N OV E M B E R 2 0 0 5
Substantive
Procedures Guide
A Guide to Designing Effective and
Efficient Substantive Procedures
S U B S TA N T I V E P RO C E D U R E S G U I D E
Contents
Introduction
Substantive Procedures by Significant Account
C – Cash and Bank Balances
D – Marketable Securities
E – Trade Accounts Receivable (ie, trade debtors)
F – Inventory (ie, stock)
G – Prepaid Expenses, Deferred Charges and Other Assets
H – Investments, including Investments in Affiliates
I – Intercompany Balances and Transactions
J – Long-Term Receivables, Non-Current Deposits, and other Long-Term Financial Assets
K – Property, Plant and Equipment and related Income Statement Accounts (ie, fixed assets)
L – Intangibles, including Goodwill
M – Notes Payable
N – Trade Accounts Payable (ie, trade creditors)
O – Income Taxes, Deferred Taxes and related Income Statement Accounts
P – Provisions, Accrued and Other Liabilities, Deferred Income
Q – Long Term Debt, Leases and related Income Statement Accounts
S – Derivatives/Hedging/Commitments/Contingencies
T – Equity
UA – Revenue/Sales
UB – Other Income
UC – Finance Income
VA – Cost of Sales
VB – Payroll
VC – Selling and Distribution
VD – Administrative and Other Expenses
VE – Finance Expense
2
3
11
12
14
19
24
25
26
27
28
30
31
32
36
40
43
44
45
46
47
48
49
50
51
52
53
Appendix A – Roll-Forward Procedures
54
Appendix B – Extent of Analytical Review Procedures – An Example
58
Appendix C – Year End Cut-Off Procedures – An Example
64
Appendix D – Documenting our use of the AAM Dashboards – An Example
65
Appendix E – Manual Roll-Forward Schedule Examples
69
S U B S TA N T I V E P RO C E D U R E S G U I D E
A Guide to Effective and Efficient
Substantive Audit Procedures
Introducing Primary Substantive Procedures
Finding an appropriate combination of audit procedures to cover an engagement’s audit
risk at an acceptable cost to the firm is a constant challenge facing most audit teams.
Primary Substantive Procedures (“PSPs”) have been introduced to assist teams in
designing substantive procedures and to manage the firm’s risk by ensuring a consistent
minimum range of tests for significant accounts. The Global Audit Methodology
(“GAM”) has been updated to mandate the completion of PSPs for all significant
accounts. For many engagements, procedures equivalent to the PSPs will already be in
place. In recognition that the individual client circumstances will vary and that common
practice and prevailing standards will vary by country, the PSPs only mandate the nature
of the procedure and leave the team to decide on the appropriate extent of testing.
This guide provides suggestions for determining appropriate substantive procedures by
combining Primary Substantive Procedures with other suggested audit tests, many of
which make use of our leading edge Automated Analytics Module (“AAM”) Dashboards.
This guide details suggested nature and extent of substantive procedures responsive to a
given combined risk assessment.
The significant accounts within this guide are referred to using an IFRS/US GAAP
based naming convention and are ordered by reference to the Global standard C-V
lettering. If you have any difficulty in identifying a suitable equivalent to the significant
accounts in your engagement you should consult your Audit Quality Team member.
Please note that only the generic Primary Substantive Procedures (which must be carried
out on all audit engagements) are included within this guide. Industry specific PSPs are
available for a number of industries which are designed to supplement the generic
procedures. Industry PSPs will continue to be developed in 2006 and 2007 and will be
available on the EY/GAM database as they are finalised.
Benefits of Using the AAMs
Since their launch in 2000 the AAMs have
been used on a wide range of
engagements to assist in the performance
of analytics and as part of substantive
procedures. Their focus on tests designed
for specific significant accounts makes
their use recommended on most suitable
engagements. This, coupled with the
visual impact of the AAM Dashboards,
provides, an effective way to demonstrate
the work we perform to our clients.
Influencing the Timing of our Work
Often the most challenging part of an
audit is just after year end. Pressing
deadlines, pressurised clients and high
expectations all conspire to place
significant demands on those performing
and managing the audit work. Bringing
our work forward helps to alleviate this
pressure. GAM very much encourages us
(depending upon the combined risk
assessment) to perform our substantive
procedures anything up to six months
prior to year end and then ‘roll-forward’
our work to the year end date. This guide
also provides suggested substantive
procedures for our roll-forward work.
