Ch # 7.

Intro to Substantive Procedures Page 251

Chapter # 7 Introduction to Substantive Procedures

Intro to Substantive Procedures

Question #1 Q.10(b) Spring 2016

Briefly describe the following concepts:

Embedded audit facilities and its significance (04)

ISA – 520

Question #1 Q.3 Autumn 2010

The analytical procedures which are carried out near the end of the audit usually assist the auditor in forming an
overall conclusion on the financial statements.

Required:
a) State the objectives which an auditor expects to achieve while applying analytical procedures at the end of an
audit. (04 marks )
b) Discuss the course of action an auditor should adopt when results of analytical procedures identify inconsistent
relationships or differ from expected values by significant amounts. (04 marks)

Question #2 Q.2 Spring 2012

In the planning phase of the audit of Dynamic Limited for the year ending 30 June 2012, you have calculated the
following ratios from the management accounts of the company for the eight months ended 29 February 2012:

Eight months period Year ended Year ended

ended 29 February 2012 30 June 2011 30 June 2010
Gross profit percentage 35% 40% 40%
Inventory turnover days 120 105 78
Current ratio 1.5 2.3 2.6
Quick ratio 0.78 1.6 1.7
Times interest earned 0.91 1.67 2.1
Debtors turnover days 132 86 68

Identify the prospective audit risks which the auditor should consider while planning the audit. (09 marks)

Question #3 Q.1(e) Spring 2015

Identify the matters that need to be considered by the auditor at the time of designing and performing substantive
analytical procedures. (04)

Question #4 Q.6d Spring 2017

State the factors which determine the extent to which an auditor may use Analytical procedures as a form of
substantive audit evidence.

Question #5 Q.10(b) Spring 2016

You are the audit manager in a firm of chartered accountants. Your audit client Zakir Textile Mills Limited (ZTML) has
emailed you its draft financial statements for the year ended 31 December 2018 along with certain explanations. The
information provided by ZTML is summarized below:
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(i) Extracts from statement of financial position

2018 2017
Equity and Liabilities ------Rs. in ‘000------
Equity and reserves 29,287 22,000
Long-term loan 8,000 12,000
provision against litigation 1,100 1,000
Trade and other payables 6,400 6,500
44,787 41,500
Assets
Property, plant and equipment 25,100 22,818
Loans to employees 1,000 800
Trade debtors 8,500 8,000
Inventory 7,600 f,000
Cash and bank balances 2,587 2,882
44,787 41,500
(ii) Extracts from statement of profit or loss
2018 2017
------Rs. in ‘000------
Sales 84,000 73,000
Cost of sales 60,400 54,750
Gross profit 23,600 18,250
Expenses 12,850 10,950
Net profit before taxation 10,750 7,300
Taxation 3,463 2,555
Net profit 7,287 4,745

(iii) At the start of the year, ZTML had increased the sale price of its products by 13%.
(iv) The entire long term loan was obtained in 2017. The principal is payable in three annual instalments along with
the amount of interest.
(v) Increase in property, plant and equipment represents additions made during the year, net of depreciation. There
were no disposals during the year.
(vi) ZTML has a policy of giving interest free loan to its employees. The loan entitlement was reduced during the year
from 8 times the gross salary to 5 times of gross salary.

Required:
Using analytical procedures, identify unexplained fluctuations and inconsistencies in the above scenario. State the key
audit procedures which you would perform to address the issues identified by you. (Maximum of three key audit
procedures are required for each issue) (11)

Question #6 Q.2(a) Autumn 2020

You are manager responsible for the audit of Pine Limited (PL) for the year ended 31 August 2020. PL has large
contracts with many government entities. During the year, the government has significantly reduced its spending
which has also affected its contract volumes with PL. Devaluation of the local currency has also resulted in increased
costs of the materials purchased from overseas suppliers.

During the planning work review, your team has provided you the following ratios:

2020 2019
Gross profit margin 32% 28%
Accounts payable to cost of sales ratio 0.20 0.28
Trade days receivable 90 75
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Required:
(i) Explain the fluctuations and inconsistencies in the given ratios.
(ii) State any four key audit procedures which you would perform to address each issue identified in (i) above. (09)

Question #7 Q.5 Autumn 2021

You are the audit manager in a firm of chartered accountants. Your audit client Dairy (Private) Limited (DPL) has
emailed you its draft financial statements for the year ended 30 June 2021 along with related notes. The information
provided by DPL is summarized below:
Draft statement of financial position as at 30 June 2021
2021 2020
--------- Rs. in '000 ---------
Equity and reserves 35,922 26,000
Long-term loan 6,000 12,000
Trade and other payables 7,800 6,500
Equity and Liabilities 49,722 44,500

Property, plant and equipment 22,630 26,818

Prepayments 1,500 -
Trade debtors 12,000 8,000
Inventory 13,000 7,000
Cash and bank balances 592 2,682
Assets 49,722 44,500

Draft income statement for the year ended 30 June 2021

2021 2020
------- Rs. in '000 -------
Sales 110,000 73,000
Cost of sales (83,050) (54,750)
Gross profit 26,950 18,250
Admin and marketing expenses (12,100) (10,950)
Finance cost (675) (1,530)
Net profit before taxation 14,175 5,770
Taxation @ 30% (4,253) (1,731)
Net profit 9,922 4,039
Notes:
(i) During the year, sales price of DPL products were increased by 20%, to offset the corresponding increase in cost
of production.
(ii) On 30 June 2019, DPL had obtained a loan of Rs. 20 million, which is payable in 10 equal quarterly instalments
at the end of every quarter. The loan carries fixed mark-up rate of 9%.
(iii) Decrease in property, plant and equipment represents disposals made during the year, net of depreciation.
(iv) Prepayment represents advance rental payment of warehouse, obtained for 6 months on 16 June 2021 at a
monthly rent of Rs. 250,000.
Required:
Using analytical procedures, identify any four unexplained fluctuations and inconsistencies in the above situation.
State the key audit procedures which you would perform to address the issues identified by you. (10)

Question #8 Q.5 Autumn 2022

Your audit team performed verification of the payroll cost for the year ended 30 June 2022, by projecting the June
2021 payroll cost in line with increase in revenue from last year to current year.
Required:
Comment on the suitability of analytical procedure as substantive procedure performed by your audit team. Also
suggest any changes to be made in the analytical procedure. (05)
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Question #9 Q.3(b)(i) Autumn 2023

The audit junior was assigned the task of verifying rent expense for a chain of retail stores based on the following
data:

2023 2022
Rent expense – stores Rs. 21,990,120 Rs. 19,875,890

Certain facts about the rent of stores are as under:

▪ There is an annual rent increase of 10%.
▪ The number of new stores opened during the year is 2.
▪ The number of stores closed during the year is 10.

The audit junior prepared a working detailing substantive analytical procedures in the following manner:
Rupees
Rent expense for 2022 19,875,890
Add: 10% annual increase as per agreement 1,987,589
Expected rent expense for 2023 21,863,479
Actual rent expense for 2023 21,990,120
Difference – Immaterial 126,641
Required:
(i) Analyze the working prepared by the audit junior and identify deficiency(ies) in above procedure, if any. (03)