SUBSTANTIVE PROCEDURES:

 TRADE RECEIVABLES

(1) Review the aged receivable ledger to identity 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.

(2) Select a significant sample of receivables and review whether there are any after date
cash receipts, ensure that a sample of slow moving/old receivable balance is also
selected.

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

(4) Review board minutes to identify whether there are significant concerns in relation to
payments by customers.

(5) Calculate average receivable days and compare this to prior year, investigate any
significant differences.

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

(7) Select a sample of goods despatched notes (GDN) before and just after the year end and
follow through to the sales ledger to ensure they are recorded in the correct accounting
period.

(8) Select a sample of year-end receivables balances and agree back to valid support
documentation of GDN and sales order to ensure existence.

(9) For non-responses, with the client permission, the team should arrange to send a follow-
up circularisation.

 TRADE PAYABLES

1. Calculate the trade payable days and compare to prior years, investigate any
significant difference, in particular any decrease for this year.

2. Compare the total trade payables and list of accruals against prior year and
investigate any significant difference.
 3. 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.

4. Discuss with management whether any correcting journal entry has been included
for the understatement.

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

6. Obtain supplier statements and reconcile these to the purchase ledger balances and
investigate any reconciling items.

7. Select a sample of payable balances and perform a trade payables circularisation,

follow up any non-replies and any reconciling items between the balance confirmed
and the trade payables balance.

8. Select a sample of goods received notes before the year end and after year end and
follow through to inclusion in the correct period payables balance to ensure correct
cut-off.

 INVENTORY

1. Observe the counting teams to confirm whether the inventory count instructions are
being followed correctly.

2. Select a sample and perform test counts from inventory sheets to warehouse aisle
and from warehouse aisle to inventory sheets.

3. Confirm the procedures for identifying and segregating damaged goods are
operating correctly.

4. Select a sample of damaged items as noted on the inventory sheets and inspect
these windows to confirm whether the level of damage is correctly noted.

5. Observe the procedures for movement of inventory during the count to confirm that
no raw materials or finished goods have been omitted or counted twice.

6. Obtain a photocopy of the completed sequentially numbered inventory sheet for

follow up testing on the final audit.
 7. Identify and make a note of the last goods received notes (GRNs) and goods
despatched notes (GDNs) in order to perform cut –off procedures.

8. Observe the procedures carried out by the warehouse manager in assessing the
level of work-in-progress and consider the reasonableness of any assumptions used.

9. Discuss with the warehouse manager how he has estimated the raw materials
quantities and re-perform the procedures adopted by the latter.

10. Identify and record any inventory held for third partied (if any) and confirm that it is
excluded from the count.

VALUATION PROCEDURES:

– Obtain a schedule of all raw materials, finished goods and work in progress (WIP)
inventory and cast to confirm completeness and accuracy of the balance and agree to trial
balance and financial statements.

– Obtain the breakdown of WIP and agree a sample of WIP assessed during the count to the
WIP schedule, agreeing the percentage completion as recorded at the inventory count.

– For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets
and confirm raw material costs to recent purchase invoices, labour costs to time sheets or
wage records and overheads allocated are of a production nature.

– For a sample of inventory items, review the calculation for equivalent units and associated
equivalent unit cost and recalculate the inventory valuation.

– Select a sample of year-end finished goods and review post year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

– Select a sample of items included in WIP at the year end and ascertain the final unit cost
price, verifying to relevant supporting documentation, and compare to the unit sales price
included in sales invoices post year end to assess NRV.

– Review aged inventory reports and identify any slow moving goods, discuss with
management why these items have not been written down or if an allowance is required.

– For the defective chemical compound E243, discuss with management their plans for
disposing of these goods, and why they believe these goods have a NRV of $400,000.

– If any E243 has been sold post year end, agree to the sales invoice to assess NRV.

– Agree the cost of $720,000 for compound E243 to supporting documentation to confirm the
raw material cost, labour cost and any overheads attributed to the cost.
– Confirm if the final adjustment for compound E243 is $320,000 (720 – 400) and discuss
with management if this adjustment has been made; if so follow through the write down to
confirm.

– Review the financial statements disclosures relating to inventory and WIP to ensure they
comply with IAS 2 Inventories

 BANK AND CASH BALANCE

1. Obtain current bank account reconciliation and check the additions to ensure
arithmetical accuracy.

2. Obtain a bank confirmation letter from banker for all of its accounts.

3. For the current account agree the balance per the bank statement to an original
year end bank statement and also to the bank confirmation letter.

4. Agree the reconciliations balance per the cash book to the year-end cash book.

5. 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.

6. Trace all un-presented 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.

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

8. Agree all balances listed on the bank confirmation letter to bank’s reconciliations or
the trial balance to ensure completeness of bank balances.