This guidance updates and replaces the
previously issued Customised Solutions
Pack and the Customised Solution Pack
Supplement.
3
S U B S TA N T I V E P RO C E D U R E S G U I D E
Nature of Substantive Testing
Timing of Substantive Testing
The nature of the substantive tests which must be performed on
all significant accounts is outlined in the Primary Substantive
Procedures. This guide suggests the nature of other substantive
procedures which you may also consider performing.
GAM encourages us to bring forward our substantive procedures
and ‘roll-forward’ the results of our work at the year end. We
follow up our earlier substantive procedures by updating our
understanding of the control environment, cut-off and activity
between interim and year end.
Reminder: PSPs are the minimum requirement and in many
circumstances additional substantive procedures will be required.
Extent of Substantive Testing
GAM provides guidance on the extent of substantive testing
required for each significant account/not-significant account.
It summarises this into four levels of testing which are driven by
the combined risk assessment:
Minimal
Low
Moderate
High
Minimal: Our substantive procedures are minimal since
considerable evidence has been gathered that errors of audit
importance are unlikely to occur.
Detection: We expect no errors; however, our substantive tests
are designed to have a reasonable chance of detecting errors
of audit importance if they have occurred.
Extensive: Although we expect few errors, our substantive tests
are sufficiently extensive to determine if errors of audit
importance have occurred and if errors are detected, to
estimate their potential monetary effect.
Estimation: Since we expect errors that could be of audit
importance, our substantive procedures are designed to
estimate their potential monetary effects.
Where we identify accounts to be ‘not significant’, we perform
analytical review procedures, and/or limited tests
of details. The aim of this work is to satisfy ourselves that the
basis for which we believe the account to be ‘not significant’ is
appropriate and the numbers make sense. These analytical
procedures ordinarily are more extensive than those necessary for
accounts with balances that we expect to be, and are, below TE
(ie, insignificant accounts). The PSPs may provide guidance in
the types of substantive testing we perform.
They are NOT required procedures for not-significant accounts.
Our substantive procedures on insignificant accounts are limited
to analytical review procedures, comparing current
and prior year.
4
Although GAM suggests the following timescales for performing
our substantive procedures, practical considerations mean that
we should normally only perform roll-forward procedures in
lower risk environments so as to gain the full benefit of being
able to bring work forward and minimise the level of year end
work required.
CRA
Timing of substantive procedures recommended by GAM
Minimal
Earlier in the year (e.g. up to 6 months prior to year end)
Low
Generally during the later portion of the year
(e.g. up to 3 months prior to year end)
Moderate
At or near to year end (e.g. one month prior to year end)
High
At or near to year end (e.g. one month prior to year end)
This guidance does not present the roll-forward procedures
necessary to cover a High CRA. When we have a high combined
risk assessment we ordinarily do not perform substantive
procedures prior to the balance sheet date as this could increase
the possibility that errors of audit importance at the balance sheet
date go undetected.
Further detailed guidance in respect of roll-forward procedures is
contained within Appendix A, ‘Roll-Forward Procedures’.
S U B S TA N T I V E P RO C E D U R E S G U I D E
How to use this guide
This guide provides general direction on how to design
substantive procedures appropriate to your combined risk
assessment for a selection of typical significant accounts. It also
provides guidance on roll-forward procedures which we may
choose to perform in order to roll our work forward from interim
testing to the balance sheet date. Where appropriate the guide also
indicates how the Automated Analytics Module Dashboards can
be used to facilitate our testing.
Combined Risk Assessments
Our audit methodology requires that certain substantive
procedures must be performed regardless of the combined risk
assessment for the significant account – these are referred to as
Primary Substantive Procedures. All (non industry specific)
Primary Substantive Procedures (as at May 2005) are included
within this guide. As PSPs may vary over time, you should refer
to GAM in respect of your planning for 2006 and subsequent year
ends for notification of any changes. Where necessary further
guidance on the extent of work required for a particular Primary
Substantive Procedure in any given CRA situation is also
provided.
