SUBSTANTIVE PROCEDURES NOTES

UNIVERSAL SUBSTAVTIVE PROCEDURES

RECIVABLES

 For a sample of receivables send confirmation letters to customers to verify their balances
 Obtain breakdown of receivables and cast them to ensure its accuracy
 For sample of receivables trace back to sale invoices to ensure completeness
 Calculate receivables days and compare it with previous year , investigate differences
 Check post year end payment from customers and compare it with figure included in financial
statement
 Calculate bad debt for the year and compare it with previous year, investigate differences
 Check aged receivables analysis to identify slow moving or old debts and discuss with credit
controller and create allowance for them
 Inspect board minutes to check if there’s any significant concerns regarding the payments from
customers
 Compare the individual receivables ledger accounts with the total of receivables control account
to ensure completeness
 For a sample of receivables agree the amount owed from customer and trace back it to
supporting document like invoices and gdn to ensure rights and obligation
 Review receivable ledger for any credit balance and dsicuss with management to include it as an
payable in financial statement
 Ensure receivable is included as current asset in financial statement

PAYABLES

 Obtain schedule of payable, cast them to ensure accuracy

 Calculate payable days and compare it with prior year, investigate differences
 For sample of payables,trace back to purchase invoice and grn to ensure right and obligation
 For sample of payables, compare it with the figure included in general mledger to ensure
completeness
 Review post year end cashbook to check whether any payment being done to payable and
compare it with the figure included in financial statement
 For sample of payable, send confirmation letter to supplier to verify their balances
 Compare the individual supplier account with total of payable ledge control account to ensure
completeness
 Ensure payables are recorded as current liability in financial statement
  Review purchase ledger for any debit balance and discuss with management whether to include
as receivable
 Select a sample of grn before the year end and after the year end to ensure it is recorded in
correct period

INVENTORY

 For sample of inventory at year end, ensure cost is correctly stated by compairing the cost with
recent purchase invoice
 Review aged inventory report to identify slow moving and old inventory and ensure allowance is
made for them
 Calculate the inventory days and compare it with previous year , investigate differences
 For sample of goods sold post year end access that nrv is above the cost or not
 In case of damaged inventory obtain schedule of damaged inventory and cast to ensure
accuracy
 Discuss with management about their plans of disposing off of damaged goods
 Agree cost of inventory to supporting documents
 For sample of inventory compare the physically present inventory with general ledger or
purchase invoice to ensure completeness
 For sample of inventory compare quantity written in general ledger or purchase invoice with
physically present inventory to ensure existence
 If standard cost is used discuss with management the basis for standard cost and check it’s
reasonability
 Review variance between the actual cost and budget cost and for adverse variance discuss with
management
 Obtain written representation from management regarding the completeness of inventory
 Ensure obsolete inventory is completely written off
 Inspect board minutes to check whether there is any significant concern over the sale of
inventory

NON CURREENT ASSETS

 Verify ownership of assets by checking title deeds and registration documentation

 For sample of physically [resent assets compare it with non current asset register to ensure
completeness
 For sample of assets present in non current asset register physically inspect to ensure existence
 Discuss with management the rational for depreciation policy and check its reasonability
 Recalculate the depreciation expense to ensure correct expense is charged
 Compare depreciation charged with prior year and investigate differences
 Reconcile the non current asset register with general ledger and investigate differences
  If revaluation is done ensure the whole class of assets are revalued as per IAS 16

RIGHT ISSUE

 Inspect board minutes to ensure issue of share was done after approval of directors
 Inspect bank statement to ensure cash was received from right issue
 Recalculate the split between share capital and share premium
 Ensure adequate disclosure have been made for issue of shares
 Ensure the issue was according to the constitution of company
 Confirm the amount raised by multiplying share issued with per share price to confirm accuracy

ACCRUALS

 Ensure accruals are related to nature of business

 Ensure reasonableness of accruals made
 Compare accrual with prior year and investigate differences
 Obtain schedule of accrual and cast it to ensure accuracy
 Agree post year end payments with the accruals figure included in financial statement
 Ensure adequate disclosure have been made for accrual
 Ensure accrual are included as current liability in financial statement

