AUDIT EVIDENCE AND PROCEDURES (C10-C14)
ANALYTICAL PROCEDURES
Evaluation of financial information made by study of plausible relationships among financial and
non-financial data. AP encompasses investigations of identified fluctuations and relationship that
inconsistent with other relevant information or deviate significantly from predicted amounts.
Comparisons with:




Similar information for prior period
Anticipated result from budgets
Predictions prepared by auditors
Industry information
TESTING


PLANNING



obtain understanding of
entity and its environment
sources (budgets, bank & cash
records, board minutes, NF
information)
COMPULSORY TO USE AP
obtain relevant and reliable
audit evidence
FACTORS TO CONSIDER:
 suitability - AP not
suitable for every
assertion
 reliability - only rely on
data generate by
system with strong ICS
 degree of precision some figures not have
recognisable trend
over time
 acceptable variation variation have
immaterial impact on
FS
REVIEW


whether FS consistent
with auditor's
understanding of entity
COMPULSORY TO USE
AP

INVESTIGATE SIGNIFICANT FLUCTUATION / UNEXPECTED RELATIONSHIP:
o
o
Inquire management and obtain appropriate audit evidence relevant to management’s
response (compare with understanding & other evidence obtained)
Perform other audit procedures
Other areas might be investigated as part of AP:





Effect of inflation, industrial disputes, changes in production methods
Assess the effect of price and mix changes on COS
Review other expenditure in SOCI
Review items on SOCI that may have been omitted
Ensure expected variation due to some circumstances (local trends / disturbance to trading
pattern i.e strikes, depot closure etc)
FINANCIAL RATIO
PROFITABILITY/RETURN
GROSS MARGIN
𝐺𝑃
× 100%
𝑅𝐸𝑉
NET MARGIN
𝑁𝑃
× 100%
𝑅𝐸𝑉
ROCE
𝑃𝐵𝑇
𝑇𝐴 − 𝐶𝐿
LIQUIDITY/EFFICIENCY
RECEIVABLE COLLECTION
DAYS
𝑇 𝑅𝐸𝐶
× 365
𝐶 𝑆𝐴𝐿𝐸𝑆
GEARING
GEARING RATIO
𝐿𝑂𝐴𝑁𝑆
× 100%
𝑂𝑆𝐶 + 𝑅𝐸𝑆𝐸𝑅𝑉𝐸𝑆
INVENTORY TURNOVER
𝐶𝑂𝑆
𝐼𝑁𝑉
CURRENT RATIO
𝐶𝐴
𝐶𝐿
QUICK RATIO
𝐶𝐴 − 𝐼𝑁𝑉
𝐶𝐿
Working paper must contain complete AP result INCLUDING:
-
Outline programme
Summary of significant figures
Result of investigations
Audit conclusion
Information considered necessary
ACCOUNTING ESTIMATES (ESTIMATES INVOLVED, RMM ↑)
Approximation of monetary amount by management of entity for an item in the absence of precise
measurement
Examples :
o
o
o
o
o
Allowances against inventory/receivables
Depreciation allowances
Accrued revenue
Provision for loss on lawsuit
Provision of warranty claims
Auditor shall determine :
 Whether management appropriately applied requirement to accounting estimate
 Whether methods to make accounting estimates are appropriate and applied consistently
Test estimates by :




Determine whether events occurring up to the date of auditor’s report provide audit
evidence
Test how management made accounting estimate
Test the operating effectiveness of controls
Develop a point estimate/independent estimate
Auditors will carry out :