The final column in each of the substantive procedures tables
indicates the degree to which the AAM Dashboards can facilitate
our work, as follows:
The guide provides examples of a generic set of audit procedures.
In addition to variations required for specific client
circumstances, certain industries may require more specific
procedures designed to address specific industry risks. You
should refer to Activity 8 in GAM for details of industry specific
PSPs. Judgement will need to be applied by the team as to the
most appropriate nature, extent and timing of tests and guidance
should be sought from the engagement partner/manager when
designing substantive audit procedures.
Key to the Individual Substantive Procedures Guides
The table below illustrates how the guide works. Each shaded box
describes the PSP as defined by GAM. The procedures
immediately below this illustrate the timing and extent of the PSP
for each CRA.
Primary Substantive Procedures
Nature of Primary Substantive Procedure (as defined in GAM)
Additional guidance on the extent of testing required to address different CRAs
Suggested Substantive Procedures including both the nature and
extent of testing
5
Min
Low
Mod
High
A darker shade indicates that as our risk increases then our testing
becomes more extensive with larger samples and/or additional
procedures.
Use of AAM Dashboards
Extensive
The AAM Dashboard should normally be expected to be used
in order to ensure that the substantive procedure is performed
in the most efficient manner.
Partial
The AAM Dashboard can provide some assistance in
undertaking the audit test.
N/A
There is no generic analytics solution available for this test.
S U B S TA N T I V E P RO C E D U R E S G U I D E
The Automated Analytics Module (“AAM”) Dashboards
AAM Dashboards are tools available via the GAM database which:
The AAM Dashboards are available for:
•
•
•
•
•
•
•
•
•
•
Leverage best practice analytical procedures;
Focus on gaining effective and efficient audit assurance;
Use simple client information;
Are simple to use and provide relevant audit evidence
and insights quickly; and
• Provide a standard approach which facilitates review
and interpretation
The AAM Dashboards provide a quick and easy way to analyse
whole populations of client data to provide audit assurance.
The level of assurance provided makes them a key element of
the testing strategy for risk assessments requiring extensive
or estimation testing levels (ie, a CRA of Moderate or High).
At a Low CRA, the use of an AAM Dashboard may provide
substantially all of the required substantive assurance. They may
be appropriate for a Minimal CRA only when the time and effort
involved in gathering the data and using the tools is lower than
that of alternative procedures including other types of analytical
tests or, where the data has already been obtained (for example,
the inventory data file may have been obtained to address the
inventory provision valuation assertion with a Moderate CRA
and would then be available for use on a gross inventory valuation
assertion with a Minimal CRA).
6
Stock (Inventory)
Trade Debtors (Trade receivables)
Trade Creditors (Trade payables)
Stock (Inventory) Provision
Payroll
Transactions (e.g., sales invoices, cash payments)
The balance sheet focused AAMs provide the ability to compare
data at three points in time, thereby enabling a comparison to
be performed to support the roll-forward analytical review.
The income statement focused AAMs allow you to compare the
audit data to a comparative period and a master file.
Guidance on the data requirements for each of the AAM
Dashboards is contained within Activity 9 of the EY/GAM
database.
The key to making best use of the AAM Dashboards is obtaining
the required data on time. When preparing our client assistance
schedule or otherwise communicating our requirements to the
client, we should ensure that we give the client clear instructions
of our data requirements and remind the client of these in advance
of (e.g., two weeks before) the relevant visit (interim or final) to
ensure it is complete and available on our arrival.
S U B S TA N T I V E P RO C E D U R E S G U I D E
Matters to Consider when Designing
our Substantive procedures
Substantive Procedures Responding to Specific Risks
Take Credit For Work We Have Already Undertaken
When deciding on the nature of test to perform, it is essential to
understand the specific risks that are driving the risk assessment
for that account assertion. For example, for one client the trade
debtors valuation combined risk assessment (“CRA”) may be low
as there is higher inherent risk due to the significance of overseas
debtors, but our control testing indicates minimal control risk. For
another client, the same risk assessment of low may arise from
lower inherent risk, but the team have decided not to test controls
beyond the walkthrough.
Before embarking on our work at year end, it is worth reminding
ourselves that we have already performed work to assess control
and inherent risks and completed our interim substantive
procedures. We need to ensure we take credit for this work
and make sure that the ‘mindset’ with which we approach
our year end work is appropriate and fully reflects our risk
assessment and expectation of the likelihood of errors of audit
importance occurring.
