ACCA AA / AAA

Audit and Assurance

Substantive
Procedures
 Factors to consider while writing down
the audit procedures
1. Write it clearly
Audit procedures should be written in such a way that even a junior auditor will be able to
understand what is to be done. For example, avoid vague procedures like ‘check goods received
notes’. This is vague as it does not explain what is to be examined in the goods received notes. Is it
the description of items received, the quantity received or the name of the vendor?

2. Write down the reason for performing the audit procedure

The audit procedure ‘check goods received notes’ does not mention why the goods received notes
are to be checked. Instead, write the audit procedure as: ‘agree the description of items and the
quantities ordered mentioned on the goods received note with the descriptions on the purchase
orders raised on the vendor’. This confirms that the entity has procured goods based on an
authorised purchase order.

3. Use audit terminology

Use terminology relating to audit like ‘cast’, ‘agree’, ‘trace’, etc.
Use the word ‘cast’ to mean totalling up a list – for example, ‘cast the trial balance’.
Use the words ‘agree’ or ‘trace’ to mean matching information from two documents/ records – for
example, ‘agree the total sales of the sales day book to the general ledger account’; or ‘trace a
sample of trade payables to the purchase invoices, to confirm the existence of the rights to the goods
purchased’.

A complete audit procedure would read as follows:

The auditor will agree a sample of items from the inventory sheets to the raw material inventory (1)
to ensure that the inventory recorded on the sheets actually exists (2). This will confirm the
assertion of existence of inventory as an asset in the financial statements (3).

1 = the audit procedure;

2 = the reason for the audit procedure;
3 = the assertion.

If the above mentioned procedure is written as ‘The auditor will check a sample of items from the
inventory sheets to the raw material inventory’, it is incomplete as it does not mention why the audit
procedure is being performed. (Source: ACCA/technical articles)

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 Common errors that must be avoided
The examiner’s reports mention various errors that candidates make while writing audit procedures.
Here is a summary of the common errors.

While writing audit procedures, avoid the following:

• Writing an audit procedure without explaining the reason for the procedure – for
example, ‘The auditor will check a sample of items from the inventory sheets to the
inventory.’

• Stating an assertion word as a reason for performing a procedure – for example,

‘confirming the occurrence of sales’.

• Writing what the internal control system should do rather than stating the audit
procedure – for example, ‘for all goods received, there should be a goods received note
raised’.

• Writing vague procedures – for example, ‘check the invoice’, ‘check the goods received
note’, etc. These procedures are inappropriate as they do not mention what is to be checked
and the reason for checking them.

• Quoting incorrect assertions – for example, ‘tracing details from the purchase orders to the
goods received notes in order to confirm existence of the goods’ – the completeness
assertion would apply here.

• Including procedures that cannot be carried out – for example, ‘agree individual items of
physical inventory to the sales invoice’. It will not be possible to agree the physical goods to
the sales invoice as the goods will already be sold.

• Including procedures that are incorrect – for example, ‘agree details from the purchase
orders (like description of items ordered, quantities ordered) to the goods held in the
inventory store’. This is an incorrect audit procedure as goods received notes (not purchase
orders) are used to update inventory.

• Writing impractical procedures – for example, suggesting a segregation of duties between

the person authorising petty cash vouchers, recording petty cash vouchers and dispensing
the petty cash.

• Writing irrelevant audit procedures – for example, when you are asked to write audit
procedures relating to depreciation of a non-current asset, it will be inappropriate to provide
general audit procedures relating to audit of non-current assets.

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Focus on;
the audit procedure,
the reason for the audit procedure,
the assertion.

Financial statements

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Opening balances
• Agree the opening balances to the prior year’s financial statement closing balances to
confirm whether they have been correctly brought forward to the current year.

• Review the notes to financial statements to ensure that accounting policies have been
applied consistently and any change made are adequately disclosed.

• Discuss with the previous year auditor about the prior year financial statements and the
prior year auditor’s report for obtaining information relevant to opening balances, including
disclosures.