9. Review the cash book and bank statement for any unusual items or large transfers
around the year end as this could be evidence of window dressing.

10. Examine the bank confirmation letter for details of any security provided by
company or any legal right of set off as this may require disclosure.

11. Review the financial statements to ensure that the disclosure of cash and bank
balances are complete and accurate.
 PAYROLL

1. Agree the total wages and salaries expense per the payroll system to the trial balance,
investigate any difference.

2. Cast a sample of payroll records to confirm completeness and accuracy of the payroll
expense.

3. For a sample of employees, recalculate the gross and net pay and agree to the payroll
records to confirm accuracy.

4. Recalculate the statutory deductions to confirm whether correct deductions for this year
have been made in the payroll.

5. Compare the total payroll expense to the prior year and investigate any significant
differences.

6. Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management for any significant variances.

7. Perform a proof of total wages and salaries, incorporating joiners and leavers and the annual
pay increase. Compare this to the actual wages and salaries in the financial statements and
investigate any significant differences.

8. Select a sample of joiners and leavers, agree their start/leave date to supporting
documentation, recalculate that their first day packet was accurately calculated and
recorded.

9. Agree the total net pay per the payroll records to the bank transfer for listing of payments
and to the cash book.

10. Select a sample of weekly overtime sheets and trace to overtime payment in payroll records
to confirm completeness of overtime paid.

 REVENUE

1. Compare the overall level of revenue against prior years and budget and investigate
any significant fluctuations.
 2. Obtain a schedule of sales for the year broken down into the two categories of hotel
and trade customers and compare this to the prior year breakdown and for any
unusual movements discuss with management.

3. Calculate the gross profit margin and compare this to the prior year and investigate
any significant fluctuations.

4. Select a sample of sales invoices for customers and agree the sales price back to the
contracted rates to ensure the accuracy of invoices.

5. Select a sample of credit notes raised trace through to the original invoice and
ensure invoice correctly removed from sales.

 RESEARCH & DEVELOPMENT

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

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

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

4. Recalculate the amortisation charge for a sample of intangible assets which have
commenced production and confirm it is line with the amortisation policy or straight line
over five years.

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

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

7. Review the disclosure for intangible assets in the draft financial statements are in
accordance with IAS 38 Intangible assets.

 DIRECTOR’S BONUS

(i) Agree the individual bonus payment to payroll records.

 (ii) Recalculate the bonus payment; agree the criteria to supporting documents and
percentage rate as per contracts.

(iii) Confirm the amount of each bonus paid post year end by agreeing to the cash book and
bank statements

(iv) Review board minutes to identify any additional payment relating to this year have been
agreed for any director.

(v) Obtain a written representation from management confirming the completeness of

director’s remuneration including the bonus.

 TAX PAYABLE ON EMPLOYMENT INCOME

(i) Compare the employable tax payable with prior year and investigate any differences.

(ii) Agree the year end employable tax to payroll records to confirm accuracy.

(iii) Reperform the employable tax payable calculation to confirm accuracy.

(iv) Agree subsequent payment to post year end cash book and bank statement to confirm
completeness.

 REVALUATION OF PPE

– Obtain a schedule of all PPE revalued during the year and cast to confirm completeness and
accuracy of the revaluation adjustment and agree to trial balance and financial statements.

– Consider the competence and capability of the valuer, Martin Dullman, by assessing
through enquiry his qualification, membership of a professional body and experience in
valuing these types of assets.

– Consider whether the valuation undertaken provides sufficiently objective audit evidence.
Discuss with management whether Martin Dullman has any financial interest in Elounda Co
which along with the family relationship could have had an impact on his independence.

– Agree the revalued amounts to the valuation statement provided by the valuer.

– Review the valuation report and consider if all assets in the same category have been
revalued in line with IAS 16 Property, Plant and Equipment.

– Agree the revalued amounts for these assets are included correctly in the non-current assets
register.
– Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.

– Recalculate the depreciation charge for the year to ensure that for the assets revalued during
the year, the depreciation was based on the correct valuation and was for 12 months.

– Review the financial statements disclosures relating to the revaluation to ensure they
comply with IAS 16.

SUBSTANTIAL PROCEDURES FOR GOING CONCERN

(i) Review correspondence with the bank to assess the likelihood of the renewal of the overdraft.

(ii) Obtain the cash flow forecast analysing the cash inflow and outflow and assess its
reasonableness.

(iii) Review correspondence with suppliers to confirm any intention of legal actions concerning
payment and extension of credit facilities.

(iv) Review correspondence with lawyers as to the existence of any pending litigation and claims.

(v) Obtain a written representation of management to confirm if they agree the business if going
concern or not.

(vii) Review board minutes to identify any other issues which might indicate the financial difficulties
for the company.

(vii) Evaluate management plan for any contingency plans in relation to on-going finance and
revenue generation.