We must focus on the specific risks for the engagement and
therefore the substantive procedures undertaken for each of these
situations will be different, despite the same risk assessment.
!
Control
Risk
Assessment
Inherent
Risk
Assessment
Minimum
Moderate
Maximum
Walkthrough of significant processes
√✓
✓
✓
Limited Controls Testing
✗
√✓
?
Full Controls Testing
√✓
✗
?
Believe controls are effective
√✓
✓
✗
LOWER
In absence of controls, LESS LIKELY
that errors of audit importance
could occur
Minimum
Low
Moderate
HIGHER
Identified specific risks/other
factors suggest that there is a
HIGHER LIKELIHOOD that errors of
audit importance could occur
Low
Moderate
High
KEY
? Our audit evidence may indicate that controls
are ineffective or after gaining an understanding
of client processes, we believe controls are
likely to be ineffective. Refer to GAM Activity 8.1
for further guidance.
!
7
!
Remember to take credit for the work that we have already done
Interim Substantive Procedures
Procedures performed and conclusions consistent with assessed level of risk
!
Approach year end review with correct ‘mindset’
Combined Risk Assessment
Minimal
Low
Moderate
“We have considerable evidence that errors
of audit importance are unlikely to occur”
“We have evidence that leads us to expect
no errors of audit importance will occur”
“We have evidence that leads us to expect
few errors of audit importance”
High
“We have evidence that leads us to expect that
errors will occur and could be of audit
importance, or insufficient evidence to
conclude otherwise”
S U B S TA N T I V E P RO C E D U R E S G U I D E
Set Appropriate Testing Thresholds
Not Significant/Insignificant Accounts
The threshold for what we consider to be significant or key will
vary depending on the prevailing CRA and the context in which
we are making the judgement. GAM suggests the following
testing threshold ranges:
A ‘not significant’ account is one that exceeds TE but where we
believe that the risk of material error is so low as to make it not
significant. An ‘insignificant account’ is one that is below TE and
has no associated inherent risks. With ‘not significant’ and
‘insignificant’ accounts we do not perform GAM activities 6 and
7 but perform more limited substantive procedures. In the case of
not significant accounts we would perform analytical review
procedures and limited tests of detail (potentially at an interim
stage) in order to satisfy us that the numbers make sense.
Insignificant accounts would ONLY be subjected to high-level
analytical procedures at year end.
Combined Risk Assessment
Assets
Liabilities
Minimum
> 75-100% TE
> 10-25% TE
Low
> 50-75% TE
Professional Judgement
Moderate
> 25-50% TE
Professional Judgement
High
> 10-25% TE
Professional Judgement
These should be challenged in the context of the client and overall
risk environment and agreed with the engagement executives.
Refer to GAM Activity 10.1 for further guidance on establishing
testing thresholds.
Conclusion Statements
GAM requires us to conclude at the significant account level on
the audit work we have performed as a whole. Refer to the GAM
database for example conclusion statements.
In addition, GAM (Activity 5.10) specifies that we are required to
document conclusion statements in respect of specific audit
procedures in the following situations:
Timing of Substantive Procedures
1. When we assess the Combined Risk Assessment as High for a
particular account assertion; or
GAM encourages us to perform our substantive procedures in
advance of the balance sheet date where appropriate.
2. When the audit area is Complex
The use of a roll-forward approach reduces routine substantive
work performed at busier times of the year, providing the
opportunity to concentrate on key client issues and higher audit
risk areas.
For other audit areas, sign-off on the applicable steps in the audit
program (including the date performed) is sufficient evidence of
the signer’s acknowledgment of having performed the procedures
and having reached a conclusion that does not warrant further
attention by others on the team.
The key components of the roll-forward are shown in the table
below and further details are provided in appendix A.
