SUBSTANTIVE PROCEDURES

Rashid Hussain
MARFAT ACCA ONLINE www.marfatacca.com
 Important Audit Procedures (Substantive)
Bank reconciliation
❑ Obtain bank account reconciliation and cast to check the additions to ensure arithmetical
accuracy.

❑ Agree the balance per the bank reconciliation to an original year-end bank statement and to the
bank confirmation letter.

❑ Agree the reconciliation’s balance per the cash book to the year-end cash book.

❑ Trace all the outstanding lodgements to the pre year-end cash book, post year-end bank
statement and also to paying-in-book pre year end.

❑ Trace all unpresented cheques through to a pre year-end cash book and post year-end
statement. For any unusual amounts or significant delays, obtain explanations from
management.

❑ Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are no longer valid to be presented.

Loans (Non-Current Liabilities)

✓ Obtain a breakdown of all loans outstanding at the year end, cast to verify arithmetical
accuracy and agree the total to the financial statements: completeness.

✓ Agree the balance outstanding to the bank confirmation letter: valuation, rights &
obligations.

✓ Inspect bank confirmation letters for any loans listed that have not been included in the
financial statements: completeness.

✓ Inspect financial statements for disclosures of interest rates, and the split of the loan
between current and noncurrent: allocation, presentation.

✓ Inspect the loan agreement for restrictive covenants (terms) and determine the effect
of any loan covenant breaches: allocation, presentation. [If loan covenants have been
breached the loan may become repayable immediately and should therefore be
included as a current liability].

✓ Inspect the cash book for loan repayments made: existence, valuation.

✓ Recalculate the interest charge and any interest accrual in accordance with terms
within the loan agreement, to ensure mathematical accuracy: accuracy of finance costs
in the statement of profit or loss, completeness of accruals.

RASHID HUSSAIN 1
Non-Current Assets (Addition)
❑ Obtain a breakdown of additions, cast the list and agree to the non-current asset register:
verifies completeness.

❑ Select a sample of additions and agree cost to supplier invoice: verifies valuation.

❑ Inspect the list of additions and confirm that they relate to capital expenditure items rather
than repairs and maintenance: verifies existence.

❑ Inspect the repairs and maintenance account in the general ledger for items of a capital nature:
verifies completeness.

❑ Inspect supplier invoices (for equipment), title deeds (for property), and registration documents
(for motor vehicles) to ensure they are in the name of the client: verifies: rights and obligations.

❑ If assets have been constructed by the client, obtain an analysis of the costs incurred, cast for
arithmetical accuracy and agree a sample of costs to supporting documentation (e.g. payroll,
material invoices): verifies valuation.

Depreciation
❑ Inspect the capital expenditure budgets for the next few years to assess the appropriateness of
the useful economic lives in light of plans to replace assets.

❑ Recalculate the depreciation charge for a sample of assets to verify arithmetical accuracy.

❑ Inspect the financial statement disclosure of the depreciation charges and policies in the draft
financial statements and compare to the prior year to ensure consistency.

❑ Recalculate the depreciation charge for revalued assets to ensure the charge is based on the
new carrying value.

❑ Review profits and losses on disposal of assets disposed of in the year, to assess the
reasonableness of the depreciation policies (if depreciation policies are reasonable, there should
not be a significant profit or loss).

❑ Compare depreciation rates to companies with the same type of assets to assess
reasonableness.

❑ Perform a proof in total calculation for the depreciation charged for each category of assets,
discuss with management if significant fluctuations arise. (Analytical procedure)

Research and development

❑ Obtain and cast a schedule of intangible assets, detailing opening balances, amount capitalised
in the current year, amortisation and closing balances.

❑ Agree the opening balances to the prior year financial statements.

❑ Agree the closing balances to the general ledger, trial balance and draft financial statements.

RASHID HUSSAIN 2
 ❑ Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is line with the amortisation policy.

❑ For the new projects, discuss with management the details of each project along with the stage
of development and whether it has been capitalised or expensed.

❑ For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.

❑ For those capitalised as development, agree costs incurred to invoices and confirm technically
feasible by discussion with development managers or review of feasibility reports.

❑ Review market research reports to confirm company has the ability to sell the product once
complete and probable future economic benefits will arise.