Consider whether data accurate, complete and reliable
Seek appropriate audit evidence from outside client
Evaluate whether base used is appropriate
Consider use of expert
Test calculation (consider complexity, methods used and materiality)
Differences between estimate supported by evidence and management’s estimate
-
If unreasonable – adjust
If management refuse to revise – consider misstatement
INVENTORIES
Why audit of inventory is area of high inherent risk?
Completeness – Closing inventory not normally part of double entry
Existence – Verified only by attending inventory count & follow up procedure
Valuation – IAS2 allow variety of methods / made up of large number of different items
Cut off – May be necessary to move inventory during count
Right & obligation – Not all inventories belongs to client
Presentation & disclosure – Classified incorrectly
PHYSICAL COUNT
at year end
•Best method
from auditor's
viewpoint
before or after year
end
•Varying
reliability
depends on :
•Length of time
between count
and year end
•ICS of business
•Quality of
inventory
movement
records
continuous
(perpetual)
•Used by larger
company
•Have
independent
count team to
carry out counting
at regular interval
If perpetual method is used, auditor will ensure that management :





Have a system to maintain accurate and up to date inventory record
Every item is counted at least once a year
Counting is well organised and controlled
Counts are documented and reviewed by management
All differences are investigated
Why do a physical count?




Gives valuable evidence that inventory actually exists
Check accuracy of inventory records
Discrepancies help to point out control deficiencies
See condition of inventory
Why auditor should attend the count?
o
o
o
o
Evaluate management’s instructions and procedures
Observe performance of count procedures
Inspect inventory
Perform test counts
How inventory count instruction considered complete and accurate?
o
o
o
o
o
Independent person supervise and deal with queries
Inventory tidies and laid out in orderly manner
Pre-numbered inventory sheets should be issue to counters
Each area subject to recount
All inventory should be marked after being counted as evidence
CUT OFF TESTING
Importance of cut off :
-
Point of purchase and receipt of goods and services
o Invoices record as liability ONLY IF goods received prior inventory count
Requisition of raw material for production
Transfer WIP to FG
Sale and despatch of FG
o Invoices for goods despatched after inventory count EXCLUDED as revenue
Management’s arrangement before inventory count so cut off properly applied :
 Appropriate system of recording receipts and despatches – GRN and GDN
sequentially pre-numbered
 Final GRN / GDN / material requisition numbers are noted
INVENTORY VALUATION (Cost vs NRV – WIL)
Cost – All cost purchase and other cost incurred in bringing inventory to present location and
condition
NRV – Estimated selling price LESS estimated cost of completion and cost necessary to make sale
PHYSICAL INVENTORY COUNT SP
PLANNING
REVIEW
INSTRUCTION
DURING COUNT
Gain understanding
- Review previous
year’s
arrangement
- Perform AP
Organising
- Supervision by
senior staff
- Tidy and mark
inventory
-
-
-
Plan procedure
Sufficient
attention to high
value item
Consider expert
Recording
Serial numbering,
control and return
of inventory
sheets
Inventory sheets
being completed
in ink and signed
Observe whether client’s staff follow instruction
Re-perform test count to ensure procedure and ICS worked properly
Confirm inventory held on behalf of third party is separately
identified and accounted
Ensure procedure for damaged, obsolete, slow moving item operate
properly
Consider any amendment necessary
Trace item that were test counted to final inventory sheet
(completeness & accuracy)
Verify all count records have been included (completeness)
Verify final inventory sheets supported by count records (existence)
Confirm client’s final valuation of inventory (accuracy)
Follow up queries and notify management any problems
-
AFTER COUNT
-
Asses key factor
Identify high value
item
Nature and volume
of inventory
Counting
Systematic counting Team of two
independent
counters
-
-
CUT OFF SP
MANAGEMENT
INSTRUCTION
-
GRN / GDN / material requisition recorded by pre-numbered
documentation
Final numbers of GRN / GDN / material requisition should be noted
Cut off arrangement with 3rd party should be satisfactory
DURING COUNT
-
Record all movement notes related to period
Observe whether correct procedure being followed
Discuss procedure with staff who perform to ensure they understood
AFTER COUNT
-
Match GRN with invoices ensure liability recorded in correct period
Match GDN with invoices ensure income recorded in correct period
Match requisition notes to WIP figures for receiving department ensure
correctly recorded
INVENTORY VALUATION SP
Cost to be included
Audit test
Raw materials / Goods for
resale
 Actual cost (invoices)
 Delivery cost
o
WIP & FG
 Cost of purchase
 Cost of conversion
(attributable/POH/other OH)
NRV
NRV < cost when;