INCOME/REVENUE

 Compare revenue with prior year , investigate differences

 Compare sale invoice of both pre year end and post year end to ensure income related to next
year is not included in revenue
 Calculate gross profit margin and compare it with prior year, investigate differences
 Breakdown the sales into major categories and compare it with previous year, investigate
differences
 For sample of sale, compare good dispatch note with sale invoice to ensure completeness
 For sample of sale invoice recalculate sales tax to ensure accuracy
 For a sample of credit note trace back to original sale invoice to ensure it is removed from
revenue

PAYROLL

 Recalculate the total of payroll to ensure arithmetical accuracy

 Compare sample of pay slips with corresponding bank transfer to verify completeness
  Ask for sample of pay slip and ensure it is recorded in correct accounting period
 For sample of pay slip ensure bank or cash transfer is done to ensure occurrence
 Compare payroll expenditure to prior year , investigate differences
 For sample of employees recalculate gross and net pay to ensure accuracy
 Agree the total as per payroll record to corresponding bank transfer
 Compare monthly payroll charges to corresponding bank transfer
 Obtain written representation from management regarding the completeness of payroll record
 For sample of employees re perform deduction for pay to ensure correct deduction have been
done

PROCEDURES RELATED TO INVENTORY COUNT

BEFORE INVENTORY COUNT

 Book audit staff to attend inventory count

 Obtain copy of inventory count instructions from client
 Prepare audit program for the count

DURING INVENTORY COUNT

 Record any inventory belongs to third party to ensure it is excluded

 Select sample of damaged inventory and ensure it is completely written off
 Observe counting item to ensure instructions are being followed

AFTER INVENTORY COUNT

 Observe whether all count records have been included in final inventory sheets
 Ensure obsolete inventory is written off from the inventory sheet
 Follow up queries and notify problems to management

SCENARIO BASED SUBSTANTIVE PROCEDURES

SP FOR LAND AND BUILDINGS IN CASE OF REVALUATION

 Ensure adequate disclosure have been made for revaluation

 For sample of land and buildings from non current asset register physically verify to ensure
existence
 Obtain schedule of land and buildings, cast them to ensure arithmetical accuracy
  Recalculate the depreciation and ensure assets which got revalued their depreciation is based
on revalued amount
 For sample of physically present land and building compare it with non current asset register to
ensure completeness
 Recalculate the total revaluation adjustment and compare it with the figure recorded in
revaluation surplus
 Agree all buildings and land to valuer report to ensure all assets in the same category are
revalued

SP FOR RECIVABLES AND PROVISON ARISING FROM SALE OF DEFECTIVE GOODS

 Review the adequacy of disclosures made for lawsuit

 Review corresponding with supplier of goods to access whether he will accept liability for
defective goods or not
 Discuss with management whether any other customer have faced issue from the sale of goods
which can give rise to future claims
 Review correspondence with company’s legal advisers to obtain their view about the probability
of loosing the case to customer
 Review board minutes to access the directors point of view regarding the probability of loosing
the case
 Review post year end cashbook, to check whether any payment have been given to customer or
any payment received from supplier

SP FOR FINISHED GOODS INVENTORY VALUATION USING STANDARD COST

 Obtain inventory listing and cast it to ensure the arithmetical accuracy of finished goods
 For production overheads included in the prices review the breakdown to ensure only
production related overheads are included
 Compare actual sales with budgeted sales to access how much actual sales are less and discuss
with management
 For sample of items in inventory , review post year end invoices to access whether nrv is above
cost or not
 For sample of inventory compare the figure included in general ledger with physically existed
inventory to ensure completeness
 Request a breakdown of cost calculation of product and discuss with management how it was
derived
 Recalculate my multiplying the standard price with quantity physically present to ensure figure
included in records is correct
SP FOR RECIVABLES OWED FROM CUSTOMER

 Recalculate the amount owed from customer and ensure its arithmetically correct
 Discuss with management about the probability of receiving payment from customer
 Review post year end cashbook, to check whether any payment received
 Review the age of debt and if it has exceeded the limit, discuss with credit controller to make an
allowance
 Inspect board minutes to check whether there any significant concerns regarding the payment
from customer
 Discuss with management why they have not created allowance and check the reasonableness
of justification