• Consider reviewing the prior auditor’s working papers to obtain evidence regarding
opening balances.

• Assess whether the opening balances reflect the application of appropriate accounting
policies.

• Perform specific audit procedures to obtain evidence regarding the opening balances.

Bank
 Obtain standard bank confirmations from each bank with which the client conducted
business during the audit period.

 Reperform arithmetic of bank reconciliation to confirm the accuracy.

 Obtain satisfactory explanations for all items in the cash book for which there are no
corresponding entries in the bank statement and vice versa by discussion with finance
staff.

 Verify balances per the cash book according to the bank reconciliation by inspecting cash
book, bank statements and general ledger.

 Consider whether there is a legal right of set-off of overdrafts against positive bank
balances.

 Compare cash book(s) and bank statements in detail for the last month of the year, and
match items outstanding at the reconciliation date to bank statements.

 Review draft accounts to ensure that disclosures for bank are complete and accurate and in
accordance with accounting standards.

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Directors' emoluments
Emoluments include salaries, fees, bonuses, pension contributions and retirement
benefits, non-cash benefits and any compensation for loss of office.

 For each director, obtain a schedule of emoluments for the year, split between
wages, bonuses, benefits, pension contributions and other emoluments.

 Review the addition of the schedule and ensure the totals are in agreement with the
disclosure in the financial statements.

 Enquire each individual director to confirm the emoluments listed are complete and in line
with their expectations.

 Compare the emoluments with both the previous year's emoluments and with
expectations, taking into account the knowledge obtained during the audit.

 Agree salaries, fees, bonuses and pension contributions to payroll records for the individual
directors and check the amounts paid on the bank statements agree with the payroll
records.

 Review the directors' contracts and ensure emoluments are consistent with the terms of
these contracts.

 Consider the adequacy of disclosure of directors' emoluments in accordance with applicable

accounting standards and local legislation, including the separate disclosure of amounts due
to or from directors in respect of directors' emoluments.

Revenue
• Compare the overall level of revenue against prior years and budget for the year and
investigate any significant fluctuations.

• Obtain a schedule of sales for the year broken down into the main product categories and
compare this to the prior year breakdown and for any unusual movements, discuss with
management.

• Select a sample of sales invoices for customers and agree the sales prices back to the price
list or customer master data information to ensure the accuracy of invoices.

• Select a sample of despatch notes both pre and post year end and match it with the
sales invoices in the correct accounting period to ensure that cut-off has been correctly
applied.

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 • Recalculate invoice totals including discounts and sales tax for a sample of invoices to
ensure the mathematical accuracy.

• Select a sample of credit notes raised and agree it to the original invoice to ensure the
invoice has been correctly removed from sales.

Purchases and other expenses

• Calculate the operating profit and gross profit margins and compare them to last
year and budget and investigate any significant differences.

• Review monthly purchases and other expenses to identify any significant fluctuations
and discuss with management.

• Discuss with management whether there have been any changes in the key suppliers
used and compare this to the purchase ledger to assess completeness and accuracy of
purchases.

• Recalculate invoice totals including discounts and sales tax for a sample of invoices to
ensure the mathematical accuracy.

• Select a sample of payments from the cash book and trace to expense account to
ensure the expense has been included and classified correctly.

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.

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

• 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 and confirm any outstanding
amounts 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.

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

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Payroll
• Agree the total wages and salaries expense per the payroll system to the trial balance,
investigate any differences.

• Recalculate the gross and net pay for a sample of employees, and agree the amounts to the
payroll records to confirm accuracy.

• Re-perform the calculation of statutory deductions to confirm

whether correct deductions for this year have been made in the
payroll.

• Agree the total net pay per the payroll records to the bank
transfer listing of payments and to the cashbook.

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

• Perform a proof in total 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.

Provision
• Obtain details of all provisions which have been included in the accounts and all
contingencies that have been disclosed.

• Obtain a detailed analysis of all provisions showing opening balances, movements

and closing balances.

• Review any correspondence relating to the provision to assess whether the

company has a present obligation as a result of past events.