❑ Review the disclosures for intangible assets in the draft financial statements are in accordance
with IAS 38 Intangible Assets.

Inventory
Before inventory count
❑ Contact client to obtain a copy of the inventory count instructions, to understand how the count
will be conducted and assess the effectiveness of the count process.

❑ Inspect prior year working papers to understand the inventory count process and identify any
issues that would need to be taken into account this year.

❑ Book audit staff to attend the inventory counts.

❑ Ascertain whether any inventory is held by third parties, and if applicable determine how to
gather sufficient appropriate evidence.

❑ Consider the need for using an expert to assist in valuing the inventory being counted.

❑ Send a letter requesting direct confirmation of inventory balances held at year end from any
third party warehouse providers used regarding quantities and condition.

During inventory count

❑ Select a sample of items from the inventory count sheets and physically inspect the items in the
warehouse: verifies existence.

❑ Select a sample of physical items from the warehouse and trace to the inventory count sheets
to ensure that they are recorded accurately: verifies completeness.

❑ Enquire of management whether goods held on behalf of third parties are segregated and
recorded separately: verifies rights and obligations.

❑ Inspect the inventory being counted for evidence of damage or obsolescence that may affect
the net realisable value: verifies valuation.

RASHID HUSSAIN 3
 ❑ Record details of the last deliveries prior to the year end. This information will be used in final
audit procedures to ensure that no further amendments have been made thereby overstating or
understating inventory: verifies completeness & existence.

❑ Obtain copies of inventory count sheets at the end of the inventory count, ready for checking
against final inventory listing after the inventory count: verifies completeness and existence.

❑ Attend the inventory count (if one is to be performed) at the third party warehouses: verifies
completeness and existence.

After inventory count: final audit procedures

❑ Trace the items counted during the inventory count to the final inventory list to ensure it is the
same as the one used at the yearend and to ensure that any errors identified during counting
procedures have been rectified: verifies completeness.

❑ Cast the list (showing inventory categorised between finished goods, WIP and raw materials) to
ensure arithmetical accuracy and agree totals to financial statement disclosures: verifies
completeness.

❑ Inspect purchase invoices for a sample of inventory items to agree their cost to verify valuation.

❑ Inspect purchase invoices for the name of the client to verify rights.

❑ Inspect post year-end sales invoices for a sample of inventory items to determine if the net
realisable value is reasonable. This will also assist in determining if inventory is held at the lower
of cost and net realisable value: verifies valuation.

❑ Inspect the ageing of inventory items to identify old/slow moving amounts that may require an
allowance, and discuss these with management: verifies valuation.

❑ Recalculate work-in-progress and finished goods valuations using payroll records for labour
costs and utility bills for overhead absorption: verifies valuation.

❑ Trace the good received immediately prior to the yearend to yearend payables and inventory
balances: verifies completeness & existence.

❑ Trace goods despatched immediately prior to yearend to the nominal ledgers to ensure the
items are not included in inventory and revenue (and receivable where relevant) has been
recorded: verifies completeness & existence.

❑ Calculate inventory turnover/days ratio and compare this to prior year, to assess whether
inventory is being held longer and therefore requires an allowance to bring the value down to
the lower of cost and NRV: verifies valuation. (Analytical procedure)

❑ Calculate gross profit margin and compare this to prior year, investigate any significant
differences that may highlight an error in costs of sales and closing inventory: verifies valuation.
(Analytical procedure)

RASHID HUSSAIN 4
Damaged inventory
❑ Obtain a schedule of the damaged products and cast to ensure accuracy.

❑ During the inventory count identify the quantity of the damaged goods and agree to the
schedule.

❑ Discuss with management their plans for disposing of these goods, whether they believe these
goods have a net realisable value (NRV) at all or if they will need to be scrapped.

❑ If any of the goods have been sold post year-end, agree to the sales invoice to assess NRV.

❑ Agree the cost of the inventory to supporting documentation to confirm the raw material cost,
labour cost and any overheads attributed to the cost.

❑ Quantify the level of adjustment required to value inventory at the lower of cost and NRV and
discuss with management.

Continuous/perpetual inventory systems

❑ Where the client uses a perpetual system the auditor should:

✓ Attend at least one count to ensure that adequate controls are applied during the
counts (in the same way as for a year end count).