SP FOR LEGAL CLAIMS

 Recalculate the legal claims from customers to ensure arithmetical accuracy

 Ensure adequate disclosures have been made for legal claims as per IAS 37
 Review board minutes to access the directors point of view about likelihood of paying the legal
claims
 Check post year end payment to access whether any payment given to customers
 Review the corresponding with the legal advisers of company to access the likelihood that the
legal claims will be successful
 Discuss with management that if any other customer have faced same issue which can give rise
to possibility of future claims

SP FOR INCOME FROM TICKETS WHICH ARE ALSO SOLD ON DAY OF EVENT AND CHARITY RAISING IS
ALSO AVAILABLE ON EVENT

 Obtain schedule of company’s income and cast to confirm accuracy

 For tickets sold on day of event check the number of ticket sold and multiply it with ticket price
and then compare the figure with corresponding bank transfer
 Compare sundry sales per stall and compare it with previous year , investigate the differences
 Select a sample of ticket sold for next year and agree that this transaction have been excluded
from the current year revenue rather it is recorded as deferred income
 For sample of new donors, check their agreed monthly donation on their forms and trace it with
corresponding bank transfers

SP FOR RESTRUCTING PROVISION

  Recalculate the restricting provision to ensure it’s accuracy
 Ensure adequate disclosure have been made for restricting provision
 Obtain breakdown of restricting provision and ensure no cost for retraining of existing staff is
including
 Review minutes of board meeting, to ensure restricting provision was approved by directors
 Obtain written representation from management regarding the completeness of restricting
provision
 Review expenditure and ensure only direct costs are included
 Review post year end purchases and compare it with the figure included in restricting provision

SP FOR BANK LOAN

 Recalculate the split between current and non current liability to ensure accuracy
 Ensure adequate disclosure have been made for bank loan
 For new loan taken out . agree the loan proceeds with corresponding bank transfer and
cashbook
 For quarterly payment agree with corresponding cashbook to ensure it is repaid
 Recalculate the finance charge on loan to ensure accurate amount has been charged
 Review board minutes to ensure loan was approved by directors
 Obtain direct confirmation from the bank regarding the loan
 Review loan agreement to check about covenants and recalculate the covenants to identidy any
breach being done

SP FOR VEHICLE ADDITION AND DISPOSAL

 For new vehicles purchases, check that all additions are added in non current asset register
 Check board minutes to ensure purchases were authorize by directors
 For sample of additions compare the costs with supplier invoice
 For vehicles sold, ensure that are completely removed from non current asset register
 Agree the cash payment paid for purchases with corresponding bank transfer and cashbook
 Recalculate the loss/profit on disposal to ensure its accuracy
 Recalculate the accumulated depreciation on vehicles sold and ensure they are remove from
accumulated depreciation account
 In light of loss on vehicle , review the reasonableness of depreciation rates to ensure assets are
not overstated
 Ensure adequate disclosure have been made for addition and disposal as per IAS 16

SP FOR TRADE RECEIVABLES

  Recalculate the receivables owed from customers to ensure its accuracy
 Check post year end payments from customers and compare it with the figure included in
financial statement
 Review board minutes to check if there any significant concerns regarding the receivables owed
 Recalculate the allowance for receivables to ensure it is accurate
 Discuss with management the rational for allowance and check its reasonability
 Review aged receivables analysis to check the slow moving or old balances and ensure an
allowance is made against them

SP FOR BREACHES

 Recalculate the amount claimed for potential breaches to ensure accuracy

 Ensure adequate disclosure have been made for breaches as per IAS 37
 Review post year end cashbook to check whether any payments has been given as fine for
breaches
 Check board minutes to access directors view of likelihood of paying the fine because of
breaches
 Discuss with management that if any other breach has occurred which can give rise to future
claims or fine penalties
 Review correspondence with company lawyers to access the likelihood of paying fines

SP FOR ALLOWANCE FOR RECEIVABLES

 Discuss with finance director the rational for decreasing allowance level and check its
reasonability
 Inspect aged receivables analysis to identify slow moving or old receivables and ensure that
allowance is provided against them
 Inspect board minutes to check if there any significant concerns regarding the recoverability of
receivables
 Check post year end payments from customers and compare it with the allowance figure
 Recalculate the potential level of receivables which are recoverable and compare it with
allowance and discuss differences with management

