calculation of the number
of tickets sold, approximately 15,000, multiplied by the ticket price of $35.
Compare this to the income recorded and discuss any significant
differences with management.
 For tickets sold on the day of the festival reconcile from ticket stubs the
number of tickets sold multiplied by $35 and agree these sales to cash
banked in the bank statement.
 Discuss with management their procedures for ensuring advance ticket
sales for the September 20X5 festival are excluded from income and
instead recognised as deferred income in the statement of financial
position.
 Select a sample of advance ticket sales made online, agree that the
transaction has been excluded from current year income and follow
through to inclusion in deferred income.
 Agree journal entry to transfer prior year deferred income relating to the
20X4 festival to current year income to the ledger and agree figures to prior
year financial statements.
 For sundry sales, obtain a breakdown of the income received per stall and
agree to supporting documentation provided by each stall holder.
Recalculate the fixed percentage received is as per the agreement/contract
made with Vega Vista Co.
 Compare sundry sales per stall holder to prior year sales data and
investigate any significant differences.
 For monthly donations, trace a sample of donations from sign up
documentation to the bank statements, cash book and income listing to
ensure that they are recorded completely and accurately.
 For a sample of new donors in the year, agree the monthly sum and start
date from their completed forms and trace to the monthly donations
received account and agree to the cash book and bank statements.

Substantive procedures for Canopus Co’s bank loans

 Obtain a schedule of opening and closing loans detailing any changes

during the year.
 Cast the schedule to confirm its accuracy and agree the closing
balances to the trial balance and draft financial statements.
 For the new loan taken out in the year, review the loan agreement to
confirm the amount borrowed, the repayment terms and the interest
rate applicable.
 For the new loan taken out in the year, agree the loan proceeds of $4.8
million per the loan agreement to the cash book and bank statements.
 For loans repaid, agree the final settlement amount per bank
correspondence to payments out during the year in the cash book and
bank statements.
 Agree the quarterly repayment of the new loan of $150,000 paid on 31
March 20X5 to the cash book and bank statement.
 Recalculate the split of the loan repayment made on 31 March 20X5
between interest and principal, recalculate interest and agree to
inclusion in statement of profit or loss, and outstanding loan balance
reduced by principal amount repaid.
 Review the bank correspondence and loan agreements for
confirmation of any early settlement charges incurred on the loans
repaid. Agree that these were charged to the statement of profit or
loss as a finance charge.
  Obtain direct confirmation at the year-end from the loan provider of
the outstanding balances and any security provided. Agree confirmed
amounts to the loans schedule.
 Review all loan agreements for details of covenants and recalculate all
covenants to identify any potential or actual breaches.
 Review the disclosure of non-current liabilities in the draft financial
statements, including any security provided and assess whether these
are in accordance with accounting standards and local legislation.
Additionally, confirm that the split of current and non-current loans in
the financial statements is correct.

Substantive procedures for the redundancy costs

 Review the board minutes for evidence of the decision to discontinue the
brand of chemicals prior to the year-end.

 Review supporting documentation to confirm that the decision to

discontinue the brand was notified to the four members of staff prior to
the year end.

 Obtain details of the redundancy calculated by employee, cast the

schedule and agree to the trial balance/financial statements.

 Recalculate the redundancy provision to confirm completeness and agree

components of the cost to supporting documentation such as employee
contracts.

 Agree the redundancy payments made in July 20X5 to the cash

book/payroll records and compare these to the provision in the financial
statements.

 Obtain a written representation from management confirming the

completeness of the costs.

 Review the disclosures included in the financial statements to verify they

are in compliance with requirements of IAS 37 Provisions, Contingent
Assets and Contingent Liabilities.

Vehicles additions and disposals

 For a sample of new vehicles on the schedule of additions agree the cost to the purchase invoice,
ensuring that the recorded cost includes the cash amount paid plus the trade-in allowance for the
old vehicle. Confirm that the invoice is made out to Encore Co.

 Physically inspect a sample of additions, confirming that the registration number of the vehicle
agrees to that on the non-current assets register.