1. Update Our Understanding of the Control Environment
2. Perform Test of Cutoff
3. Perform Analytical Review Procedures (ARP’s)
MINIMAL
LOW
MODERATE
HIGH
– Review activity interim to year end
– Review non-standard journals
– Perform A/R of balances
– Review key ratios
As for minimal, plus:
– Compare balances/ratios during
roll-forward period
– Perform some tests of
intervening activity
Extensive roll-forward procedures
Update or reperform interim customised
solutions at year end
8
S U B S TA N T I V E P RO C E D U R E S G U I D E
Other opportunities for influencing
the timing of our work
Review of Events Occurring Prior to Year End
We can normally perform audit procedures prior to year end for
balance sheet and income statement accounts that accumulate
transactions that, for the most part, will remain in the account
balance at year end. This might include: major business
acquisitions or disposals, key charges to expense accounts
e.g., payroll bonuses or major fixed asset additions/disposals
likely to represent key items at year end.
Consider assets and their associated provisioning
accounts separately
Challenge the inclusion of provision accounts eg, bad debt
provisions, within the host significant account eg, trade debtors.
These accounts are usually subject to different risks or classes
of transactions and are capable of being treated as separate
significant accounts. We can then audit the host significant
account earlier in the year..
Review of Activity in the Period
Statutory Account Preparation
Where we would normally review activity over the entire
accounting period e.g., monthly review of gross margins, we can
prepare, review and understand the activity up to the interim date
as part of our earlier audit visit. Our year end visit will then
concentrate on updating our review for the period since interim.
By planning to produce statutory accounts during the audit
fieldwork and using the Lead Schedule Workbook for our lead
schedule creation, we can rapidly gain an overall understanding
of the current year end figures shortly after the year end and use
the Sage APA ratio reports to aid our overall analytical review.
Programme of General Audit Procedures
Leverage internal audit
There are some procedures that involve an accumulation of
knowledge throughout the year eg, review of board minutes,
statutory books and records. Some of these procedures can be
performed at an interim date, with an update being performed at
year end.
Whilst planning the audit we should obtain an understanding
of internal audit activities to assess whether we are able to
modify our audit procedures as a result of these activities.
Information generated by Internal Audit may allow us to reduce
the overall level of work we perform in establishing our control
risk assessments and help us to update our understanding of
controls more efficiently at year end.
Reviewing Provisions Prior to Year End
Where provisions are based on a non-routine data process
eg, client relies on system-generated assessments of the provision
as a basis for the overall calculation; we should take the
opportunity to review these processes. By placing reliance
on controls around the process we may be able to determine
a lower CRA and bring forward our review.
Even where provisions result from an estimation process,
we may be able to save valuable time at year end by familiarising
ourselves with the approach taken by management prior to year
end, so that we can begin to develop our expectations in advance
of the year end visit.
9
S U B S TA N T I V E P RO C E D U R E S G U I D E
Further Guidance
Guidance on the nature, timing and extent of substantive
procedures as well as roll-forward procedures is contained within
Activities 8, 9 and 10 of the GAM database.
In particular:
• Activity 10.2 provides guidance on the extent of procedures
required to perform a roll-forward in different risk
environments;
• Activity 8.2 covers the nature, timing and extent of our
substantive procedures (including roll-forwards); and
• Exhibit 9.2 provides guidance on using analytics to test cut-off
and roll-forward amounts.
For guidance on the use of analytics and the AAMs, refer to GAM
Activity 9 and the Analytics PowerPack.
For guidance on the PSPs, refer to EY/GAM database, Activity 8,
and for documenting or concluding on our work, Activity 5.10.
10
S U B S TA N T I V E P RO C E D U R E S G U I D E
Substantive Procedures by Significant Account
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
C – Cash & Bank Balances
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
Agree balances to the bank reconciliation and ensure appropriate other items are disclosed within
the financial statements.
X
X
Document the rationale for any bank accounts not planned to be confirmed.
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of cash and bank per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
X
X
X
1
1
1
1
X
X
X
1
1
1
1
1
1
1
1
Obtain a complete list of bank accounts (debit and credit balances) as well as related contracts.
Obtain bank confirmations for all accounts, including the accounts closed during the year, to
confirm the relationship with the bank including contingencies, liens, pledges, restrictions on the
client´s assets, guaranteed amounts etc. If there is a valid reason for not confirming all accounts,
document the rationale in the working papers.
Check appropriateness of presentation of balances within the financial statements (eg. overdraft
classified as current liability) and consider the impact of any set-off agreements and banking covenants.