Increase in cost
Fall in selling price
Physical deterioration
Obsolescence of products
Marketing decision to sell
at loss
Confirm which valuation
method used
o Agree valuation of raw
materials to invoices
(accuracy)
Materials :
o Confirm which valuation
method used
o Agree valuation of raw
materials to invoices
(accuracy)
Labour :
o Agree labour cost to
wage record
o Agree labour hours to
time summaries
POH :
o Ensure only POH
(exclude admin &
selling)
o OH absorption rate
based on normal
output
WIP :
o Check stage of
completion for
materials, labour & OH
o Review and test client’s
system to identify slow
moving
o Examine inventory records
to identify slow moving
item
o Review quantities of goods
sold after YE
o Review procedure to
compare cost and NRV
o Ensure estimated cost to
complete are correct
NON CURRENT ASSETS
What are the inherent risks on audit of NCA?
Completeness – Assets owned but not included in FS
Existence – Assets on FS do not actually exist (sold / scrap)
Valuation – Incorrect valuation, recording and depreciation calculation
Right & obligation – Asset in FS not actually controlled by entity
Presentation & disclosure – Incorrect disclosures
TANGIBLE NCA
How auditors proceed to audit NCA if client does not maintain NCA register?
-
Ask client for a schedule listing the major items of NCA (show original cost,
depreciation, additions, disposals)
Reconcile schedule to draft FS
Verify additions to supported document and inspect asset
Review previous year schedule listing
Inspect board minutes for any reference to disposal
Completeness
(understatement)
Existence
(overstatement)
Valuation
Rights &
obligation
Depreciation
Additions
Self-constructed
asset
Disposals
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Match sample of assets which physically exist to register
Compare NCA in register to NCA in general ledger
Reconcile schedule of NCA to general ledger
Physically inspect a sample from register
Check sample of asset in use
Investigate any asset not be found
Verify valuation to valuation certificate
Consider reasonableness of valuation
Recalculate revaluation surplus
Obtain certificate from solicitors/bankers
Confirm all assets used for business
Inspect registration document to verify ownership
Confirm depreciation has been charged on all assets
Confirm depreciation based on revalued amount (revalued assets)
Re-perform calculation of depreciation rates
Inspect relevant certification to verify
Verify capitalisation of expenditure is correct
Inspect board minutes to confirm that purchase authorised by directors
Inspect relevant documents to verify cost
Confirm expenditure has been analysed and charged properly
Verify no profit element included in cost
Recalculate to verify calculation of profit/loss
Inspect board minutes to confirm that disposal authorised by directors
Consider whether proceeds are reasonable
INTANGIBLE NCA (GOODWILL) & INVESTMENT
Goodwill
Completeness
Ownership
Valuation

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





Presentation


Additions

Disposals


Recalculate goodwill
Check amount paid for business acquired
Reconcile schedule of investment with general ledger
Match sample of investment held to investment register
Agree investment on register to appropriate legal documents
Inspect investment document
Verify market value for securities
Investment in portfolio held at fair value in accordance to accounting
standard
Inspect FS to verify investment properly described and classified
Inspect SOCI to confirm that any gain or loss on portfolio has been
properly classified
Inspect a sample of purchases to verify it has been properly allocated to
NCA
Verify disposal to supporting document
Recalculate gain or loss from sale of securities
ACCOUNTS RECEIVABLES
CONFIRMATION/CIRCULARISATION
Problems :


Not all customers reply
Customer reply, but not check properly
Key things :




Auditor decide what needs to be confirmed
Auditor select which customer to get asked (not client)\
Auditor states that reply comes to her directly
Auditor sends out request personally
Results :