✓ Inspect the number and value of adjustments made as a result of the count. If
significant adjustments are required each month, this would indicate that the system
figures for inventory cannot be relied on at the year end and a full count will be
required.

✓ If the system balance for inventory is deemed reliable as a result of these procedures,
further procedures to verify cutoff, valuation and rights will still be required.

✓ The auditor should still inspect GRN's and GDN's around the year end to confirm correct
cutoff.

✓ NRV testing and comparison of inventory days with prior year will be performed to
identify issues with valuation.

✓ Inspection of purchase invoices for the name of the client will enable rights to be
confirmed.

Work in progress (WIP)

 Prior to attending the inventory count, discuss with management how the percentage
completions are attributed to the WIP.

 During the count, observe the procedures carried out by staff in assessing the level of WIP and
consider the reasonableness of the assumptions used.

 Agree for a sample that the percentage completions assessed during the count are in
accordance with policies communicated prior to the count.

RASHID HUSSAIN 5
  Discuss with management the basis of the standard costs applied to the percentage completion
of WIP, and how often these are reviewed and updated.

 Review the level of variances between standard and actual costs and discuss with management
how these are treated.

 Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices
or payroll records to assess their reasonableness.

 Cast the schedule of total WIP and agree to the trial balance and financial statements.

 Agree sample of WIP assessed during the count to the WIP schedule, agree percentage
completion is correct and recalculate the inventory valuation.

Receivables
❑ Obtain an aged receivables listing, cast it to verify arithmetical accuracy and agree the total to
the financial statements.

❑ Agree the sales ledger control account with the sales ledger list of balances: verifies
completeness and existence.

❑ Select a sample of yearend receivable balances and agree back to valid supporting
documentation of GDN and sales order: verifies existence.

❑ Inspect after date cash receipts and follow through to preyearend receivable balances: verifies
valuation, rights and obligations and existence.

❑ Select a sample of goods despatched notes (GDN) before and just after the year end and follow
through to the sales invoice to ensure they are recorded in the correct accounting period:
verifies completeness and existence (cutoff of revenue).

❑ Perform a positive receivables circularisation of a representative sample of Co's yearend

balances, for any non-replies, With Co's permission, send a reminder letter to follow-up: Verifies
existence and rights and obligations.

❑ Inspect the aged receivables report to identify any slow moving balances, discuss these with the
credit control manager to assess whether an allowance or write down is necessary: verifies
valuation and allocation.

❑ Inspect customer correspondence in respect of any slow moving/aged balances to assess

whether there are any invoices in dispute: verifies existence and rights and obligations.

❑ Inspect board minutes of Co to assess whether there are any material disputed receivables that
may require write off: verifies existence and rights and obligations.

❑ Inspect the sales ledger for any credit balances and discuss with management whether these
should be reclassified as payables: verifies existence of receivables and completeness of
payables.

❑ Inspect a sample of post yearend credit notes to identify any that relate to pre year-end
transactions to ensure that they have not been included in receivables: verifies existence
(occurrence of revenue).
RASHID HUSSAIN 6
 ❑ Calculate average receivable days and compare this to prior year, investigate any significant
differences: verifies completeness and valuation. (Analytical procedure)

Allowance for receivables

❑ Discuss with the finance director his rationale for not providing against any receivables.

❑ Review the aged receivable ledger to identify any slow moving or old receivable balances,
discuss the status of these balances with the credit controller to assess whether they are likely
to pay.

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

❑ Review customer correspondence to identify any balances which are in dispute or unlikely to be
paid.

❑ Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.

❑ Calculate the potential level of receivables which are not recoverable and assess whether this is
material or not and discuss with management.

Cut-off of purchases
❑ Analytically review the gross profit margin this year versus last year and investigate a any
unexpected fluctuations.

❑ For a sample of goods received notes and supplier delivery notes received either side of the year
end, trace to:

✓ The purchase invoice, and

✓ The year-end payables/accruals balances. ldentify in which period the goods were
received and ensure that they have been accrued in the correct period.

❑ Select a sample of purchase invoices recorded in the nominal ledger either side of the year-end
and trace to the associated goods received note (GRN).