SP FOR INVENTORY HAVING DEFECTIVE GOODS

 Discuss the basis for WIP calculation with management and check its reasonableness
 For defective goods discuss with management why they think it have nrv of 9000
 If damaged goods have been sold post year end check its invoices to access its nrv
  Obtain written representation from management that the damaged inventory is correctly
written off
 Obtain schedule of inventory and recalculate to ensure its accuracy
 For finished goods in inventory , obtain year end invoices to access if nrv is above the cost or any
adjustment is required
 Review aged inventory report and identify slow moving inventory and ensure allowance is given
for them
 Calculate average inventory days and compare it with last year, investigate differences

SP FOR RESEARCH AND DEVELOPMENT

 Ensure adequate disclosures have been made as per IAS 38

 Obtain schedule of development expenditure and cast to ensure its accuracy
 Recalculate the amortization expense to ensure correct expense is charged
 Discuss with management the rational for useful life’s and check its reasonability
 For new 3 products discuss with management about the stage in which they are and whether it
has been capitalized or expensed
 For expenses recognized as research, agree them to invoices to ensure correct amount is
charged in profit or loss
 For those expenses charged as development, compare it with the invoices
 Review cost and benefits to be arise from the 3 projects and check that probable economic
benefits exists

SP FOR SALES TAX LIABILITY

 Compare year end sales tax liability and compare it with prior year or budget, investigate the
differences
 Ensure that sales tax is shown an current liability at year end
 Review post year end cashbook whether any payment made to tax department and compare it
with the figure included in financial statement and ensure its completeness
 Recalculate the sales tax owed to authority by subtracting sales tax charged less sales tax
incurred
 Review correspondence with tax authority to identify if any payment is owed to them

SP FOR BANK BALANCES

 Obtain bank confirmation letter from company banker’s for all of its accounts
 Obtain company bank reconciliation and check additions to ensure arithmetical accuracy
  Verify balance as per cashbook to bank statement and also to bank confirmation letter
 Review cashbook and bank statement for any unusual item
 Review financial statement to ensure disclosure for bank balance and overdraft is accurate
 Examine the bank confirmation letter to identify any security given by company for overdraft
facility and check if there’s any breach
 Trace all outstanding lodgments to pre year cash book and post year end bank statement
 Trace all unpresented cheques to pre year end cashbook and post year end bank statement
 Compare changes in bank balance with previous year, investigate differences

SP FOR DEPRICIATION AND CHANGE IN DEPRICIATION

 Ensure adequate disclosure have been made for change in useful life’s as per IAS 16
 Discuss with management the rational for increasing useful life’s and check its reasonability
 Review breakdown of depreciation charge and ensure after increase in useful life the assets are
being depreciated on new rates
 Review the profit or loss on the sale of assets to check the reasonableness of increase in useful
life’s
 Compare revised depreciation charges with industry averages
 Review capital expenditure budget for next few years to ensure increase in useful life’s is
consistent with that
 Select a sample of PPE and recalculate the depreciation charge to ensure non current asset
register is accurate

SP FOR DIRECTOR BONUS

 Obtain the schedule of director bonus and cast to ensure its accuracy
 Ensure that bonus is included as a year-end liability
 Confirm the bonus payment to each director made to corresponding bank transfer
 Obtain written representation from management regarding the completeness of director’s
remuneration including bonus
 Inspect board minutes to ensure bonus was approved
 Ensure adequate disclosure have been made for the bonus announced for directors
 Agree the bonus amount paid to each director to board minutes to ensure accuracy

SP FOR REDUNDANCY PROVISION

 Review adequate disclosure have been made as per IAS 37

 Obtain schedule of redundancy and cast it to ensure accuracy
  Review board minutes to review discussion on redundancy
 Obtain written representation from management regarding the completeness of provision
 Review post year end cashbook to check whether any payment have been made to employees
 Confirm from management that redundancy was announced before the year to ensure present
obligation exist at year end

PREPARED BY MOEEZ ALI

As these are prepared by me for myself so these are not 100% accurate

Keep remember me in your prayers

For any issue or error kindly contact

[email protected]