• Obtain confirmation from solicitor to confirm whether it is probable that a transfer

of economic benefits will be required to settle the obligation .

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

documentation to ensure the mathematical accuracy.

 Ensure that a contingent liability is disclosed in the accounts in the event that it is
not possible to estimate the amount of the provision.

 Consider the adequacy of disclosure of provisions, contingent assets and contingent

liabilities in accordance with IAS 37.

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Receivables
Completeness
 Obtain an aged receivables listing and agree the total to the general ledger by casting and
cross-casting.

 Match the total of the aged receivables' listing to the sales ledger control account.

 Vouch selected amounts from the sales and receivables ledger to supporting
documentation, such as sales order and sales invoices.

 Complete the disclosure checklist to ensure that all the disclosures relevant to receivables
have been made.

 Compare receivables turnover and receivables collection period with the previous year
and/or with industry data, and investigate any significant differences.

 Compare the level of prepayments to the previous year to ensure the figure is materially
correct and complete.

Existence
• Perform a receivables circularisation on a sample of year-end trade receivables and
follow up all balance disagreements and non-replies to the receivables confirmation.

Alternative audit procedures to confirm existence

• Review after-date cash receipts by inspecting bank statements and cash receipts
documentation.

• Examine the customer's account and customer correspondence to assess whether the
balance outstanding represents specific invoices and confirm their validity.

• Vouch selected amounts from the sales and receivables ledger to supporting
documentation, such as sales order and sales invoices.

• Enquire from management explanations for invoices remaining unpaid after

subsequent ones have been paid.

• Discuss with management to determine whether the balance on the customer account
is growing and obtain explanations for the same.

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 Accuracy, valuation and allocation
 Recalculate the amount prepaid to ensure that it has been accurately calculated
for a sample of prepayments from the prepayments' listing.

 Obtain additional information regarding the recoverability of receivables by

discussions with management and review of customer correspondence for a
sample of old debts on the aged trial balance.

 Compare receivables turnover and receivables collection period with the previous
year and/or with industry data, and investigate any significant differences.

 Compare the irrecoverable debt expense as a percentage of sales with the previous
year and/or with industry data.

 Compare the allowance for irrecoverable debts as a percentage of

receivables or credit sales with the previous year and/or with
industry data

Rights and obligations

 Review bank confirmation for any liens on receivables.

 Discuss with management to asses whether any receivables have been pledged,
assigned or discounted and whether such items require disclosure in the financial
statements.

Classification
• Take a sample of sales invoices and examine for proper classification into revenue
accounts.

 Review the aged analysis of receivables for any large credits, non-trade receivables and
long-term receivables and consider whether such items require separate disclosure.

 Read the disclosure notes relevant to receivables in the draft financial statements and
review for understandability.

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 Cut off
 Inspect the dates and compare with the dates of despatch and the dates recorded in
the ledger for a sample of sales invoices around the year end to determine the
transactions are recorded in the correct financial year.

 For sales returns, select a sample of returns documentation around the year end and
trace to the related credit entries.

 Review material after-date invoices, credit notes and adjustments and ensure that they
are recorded correctly in the relevant financial period.

 Compare the prices and terms to the authorised price list and terms of trade
documentation for a sample of sales invoices.

Occurrence
• Vouch the sales invoice back to customer orders and despatch documentation for a
sample of sales transactions recorded in the ledger.

• Discuss with management to asses whether any receivables have been pledged, assigned
or discounted and whether such items require disclosure in the financial statements.

Presentation
• Read the disclosure notes to ensure the information is accurate and properly presented at the
appropriate amounts.

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Inventory
Completeness
 Complete the disclosure checklist to ensure that all the disclosures relevant to inventory
have been made.

 Trace test counts to the detailed inventory listing.

 Where inventory is held in third-party locations, physically inspect this inventory or

review confirmations received from the third party and match to the general ledger.

 Compare the gross profit percentage to the previous year or industry data.

Rights and obligations

 Confirm that any inventory held at third-party locations is included in the year-end
inventory figure by reviewing the inventory listing.