X
Examine the client's bank reconciliation as of year-end, including cash-in-transit accounts, (e.g. in
subledgers) to verify the proper reconciliation of bank statements and general ledger accounts.
Trace the ledger and bank balance back to GL and confirmation. Review for significant (>50-100% TE)
unusual reconciling items, and ensure treated appropriately.
X
X
X
Trace the ledger and bank balance back to GL and confirmation. Agree reconciling items (>10-25% TE)
to evidence of clearance in the subsequent period, and conclude if treated appropriately at year end.
X
X
X
Review transfers between bank accounts pre and post year end for significant amounts.
Ensure recorded in only one account balance on the ledger.
X
X
Obtain or prepare a listing of all transfers between bank accounts for the period (2 weeks) pre and
post year end. Check the listing for completeness. For all transfers > 10-25% TE, ensure that
transferred amount appears only once in the ledger at year end.
X
X
Test cutoff of cash receipts and cash disbursements for transfers between different bank accounts
at the balance sheet date.
Test appropriate valuation of cash and cash equivalents (including overdrafts) in foreign currencies.
Compare the rates used to external sources and review the translation of significant balances
denominated in foreign currencies for reasonableness.
X
Compare the rates used to external sources and reperform the translation of foreign currency
balances >TE
X
Compare the rates used to external sources and reperform the translation of foreign currency
balances >TE. Test the listing for completeness.
X
Review the cash book during the year for any large or unusual items and follow up with the client as
necessary. Increase scope of review as risk increases.
2
2
2
2
2
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. This test would normally be performed in conjunction with other work on cash but is designed to identify/confirm unusual transactions impacting income statement items, PPE, accruals and prepayments etc.
11
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
D – Marketable Securities
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of marketable securities per lead schedule by comparison with prior year,
interim and knowledge of changes in the business.
C
E
V
X
X
X
R&O
P&D
Min
Low
Mod
High
AAM
Verify the existence and ownership of recorded securities through confirmation or examination of
evidence of ownership (e.g., stock certificates, bank statements, broker statements).
X
Select a sample (using Microstart where appropriate) of marketable securities at the year end (or
interim) date. Confirm existence and ownership to supporting documentation.
X
1
If our confirmation work above is performed at an interim date, review the roll-forward of movements
between the interim and balance sheet dates in a manner responsive to our risk assessment.
Review movements between the interim and year end dates, such as:
• significant new securities
• disposed of securities
• volume of activity (compared to prior periods and expectations)
• investigate significant changes, vouching to source documentation or reconfirming with the third
party if considered necessary.
X
X
X
X
X
X
X
*
*
*
2
2
*
2
* Extent of testing increases as risk increases. However, roll-forward is not applicable at High CRAs, as
we would not normally perform our substantive procedures on account assertions with a High CRA
prior to the balance date, due to the need to reperform this work at the year end.
Review confirmation replies for evidence of marketable securities, and of liens, pledges or other
security interests in marketable securities.
Review bank confirmations, and direct confirmations of marketable securities for evidence of
marketable securities owned by the client, and of liens, pledges and other security arrangements over
these assets. Ensure adequate disclosure of such arrangements is made in the financial statements.
X
X
1
3
3
3
1. The Inventory AAM Dashboard can be used to assist in the identification of high value items and the 'stock line churn' test selected to identify marketable securities that are new, common or have been deleted compared to the
prior year.
2. The Inventory AAM Dashboard allows data to be imported at three points in time (eg, interim, final and prior year end), facilitating roll-forward of our work by enabling the comparison of changes from interim to year end to be displayed
(see footnote 1. above for the relevant test). Note that this guidance does not cover roll-forward at High CRAs.
3. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
12
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
D – Marketable Securities (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Inspect market quotations or other evidence of current value of marketable securities, including
those in foreign currencies.
For significant marketable securities, review period end valuation and if appropriate compare with
prior year to assess reasonableness. Depending on the level of new lines, consider the need to test a
sample of new lines to supporting documentation.
Using the same sample as for existence and ownership testing agree the value of marketable
securities to third party evidence where available, otherwise reperform valuation calculation. If
denominated in a foreign currency, agree exchange rate used to the relevant published exchange rate.
If our work above is performed at an interim date, review the movements in valuation between the
interim and balance sheet dates in a manner responsive to our risk assessment.