❑ Enquire of directors how they ensure that all goods received but not yet invoiced are recorded
in the correct period, particularly if they are held by the buying department.

❑ Enquire of the procedures for dealing with goods awaiting return to suppliers at the date of the
physical inventory count

❑ Examine goods returned notes post year-end and trace to adjusting entries in the nominal
ledger at the year end.

RASHID HUSSAIN 7
Payables and accruals
❑ Obtain a listing of trade payables from the purchase ledger, cast to verify arithmetical accuracy
and agree to the general ledger and the financial statements: verifies completeness.

❑ Reconcile the total of purchase ledger accounts with the purchase ledger control account:
verifies completeness.

❑ Obtain supplier statements and reconcile these to the purchase ledger balances. Investigate any
reconciling items: verifies existence, completeness, obligations and valuation.

❑ Inspect after date payments, if they relate to the current year then follow through to the
purchase ledger or accrual listing: verifies completeness.

❑ Inspect invoices received after the year end to ensure no further items need to be accrued:
verifies completeness.

❑ Enquire of management their process for identifying goods received but not invoiced or logged
in the purchase ledger and ensure that it is reasonable: verifies completeness.

❑ Select a sample of goods received notes before the year-end and follow through to inclusion in
the yearend payables balance: verifies completeness of payables and cut-off of purchases.

Accrual for income tax payable on employment income

❑ Agree the year-end income tax payable accrual to the payroll records to confirm accuracy.

❑ Re-perform the calculation of the accrual to confirm accuracy.

❑ 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, agree they are included in the year-end accrual.

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

Provisions
❑ Obtain a breakdown of the items to be provided for and cast it to confirm arithmetical accuracy
and agree the figure to the financial statements.

❑ Enquire with the directors or inspect relevant supporting documentation to confirm that a
present obligation exists at the year end.

❑ Inspect relevant board minutes to ascertain whether payment is probable.

❑ Recalculate the provision and agree components of the calculation to supporting

documentation: verifies completeness.

RASHID HUSSAIN 8
 ❑ Inspect post yearend bank statements to identify whether any payments have been made,
compare actual payments to the amounts provided to assess whether the provision is
reasonable: verifies valuation.

❑ Obtain a written representation from management that they believe the provision is valued
appropriately and is complete.

❑ Obtain confirmation from client's lawyer about the likely outcome and chances of payment (e.g.
for a legal provision).

❑ Inspect correspondence received from the lawyer regarding the legal provision to assess
whether a provision should be recognised and if so, whether the amount of the provision is
adequate.

❑ Inspect the financial statement disclosure of the provision to ensure compliance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets: verifies classification and
understandibility.

Redundancy provision
❑ Discuss with the directors as to whether they have formally announced their intention to make
the sales ledger department redundant, to confirm that a present obligation exists at the year
end.

❑ If announced before the year end, review supporting documentation to verify that the decision
has been formally announced.

❑ Review the board minutes to ascertain whether it is probable that the redundancy payments
will be paid.

❑ Obtain a breakdown of the redundancy calculations by employee and cast it to ensure

completeness.

❑ Recalculate the redundancy provision to confirm completeness and agree components of the
calculation to supporting documentation.

❑ Review the post year-end period to identify whether any redundancy payments have been
made, compare actual payments to the amounts provided to assess whether the provision is
reasonable.

❑ Obtain a written representation from management to confirm the completeness of the

provision.

❑ Review the disclosure of the redundancy provision to ensure compliance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

RASHID HUSSAIN 9
Reorganisation/Restructuring
❑ Review the board minutes where the decision to reorganise the business was taken, ascertain if
this decision was made pre year end.

❑ Review the announcement to shareholders, to confirm that this was announced before the year
end.

❑ Obtain a breakdown of the reorganisation provision and confirm that only direct expenditure
from restructuring is included.

❑ Review the expenditure to confirm that there are no retraining costs included.

❑ Cast the breakdown of the reorganisation provision to ensure correctly calculated.

❑ For the costs included within the provision, agree to supporting documentation to confirm
validity of items included.

❑ Obtain a written representation confirming management discussions in relation to the

announcement of the reorganisation.

❑ Review the adequacy of the disclosures of the reorganisation in the financial statements to
ensure they are in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
Assets.