 Verify that any inventory held for third parties is not included in the year-end inventory
figure by being appropriately segregated during the inventory count.

 For any 'bill and hold' inventory identify such inventory and ensure that it is segregated
during the inventory count so that it is not included in the year-end inventory figure.

Existence
• Observe the physical inventory count to ensure the existence and condition of the
inventory.

• Where inventory is held in third-party locations, physically inspect this inventory or

review confirmations received from the third party and match to the general ledger.

Occurrence and rights and obligations

 Enquire of management and review any loan agreements and board minutes for
evidence that inventory has been pledged or assigned.

 Enquire of management about warranty obligation issues.

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 Cut off
• Note the numbers of the last GDNs and GRNs before the year end and the first GDNs
and GRNs after the year end and check that these have been included in the correct
financial year.

Accuracy, valuation and allocation

 Obtain a copy of the inventory listing and agree the totals to the general ledger.

 Cast the inventory listing to ensure it is mathematically correct.

 Vouch a sample of inventory items to suppliers' invoices to ensure it is correctly

valued.

 Confirm that an appropriate basis of valuation is being used by discussing with

management.

 Examine prices at which finished goods have been sold after the year end to
ascertain whether any finished goods need to be written down.

 Discuss with management and consider the need to make allowance if significant
levels of finished goods remain unsold for an unusual period of time.

 Compare the gross profit percentage to the previous year

or industry data.

 Compare raw material, finished goods and inventory

collection period to the previous year and industry
averages.

Classification
 Review the inventory listing to ensure that inventory has been properly classified
between raw materials, work-in-progress and finished goods.

 Read the notes to the accounts relating to inventory to ensure they are understandable.

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Before the inventory count
• Contact the 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.

• 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.

Attendance at inventory count

 Observe whether the client's staff are following instructions to ensure the count is
complete and accurate.

 Perform test counts to ensure procedures and internal controls are working properly,
and to gain evidence over existence and completeness of inventory.

 Ensure that the procedures for identifying damaged, obsolete and slow-moving
inventory operate properly and obtain information about the inventory's condition, age,
usage and, in the case of work-in-progress, its stage of completion to ensure that it is
later valued appropriately.

 Confirm that inventory held on behalf of third parties is separately identified and
accounted for so that inventory is not overstated.

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

After the inventory count

 Trace items that were test counted to final inventory sheets.

 Inspect final inventory sheets to ensure they are supported by count records.

 Ensure that continuous inventory records have been adjusted to the amounts
physically counted or measured, and that differences have been investigated.

 Confirm cut-off by using details of the last serial number of goods inward and outward
notes and details of movements during the count.

 Confirm the client's final valuation of inventory has been calculated correctly.

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Inventory held by third parties
• Direct confirmation from the third party regarding quantities and condition of the goods
to confirm rights and valuation.

 Attend the inventory count or arrange another auditor to attend the third party's
inventory count to ensure the existence of the inventory.

 Obtaining another auditor's report on the adequacy of the third party's internal control
for ensuring that inventory is properly counted and adequately safeguarded

 Inspecting documentation in respect of third-party warehouse such

as warehouse receipts or consignment letters.

 Obtain confirmation from other parties if any of the inventory has

been pledged as collateral

(ISA 501: para. A16)

Continuous (perpetual) inventory count

• Attend at least one of the continuous (perpetual) inventory counts to review whether the
controls over the inventory count are adequate.

• Confirm that all of the inventory lines have been counted or are due to be counted at
least once a year by reviewing the schedules of counts undertaken/due to be undertaken.

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• Review the adjustments made to the inventory records on a monthly basis to gain an
understanding of the level of differences arising on a month by month basis.

• Discuss with management how they will ensure that year-end inventory will not be
under or overstated incase if there are any significant differences consistently arise that
could indicate that the inventory records are not adequately maintained.

• Consider attending the inventory count at the year end to undertake test counts of
inventory from records to floor and from floor to records in order to confirm the existence
and completeness of inventory.