Any doubts over reliability – perform alternative test
Not reliable for sure – consider effect on risk assessment & perform alternative test
No response – perform alternative test
Confirm different amount – timing difference / problem with controls / fraud
Process :
1. Planning
Decide TWO things :
-
When? (timing)
Include who? (sample)
2. Decide +ve/-ve circularisation
positive
Ask customer whether he agree or not
with the balances
Methods :
1. Give him figure and confirm
2. Ask him to provide by himself
Risks :
1. Confirm without checking
2. Lower response rate
negative
Reply only if he disagrees with the balance
(less reliable)
Used if :
1. RMM is low
2. Client has good ICS
3. Very low exception rate is expected
3. Sample selection
Procedure :
May include :
-
- Sample representative of population
- Get aged receivable listing
- Check listing is accurate
Overdue balances
Negative balances
Nil balances
All materials balances
4. Procedure when getting reply:
Check :
Balances not agree :
-
- Ask client to reconcile and check
- Control/timing? If timing, no further work
Signed by responsible official
Replies filed in current audit file
No reply – carry out further work
-
Balances agree – no further work
Check cash received
Check signed PO
Check sales invoice exist
5. Summarise & conclude
-
Summarise balances not verified
Conclude likelihood and materiality of misstatement
Bad debts
Cut off
Prepayment
-
Examine customer files on overdue receivables, asses allowance
Review calculation of bad debt
Review company procedure for identifying them
Inspect goods despatch and return inwards
Reconcile entries in receivable ledger control account to daily batch invoice
Review receivable ledger control account for unusual item
-
Refer to cashbook, expense invoices, etc (existence)
Recalculate sample of prepayment
Review detail SOPL (completeness)
CASH AND BANK
What is inherent risk of cash and bank?
Completeness – Material cash balances are omitted
Existence – Bank balances not actually owned by the client
Valuation – Reconciliation differences incorrectly dealt with
Right & obligation – Bank balances not actually owned by the client
CONFIRMATION / BANK LETTER




Client must give permission to the bank to reply
Should be in a standard format acceptable to the bank
The authorisation could be a standing authority - this must be referred to in the letter
The letter is sent from the auditor (and the reply back to auditor)
Methods :
1. The auditor gives the balances from the client’s accounting records and asks the bank to confirm
2. The auditor asks for the balance (not giving the bank the balance first)
What is in the bank letter?





balances on all bank accounts
any unpaid bank charges
any liens (charges) over clients assets
any client assets held as security
any other bank accounts known but not listed
Bank balances
o
o
o
o
o
Verify arithmetic of bank reconciliation (accuracy)
Compare CB to BS for last month, trace outstanding items
Get bank reconciliation
Check bank letter against balance used in bank record
Review letter for any other information
Cash count
o
o
o
o
o
o
o
o
All cash/petty cash book should be written up to date in ink
All balances counted at same time
No time auditors left alone with cash
All cash counted must be recorded in working paper
Reconciliation should be prepared if applicable
Certificates of cash in hand obtained as appropriate
IOUs and cheques cashed by employee have been reimbursed
The balances as counted are reflected in the account
Follow up
procedures
CURRENT LIABILITIES
What are the main risks on payables?




Not all recorded
Cut off incorrect
Some included are not obligation of client
Not properly disclosed
“Positive” replies for supplier’s confirmation letter will be required if:




Supplier’s statement unavailable or incomplete
ICS is weak – possible MM of liabilities
Client deliberately understate trade account payables
Accounts appear to be irregular/abnormal
PURCHASES &
EXPENSES:
-
Completeness
(understatement)
Occurrence
(overstatement)
-
CUT OFF:
-
Completeness
-
ACCRUALS:
-
Completeness
-
WAGES &
SALARIES:
-
Occurrence
Accuracy
Completeness
-
Compare supplier’s statement with year-end purchase ledger balances
(include NIL and –ve balances)
Reconcile the balance statement to purchase ledger account on
monthly basis
Match sample of PO/GRN to invoices
Review unprocessed invoices and obtain explanations
Agree purchases & expenses in ledger/cash book to supporting
document
Consider reasonableness of deductions (refer to subsequent event)
Verify whether valid debt recorded in purchase ledger (review credit
note)
Review GRN before period end - invoices (posted to ledger / included in
accruals schedule)
Review accruals schedule – goods received after period end exc
Reconcile daily batch invoice totals to payable control ledger – post in
correct period
Verify accruals are fairly calculated and refer to subsequent payment
and document to verify it
Test transactions around YE to determine whether amount recognised
at correct period
Ensure disclosure relevant to liabilities have been made in FS
Agree individual remuneration per payroll to personnel records/record
of hours worked/agreement
Meet employees (attend wages pay out/confirm with manager) to
confirm existence
Agree benefits to document
Verify accuracy calculation of payroll
Reperform calculation on statutory deduction
Confirm validity of other deduction
Select sample from personnel records ensure they are included in
payroll records
Perform casts of payroll records
Obtain details of new joiners ensure recorded in correct period
AP is IMPORTANT in purchases & expenses, auditor should consider:
o
o
o
o
o
Level of purchase and expenses (month-by-month with previous period)
Effect on purchase value due to changes in quantity purchased
Effect on purchase value due to changes in product purchased (ingredient/price)
Ratio trade account to purchases with previous figure
Ratio trade account to inventory with previous figure
AP is IMPORTANT in wages & salaries, auditor should consider:
o
o
o
o
o
Level of wages & salaries (month-by-month with previous period)
Effect on wages & salaries due to changes in rate
Average wage per month over the year
Sales/profit per employee
Payroll proof in total
NON CURRENT LIABILITIES (authorised by board & well documented)
Completeness
Accuracy
-
Presentation
-
Review board minutes and cash book – all loans have been recorded
Compare balances to general ledger and investigate differences
Compare opening balances to previous years paper (carried forward
accurately)
Obtain direct confirmation from lenders
Trace addition and repayment to entries in cashbook (closing balance)
Review draft of FS – disclosure correct in accordance to standard
PROVISIONS & CONTINGENCIES
V. certain (≥90%)
Probable (>50%)
Possible (≥5%)
PROVISIONS & CONTINGENT LIABILITIES
Provision+disclosure Provision+disclosure
Disclosure
Provision – Uncertain timing / amount
Contingent – Possible obligation
from past events only will be
confirmed by occurrence of ≥future
events not within entity’s control
Recognised as assets
Not report as
contingent
Remote (<5%)
Ignore
Present obligation from past events
not recognised :
- Outflow economic benefit
not probable
- Cannot measure amount
CONTINGENT ASSETS
Disclosure
Ignore
Ignore
Contingent – Possible
EXAMPLES OF CONTINGENCIES :
asset from past events
- guarantees
only will be confirmed
- discounted bills of exchange
by occurrence of
- lawsuits
≥future events not
- uncalled liabilities
within entity’s control
Obligating event – Event that creates legal/constructive obligation resulting entity having
no realistic alternative to settle obligation
Legal obligation – Contract/legislation/operation of law
Constructive obligation – Pattern of past practices/published policies/sufficiently current
statement, indicate other that it will accept certain responsibilities AND create valid
expectation
What to be disclosed for contingent liabilities & assets?




A brief description of the contingent liability/asset
An estimate of its financial effect
An indication of the uncertainties
For contingent liabilities, the possibility of any reimbursement
General vs Specific inquiry?
General
-
Specific
-
Provisions
Contingencies
-
Inform auditor any claims/litigation they aware, assessment &
estimates
Legal adviser unlikely to reply appropriately
Include list of claims, management’s assessment & estimates and
confirmed reasonableness of assessments by entity if incorrect
- Get a list of provisions ensure all have been disclosed
- Confirm in line with IAS 37 (obligation, probable, reliable measure)
- Review changes in the provisions
- Review the valuation and think of using an expert
- Understand the management approach to identifying contingencies
- Review board minutes
- Review legal correspondence and possible direct confirmation from them
(letter from management but reply direct to auditor)