Issuance of Shares
❑ Review board minutes to confirm the issue of additional share capital during the year.

❑ Agree the issue of shares is permitted from a review of any statutory constitution agreements
in place.

❑ Inspect the cash book and bank statements for evidence of cash receipts from the share issue.

❑ Where the sum received is less, agree the difference is treated as share capital called up but not
paid in the financial statements.

❑ Recalculate the split of proceeds between the nominal value of shares and premium on issue
and agree correctly recorded within share capital and share premium account.

❑ Review the disclosure of the share issue in the draft financial statements and ensure it is in line
with relevant accounting standards and local legislation.

Director's emloments
❑ Obtain and cast a schedule of director's remuneration split between wages, bonuses, benefits,
pension contributions and other remuneration, and agree to financial statement disclosures.

❑ Inspect payroll records and agree wages, bonuses, and pension contributions.

❑ Inspect bank statements to verify the amounts actually paid to directors.

❑ Inspect board minutes for discussion and approval of directors' bonus announcements or other
additional remuneration.

RASHID HUSSAIN 10
 ❑ Obtain a written representation from directors that they have disclosed director's remuneration
to the auditor.

Payroll
❑ Agree the total wages and salaries expense per the payroll system to the general ledger and the
financial statements: verifies completeness.

❑ Cast the monthly payroll listings to verify the accuracy of the payroll expense: verifies accuracy.

❑ Recalculate the gross and net pay for a sample of employees, and agree to the payroll records:
verifies accuracy.

❑ Reperform calculation of statutory deductions to confirm whether correct deductions for this
year have been included within the payroll expense: verifies accuracy.

❑ Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate that their first/last pay packet was accurately calculated and
recorded: verifies completeness, occurrence, accuracy.

❑ For salaries, agree the total net pay per the payroll records to the bank transfer listing of
payments and to the cashbook: verifies occurrence.

❑ For wages, agree the total cash withdrawn for wage payments equates to the weekly wages
paid plus any surplus cash subsequently banked: verifies completeness, occurrence.

❑ Agree the yearend tax liabilities to the payroll records, and subsequent payment to the post
yearend cash book: verifies occurrence.

❑ Agree the individual wages and salaries per the payroll to the personnel records and records of
hours worked per clocking in cards: verifies accuracy.

Revenue
❑ Inspect a sample of GDN's before and after the year end and ensure they have been recorded in
the correct period: verifies cutoff.

❑ Recalculate discounts and sales tax applied for a sample of large sales invoices: verifies
accuracy.

❑ Select a sample of customer orders and agree these to the despatch notes and sales invoices
through to inclusion in the sales ledger: verifies completeness.

❑ Inspect credit notes issued after the year end, trace to GDN and invoice and ensure the sale has
been reversed: verifies occurrence.

❑ Analytical procedures

❑ Compare revenue against prior year and investigate any significant fluctuations: verifies
occurrence, accuracy and completeness.

❑ Compare revenue with budget/forecast and investigate any significant fluctuations: verifies
occurrence, accuracy and completeness.

RASHID HUSSAIN 11
 ❑ Calculate the gross profit margin and compare to prior year. Investigate any significant
differences: verifies occurrence, accuracy and completeness.

Accounting estimates
❑ Enquire of management how the accounting estimate is made and the data on which it is based.

❑ Determine whether events occurring up to the date of the auditor’s report (after the reporting
period) provide audit evidence regarding the accounting estimate.

❑ Review the method of measurement used and assess the reasonableness of assumptions made.

❑ Test the operating effectiveness of the controls over how management made the accounting
estimate.

❑ Develop an expectation of the possible estimate (point estimate) or a range of amounts to

evaluate management’s estimate.

❑ Review the judgements and decisions made by management in the making of accounting
estimates to identify whether there are indicators of possible management bias.

❑ Evaluate overall whether the accounting estimates in the financial statements are either
reasonable or misstated.

❑ Obtain sufficient appropriate audit evidence about whether the disclosures in the financial
statements related to accounting estimates and estimation uncertainty (e.g. contingent
liabilities) are reasonable.

❑ Obtain written representations from management and, where appropriate, those charged with
governance whether they believe significant assumptions used in making accounting estimates
are reasonable.

RASHID HUSSAIN 12