NOTES

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Trade payables

Completeness
 Obtain a listing of trade accounts payables and agree the total to the general ledger
by casting and cross-casting.

 Perform a confirmation of accounts payables for a sample of payable balances.

 Obtain selected suppliers' statements and reconcile these to the relevant suppliers'
accounts.

 Examine files of unmatched purchase orders and supplier invoices for any
unrecorded liabilities.

 Complete the disclosure checklist to ensure that all the disclosures relevant to
liabilities have been made.

 Enquire the management about how unrecorded liabilities and accruals are
identified and examining post year end transactions to test for unrecorded liabilities.
…………………………………………………………………………………………

 Compare the current year balances for trade accounts payables and accruals with
the previous year.

 Compare the amounts owed to a sample of individual suppliers in the trade

accounts payables listing with amounts owed to these suppliers in the previous year.

 Compare the payables turnover and payables payment period to the previous year
and industry data.

Cut-off
 Compare the dates of a sample of vouchers with the dates they were recorded in the
ledger for application of correct cut-off.

 Test transactions around the year end to determine whether amounts have been
recognised in the correct financial period.

 Compare the purchase returns as a percentage of sales or cost of sales to the previous
year.

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 Rights and obligations
• Vouch selected amounts from the trade accounts payables listing and accruals listing
to supporting documentation, such as purchase orders and suppliers' invoices.

Existence
 Obtain selected suppliers' statements and reconcile these to the relevant suppliers'
accounts.

 Perform a confirmation of accounts payables for a sample of payable balances.

 Vouch selected amounts from the trade accounts payables listing and accruals
listing to supporting documentation, such as purchase orders and suppliers'
invoices.

 Compare the current year payables' turnover with the previous year to confirm
reasonableness.

Accuracy, valuation and allocation

 Obtain selected suppliers' statements and reconcile these to the relevant suppliers'
accounts.

 Recalculate the amount of the accrual for a sample of accruals to ensure the amount
accrued is correct.

 Vouch selected amounts from the trade accounts payables listing and accruals listing
to supporting documentation, such as purchase orders and suppliers' invoices.

 Compare the current year balances for trade accounts payables and accruals with the
previous year.

 Compare the amounts owed to a sample of individual suppliers in the trade

accounts payables listing with amounts owed to these suppliers in the
previous year.

 Compare the payables turnover and payables payment period with the
previous year and industry data, and investigate any significant differences.

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Tangible non-current assets
Completeness
 Obtain or prepare a summary of tangible non-current assets showing how the net
book value reconcile with the opening position.

 Compare non-current assets in the general ledger with the non-current assets register
and obtain explanations for differences.

 Obtain a schedule showing the original costs and present depreciated value of major
non-current assets, if a non-current asset register is not kept.

 Reconcile the schedule of non-current assets with the general ledger.

 For a sample of assets which physically exist, Agree that they are recorded in the non-
current asset register.

Existence
• Inspect assets, concentrating on high value items and additions in-year and confirm
that items inspected exist and are in good condition.

• Confirm that the company physically inspects all items in the non-current asset
register each year.

• Review records of income-yielding assets .

• Reconcile opening and closing of non-current asset by numbers as well as amounts.

Valuation
• Verify valuation to valuation certificate.

• Consider reasonableness of valuation, reviewing the methods and assumptions used

and by ensuring that valuation bases are in line with accounting standards.

• Reperform calculation of revaluation surplus to ensure the mathematical accuracy.

• Discuss with the management and inspect the previous financial statements to
confirm whether valuation of all assets have been done regularly.

• Inspect draft accounts to ensure that client has recognised revaluation

losses in the statement of profit or loss unless there is a credit balance in
respect of that asset in equity.

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 Rights and obligation
 Obtain a certificate from solicitors or bankers stating purpose for which the deeds
are being held and to ensure that they are free from mortgage or lien.

 Verify title of non current asset by inspection of title deeds and registration
certificates.

 Confirm all non current assets are used for the purpose of client's business.

 Review for evidence of charges in statutory books and by company search.

 Examine invoices received after year end, orders and minutes for evidence of
capital commitments.