 Review the non-current assets register to confirm that the 20 old vehicles were removed and that
the 20 new vehicles were included.

 Recalculate the loss on disposal of $1.1m ($1.8 - ($4.6m - $3.9m) and agree to the trial balance and
statement of profit or loss.

 Agree the cash payment of $3.9m to the cash book and bank statement.
 Recalculate the depreciation expense, confirming that the depreciation expense was based on the
old vehicles until 1 February and on the cost of the new vehicles after that date.

 Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has been
removed from accumulated depreciation carried forward.

 In light of the loss on disposal, review depreciation rates on existing vehicles to establish if the
carrying amount of other vehicles may be overstated.

 Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles are
being used for the entire period of their estimated useful life.

 Discuss with management why trade-in allowances were so much lower than the carrying amounts
of the vehicles to provide further evidence as to whether depreciation policies are reasonable.

 Review the notes to the financial statements to ensure that disclosure of the additions and
disposals is in accordance with IAS 16 Property, Plant and Equipment.

Valuation of trade receivables

 Review the aged receivables listing to identify slow moving or old balances. Discuss the status of
these balances with the credit controller to assess whether the customers are likely to pay or if an
allowance for receivables is required.

 Review whether there are any after-date cash receipts for slow moving/old receivable balances.

 Review correspondence with customers in order to identify any balances which are in dispute or
unlikely to be paid and discuss with management whether any allowance is required.

 Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable.

 Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any
potentially irrecoverable balances to assess if the allowance is adequate.

 Review the payment history for evidence of slow paying by any customers who were granted credit
in the period when there was no credit controller and who may not, therefore, have been properly
scrutinised.

 Discuss with the finance director the rationale for maintaining the allowance at the same level in
light of the increase in the receivables collection period and the absence of a credit controller.

 Inspect post year-end sales returns/credit notes and consider whether an additional allowance
against receivables is required.

Potential breach of regulations

 Review correspondence with the transport authority to establish details of the complaint and the
number of times the breach has allegedly occurred.

 Enquire of the directors why they are unwilling to provide or make disclosure, whether they accept
that any breaches took place but believe that the effect is immaterial or whether they dispute their
occurrence.

 Review Encore Co’s policies and procedures to record driving hours and rest periods and compare
to the regulations to determine the likelihood that breaches have occurred and how frequently.
 Review correspondence with the transport authority to establish if there have been discussions
about other instances of potential non-compliance.

 Review correspondence with Encore Co’s legal advisers or, with the client’s permission, contact the
lawyers to establish their assessment of the likelihood of the breach being proven and any fines that
would be payable.

 Review the board minutes to ascertain management’s view as to the likelihood of payment to the
transport authority.

 Obtain a written representation to the effect that the directors are not aware of any other
breaches of laws or regulations that would require a provision or disclosure in the financial
statements.

 Inspect the post year-end cash book and bank statements to identify whether any fines have been
paid.

Substantive procedures – Valuation of WIP

 Prior to attending inventory count, discuss with management how the percentage
completion are attributed to the work in progress. For example, is this based on the motor
cars reaching certain level of production stage.
 During the inventory count, observe the company staff procedures for assessing the
percentage completion of WIP and assess its reasonableness.
 For a sample of percentage completion assessed during the inventory count, agree the
procedures used by company’s staff in inventory count to the procedures and policies
communicated prior to inventory count.
 Discuss with management the basis for applying the standard costs to the percentage
completion of WIP and how often they are reviewed and changed.
 Review the variance between actual and standard costs and discuss with management how
they are treated.
 Obtain a breakdown of standard costs and compare a sample of standard costs to the
purchase invoices/payroll records to assess its reasonableness.
 Obtain a schedule of all WIP, cast it and agree to the trail balance and financial statements
to confirm its completeness.

Exceptions in the receivable’s circularisation

The following steps should be undertaken in regard to the exceptions arising in the positive
receivable’s circularisation:

Albacore Co

– For the non-response from Albacore Co, with the client’s permission, the team should arrange
to send a follow-up circularisation.

