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[SAPP] AA Revision_substantive Procedures Provisions

The document outlines a revision audit procedure focusing on substantive procedures for legal claims, restructuring, and redundancy provisions. It details specific activities auditors should perform, such as reviewing correspondence, board minutes, and financial statements to assess the appropriateness and materiality of provisions in accordance with IAS 37. Each section includes guidance on how to verify calculations, confirm management's representations, and ensure compliance with accounting standards.

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1 views3 pages

[SAPP] AA Revision_substantive Procedures Provisions

The document outlines a revision audit procedure focusing on substantive procedures for legal claims, restructuring, and redundancy provisions. It details specific activities auditors should perform, such as reviewing correspondence, board minutes, and financial statements to assess the appropriateness and materiality of provisions in accordance with IAS 37. Each section includes guidance on how to verify calculations, confirm management's representations, and ensure compliance with accounting standards.

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REVISION AUDIT PROCEDURE THEORY

Marks will be allocated:


• 0.5 marks to activity performed by auditor (correct action verb and correct audit evidence)
• 0.5 marks to objective of activity

Section Substantive procedures Guidance

Provision • Review customer correspondence to establish the details of the claims and the
amounts being claimed.
(Legal claim)
• Review correspondence with the Company’s lawyers or, with the client’s
permission, contact the lawyers to establish the likely outcome of the customer
claims made to date.
• Discuss with the lawyers the likelihood and amount of potential future claims and
obtain confirmation regarding the claim to assess whether a provision should be
recognised and whether the amount of the provision is material.
• Inspect board minutes to establish details of the circumstances of the
contamination and to ascertain management’s view as to the likelihood that the
existing claims will be successful and the extent of possible future claims.
• Compare levels of returns and claims to date against sales volumes of the product
to assess the potential level of future claims.
• Review post-year end payments for damage settlements and compare with any
amounts provided at the year end to assess the reasonableness of the provision.
• Obtain a written representation from management confirming their view that
they have an obligation at the year end in respect of the claim and that it is
appropriate to include a provision.
• Review the draft financial statements to establish that the legal claims have been
appropriately provided for or disclosed in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

Provision • Cast the breakdown of the restructuring provision to ensure it is correctly


calculated and agree the total to the trial balance.
(Restructuring)
• Review the board minutes where the decision to restructure the production
process was taken and confirm the decision was made.
• Review the announcement to shareholders and employees, to confirm that this
was announced before the year end.
• Inspect a breakdown of the restructuring provision to confirm that only direct
expenditure relating to the restructuring is included.
• Review the expenditure to confirm that there are no retraining costs of existing
staff included.
• For the costs included within the provision, including acquisitions of plant and
machinery, agree to supporting documentation, such as purchase invoices, to
confirm validity and value of items included.
• Review post year end payments/invoices relating to the expenditure and
compare the actual costs incurred to the amounts provided to assess whether
the amount of the provision is reasonable.
• Inspect a written representation confirming management discussions in relation
to the announcement of the restructuring and to confirm the completeness of
the provision.
• Review the adequacy of the disclosures of the restructuring provision in the
financial statements and assess whether these are in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

Provision • Discuss with the directors as to whether they have formally announced their
intention to close the production site and make their employees redundant, to
(Redundancy)
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 and agree to trial balance.
• Recalculate the redundancy provision to confirm completeness and agree
components of the calculation to supporting documentation such as employee
contracts.
• Review the post year-end cash book 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.

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