 Review leases of leasehold properties to ensure that company has fulfilled covenants
therein.

Addition of Non-current assets

• Review capitalisation of expenditure by examining for non-current assets additions and
items in relevant expense categories to ensure that capital and revenue distinction is
correctly drawn

• Obtain a breakdown of additions and cast the list and agree it to the non-current assets
register to confirm completeness.

• Verify that additions have been recorded by scrutinising the non-current asset register
and general ledger.

• Select a sample of additions and agree cost to supplier invoice to confirm valuation.

• Inspect non-current asset accounts for a sample of purchases to ensure they have
been properly allocated.

• Recalculate the depreciation charge for a sample of additions to confirm the calculations
are correctly applied as per the company policy .

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 Self constructed assets
• Verify material and labour costs and overheads to invoices, wage records etc.

• Ensure expenditure has been analysed correctly and properly charged to capital.

• Expenditure should be capitalised only if it relates to a major overhaul expenditure,

replacement of a component asset or an expenditure for the enhancement of the
economic benefits provided by an asset.

• Review costs to ensure that no profit element has been included.

• Review accounts to ensure that finance costs have been capitalised or not
capitalised on a consistent basis, and costs capitalised in period do not exceed total
finance costs for period.

Disposal
• Verify disposals with supporting documentation, checking transfer of title, sales
price and dates of completion and payment.

• Recalculate profit or loss on disposal to ensure the mathematical accuracy.

• Consider whether proceeds are reasonable.

• If the asset was used as security, ensure release from security has been correctly
made.

Valuation of depreciation
 Review non-current assets register to ensure that depreciation has been charged
on all assets with a limited useful life. .

 Reperform calculation of depreciation rates to ensure it is

mathematically accurate.

 Ensure that the charge for depreciation is based on the revalued amount
by recalculating it for a sample of revalued assets

 Scrutinise draft accounts to ensure that depreciation policies and rates are
disclosed in the accounts.

 Compare ratios of depreciation to non-current assets (by category) with the

previous years and depreciation policy rates.

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 Revaluation of property, plant and equipment (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.

 Agree the revalued amounts to the valuation statement provided by the valuer and
confirm the revalued amounts for these assets are included correctly in the non-current
assets register..

 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.

 Recalculate the depreciation charge for the year to ensure that for the assets revalued
during the year, the depreciation was based on the revalued amount.

 Recalculate the total revaluation adjustment and agree correctly recorded in the
revaluation surplus.

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

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

 Obtain direct confirmation from lenders of the amounts outstanding, accrued interest
and what security they hold.

 Verify that interest charged for the period is in accordance with statements and
supporting agreements, and consistent with known interest rates. Consider the adequacy
of accrued interest.

 Confirm assets charged have been entered in the register of charges and notified to the
Registrar.

 Review board minutes and cash book to confirm that all additions and
repayments of the loans have been recorded.

 Review draft accounts to ensure that disclosures for non-current

liabilities are correct and in accordance with accounting standards
and ensure that the borrowings are correctly classified between
current and non current liabilities.

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  Confirm repayments are in accordance with loan agreement.

Intangible Assets
 Obtain and cast a schedule of intangible assets, detailing opening balances, amounts
capitalised in the current year, amortisation and closing balances.

 Discuss with the finance director the rationale for determining useful life of intangible
assets and consider its reasonableness.

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

 Recalculate the amortisation charge for a sample of intangible assets which have
commenced production and confirm it is in line with the amortisation policy and that
amortisation only commenced from the point of production.

 Inspect specialist valuation report and agree to the

amount included in the general ledger and the financial
statements

 Review the disclosures for intangible assets in the draft

financial statements to verify that they are in accordance
with IAS 38 Intangible Assets.

Research and development

 Discuss with management the details of each new project along with the stage of
development and whether it has been capitalised or expensed.

 Agree the expenses for research incurred to the invoices and supporting documentation
and to inclusion in profit or loss.

 Agree those costs that are capitalised as development expenditure to invoices and
confirm technically feasible by discussion with development managers or review of
feasibility reports.