– If Albacore Co does not respond to the follow up, then with the client’s permission, the
auditor should telephone the customer and ask whether they are able to respond in writing to
the circularisation request.

– If there is still no response, then the auditor should undertake alternative procedures to
confirm the balance owing from Albacore Co. Such as detailed testing of the balance by agreeing
to sales invoices and goods dispatched notes (GDN).
 Flounder Co

– For the response from Flounder Co, with a difference of $5,850 the auditor should identify any
disputed amounts and identify whether these relate to timing differences or whether there are
possible errors in the records of Triggerfish.

– If the difference is due to timing, such as cash in transit, this should be agreed to post year-end
cash receipts in the cash book.

– If the difference relates to goods in transit, then this should be agreed to a pre-year-end GDN.
Menhaden Co

– The reason for the credit balance with Menhaden should be discussed with the credit
controller or finance department to understand how a credit balance has arisen.

– Review the payables ledger to identify if Menhaden is a supplier as well as a customer; if so, a
purchase invoice may have been posted in error to the receivables rather than payables ledger.

– If the difference is due to credit notes, this should be agreed to pre-year-end credit notes
dispatched around the year-end date.

– The receivables ledger should be reviewed to identify any possible mis-postings as this could
be a reason for the difference with Menhaden Co.

Accrual for employment tax payable Substantive procedures the auditor should adopt in respect
of auditing this accrual include:

– Compare the accrual for employment tax payable to the prior year, investigate any significant
differences.

– Agree the year-end employment tax payable accrual to the payroll records to confirm accuracy.

– Re-perform the calculation of the accrual for a sample of employees to confirm the accuracy.

– Undertake a proof in total test for the employment tax accrual by multiplying the payroll cost for
June 20X9 with the appropriate tax rate. Compare this expectation to the actual accrual and
investigate any significant differences.

– Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness.

– Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due. If so, confirm they are included in the year-end accrual.

– Review any disclosures made of the employment tax accrual and assess whether these are in
compliance with accounting standards and legislation.

Sales tax liability

– Agree the year-end sales tax liability in the trial balance to the tax return/reconciliation submitted
to the tax authority and cast the return/reconciliation.
– Agree the quarterly sales tax charged equates to 15% of the last quarter’s sales as per the sales
daybook.

– Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final quarter’s
purchases and expenses as per the purchase daybook.

– Recalculate the amount payable to the tax authority as being sales tax charged less sales tax
incurred.

– Compare the year-end sales tax liability to the prior year balance or budget and investigate any
significant differences.

– Agree the subsequent payment to the post year-end cash book and bank statements to confirm
completeness and that it has been paid in line with the terms of the tax authority.

– Review any current and post year-end correspondence with the tax authority to assess whether
there are any additional outstanding payments due. If so, confirm they are included in the year-end
liability.

– Review any disclosures made of the sales tax liability to ensure that it is shown as a current liability
and assess whether disclosures are in compliance with accounting standards and legislation.

Substantive procedures - Payables and Accruals

 Calculate trade payable days for rose leisure clubs (rose) end compare to prior years,
investigate any significant difference, in particular any decrease for this year.

 Compare the total trade payables and list of accruals against prior year and investigate any
significant differences.

 Discuss with management the process they have undertaken to quantify the
understatement of trade payables due to the cut-off error and consider the materiality of
the error.
 Discuss with management whether any correcting journal entry has been included for the
understatement.

 Select a sample of purchase invoices received between the period of 25 may and the year
end and follow them through to inclusion within accruals or as part of the trade payables
journal adjustment,

 Review after date payments; if they relate to the current year, follow through to the
purchase ledger or accrual listing to ensure they are recorded in the correct period.

 Obtain supplier statements and reconcile these to the purchase ledger balances, and
investigate any reconciling items,

 Select a sample of payable balances and perform trade payables' external confirmation
procedures. Follow up non-replies any reconciling items between the balance confirmed end
the trade payables' balance.
 Select a sample of goods received notes before the year end and after the year end and
follow through to inclusion in the correct period's payables balance, to ensure correct cut-
off.