 Confirm technically feasible and intention to complete the project by discussion with
development managers or review of feasibility reports.

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

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Going concern procedures
 Review post year-end management accounts to assess if in line with cash flow forecast.

 Enquire of the lawyers of company with the client’s permission, to confirm the existence
of any litigation and if so, the likely outcome of any litigation.

 Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate.

 Review the post year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.

 Obtain a written representation confirming the directors’ view that company is a going
concern.

 Consider whether any additional disclosures as required by IAS 1 Presentation of

Financial Statements in relation to any material uncertainties over going concern should be
made in the financial statements.

Prepayments
Prepayments are services or goods which a company has paid for in advance.

• Inspect bank statements to assess whether payment has been made to confirm the
existence.

• Inspect invoices to ensure payment relates to goods or services not yet received.

• Recalculate the amount prepaid to confirm mathematical accuracy

• Compare prepayments with the prior year to identify any missing items or any new
prepayments which require further testing

Accruals (Income tax payable on employment income)

• Obtain the list of accruals from the client, cast it to confirm mathematical accuracy and
agree to the general ledger and the financial statements

• Re-perform the calculation of the accrual to confirm accuracy and discuss any unexpected
variances with management.

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

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 • Agree the year-end income tax payable accrual to the general ledger and payroll records
to confirm accuracy.

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

• Compare the accrual for income tax payable to the prior year, investigate any significant
differences.

Equity share capital

 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 than market value, 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.

Dividends
• Inspect board minutes to agree dividends declared before the year-end.

• Inspect bank statements to agree dividends paid before the year-end.

• Agree dividends paid and declared pre year end to authority in minute books and
reperform calculation with total share capital issued to ascertain whether there are any
outstanding or unclaimed dividends.

• Agree dividend payments to documentary evidence such as the returned dividend

warrants.

• Test that dividends do not contravene distribution provisions by reviewing the

legislation

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Reserves
 Agree movements on reserves to supporting documents such as independent valuers
report.

 Ensure that movements on reserves do not contravene the legislation and the
company's constitution by reviewing the legislation.

 Confirm that the company can distinguish distributable reserves from those that are non-
distributable.

 Ensure that appropriate disclosures of movements on reserves are made in the company's
accounts by inspection of the financial statements.

Uncorrected misstatement
• Consider the extent of the potential misstatement by selecting a large sample of items that
needs to be be tested to identify the possible size of the misstatement.

• Discuss with management about the potential misstatement in order to understand the
reasons of the occurring the amount of misstatement.

• Request a written representation from the directors about the uncorrected misstatements.

• Consider the implication for the audit report if the misstatements are material and the
directors refuses to make adjustments.

• Compare the misstatements with the materiality thresholds to assess if the error is
material individually.

Overall review of financial statements

 Assess whether the audit evidence gathered by the team is sufficient
and appropriate to support the audit opinion.

 Review the aggregate of uncorrected misstatements to assess whether

in aggregate a material misstatement arises and discuss with
management with regards to a potential adjustment.

 Review the financial statements to ensure compliance with accounting

standards and local legislation requirements.

 Review the financial statements to ensure they are consistent with the
auditor’s knowledge of the business and the results of their audit work.

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  Review the financial statements to assess whether they adequately reflect the information
and explanations previously obtained and conclusions reached during the course of the
audit.

 Review the disclosure of the accounting policies and estimates to ensure that they are in
accordance with the accounting treatment adopted in the financial statements, and that they
are sufficiently disclosed.

Audit software procedures using computer

assisted audit techniques (CAATs)
• Audit software can be used to perform analytical procedures by comparing (eg: current
ratio) with the prior year and industry standards.

• Audit software can be used to select a representative sample of for further

investigation.

• Audit software can be utilised to recalculate the to ensure mathematical

accuracy.

• CAATs can be used to undertake cut-off testing by assessing whether the dates of the last
(eg: GRN, Sales invoice) recorded relate to pre year end and those related to the post year
end were excluded.