Review movements between the interim and year end dates, such as:
• new securities
• investigate significant changes, vouching to source documentation or reconfirming with the third
party if considered necessary.
X
X
4
X
X
4
X
*
5
X
X
*
*
5
5
* Extent of testing increases as risk increases. However, roll-forward is not applicable at High CRAs,
as we would not normally perform our substantive procedures on account assertions with a High CRA
prior to the balance date, due to the need to reperform this work at the year end.
Test that marketable securities are carried in accordance with the client's accounting policies or
applicable financial reporting framework.
Enquire as to whether there has been any change in accounting policy compared to the prior year.
Consider the impact of any new accounting standards on the client's accounting policy. For significant
marketable securities review to ensure that they have been accounted for in accordance with the
stated policy and for any changes in policy, ensure that adequate disclosure has been made.
X
X
Using the same sample as for existence and ownership, obtain details of the accounting treatment of
each marketable security and check to ensure that this treatment is in line with the stated
accounting policy. Review the accounting policy for reasonableness and consistency with the prior
year or changes to relevant accounting standards.
X
X
4. The Inventory AAM Dashboard can be used and the impact of changes in unit price in common lines (securities) compared to the prior year analysed.
5. The Inventory AAM Dashboard allows data to be imported a three points in time (eg, interim, final and prior year end), facilitating roll-forward of our work by enabling the comparison of changes from interim to year end to be displayed.
Note that this guidance does not cover roll-forward at High CRAs.
13
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
E – Trade receivables
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
• Compare year end trade receivable profile with prior year and investigate significant changes.•
Drill down the above analysis to individual customers or components.
X
X
• Compare make-up of the ledger (transactions and customer balances) and understand any
changes/absence of changes in volume, value and mix of credit and debit amounts.
X
X
• Understand the reason for any large (>50-75% TE) credit transactions/balances on the ledger
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of trade receivables per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
AAM
X
*
*
1
X
*
*
1
Perform Analytical Review Procedures
Confirm our expectation of the level of trade receivables (including provisions) per lead schedule by
comparison with prior year and knowledge of changes in the business. Consider doing all or some of
the following:
X
• Review the list of top 5 customers and top 5 customers with debts >90 (or selected) days.
Gain an explanation from management for any significant changes from prior year.
X
• Review volatility of customer base (eg. new customers as % of existing) and compare with
our expectations.
X
X
*
*
1
*
*
1
*
*
1
* Extend Analytical Review as risk increases.
At Moderate and High CRAs, we expect errors to exist. Therefore, the purpose of analytical review
procedures is to assist in the direction of further work.
Verify the existence of trade receivables through confirmation or subsequent cash receipts or a
combination of those procedures. Consider using the audit risk tables or E&Y Microstart to determine
the extent of the sample or document the rationale for the sample selection in the working papers.
Select a sample (of key items and a representative sample using Microstart where appropriate) of
open items on the receivables ledger (or by customer balance).
X
X
X
X
2
X
X
X
X
2
When performing a circularisation; For disagreements, request client follow up; For non-replies, agree
to after date cash (via remittance advices), proof of delivery or proof of acceptance by the customer.
Develop additional specific tests to address the higher inherent risk for trade receivables, and
estimate the value of errors occurring.
1. Main AAM Dashboard screen can be used to assist in the initial understanding of movements in the receivables ledger between 2 (or 3) points in time. The tests behind the main screen (such as Customer Churn) can then be used as
required to extract more detailed information and investigate apparent anomalies.
2. The AAM Dashboard can be used to select key items for testing and provide a total for Microstart. Where verification is performed by reference to after-date-cash, the dashboard can also be used to identify cleared items which can
then be agreed to remittance advice, and open and part-paid items which can be investigated further. At high CRA, the extent of the use of the AAM will vary depending upon the nature of the test selected.
14
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
E – Trade receivables (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
X
X
X
R&O
P&D
Min
Low
Mod
High
AAM
X
X
X
X
X
X
X
X
*
*
*
*
*
*
*
*
*
*
3
3
3
3
3
X
X
X
*
*
3
Review the control account for evidence of any unusual non-standard journals, and investigate as
necessary.
X
X
3
4
Reperform the client prepared control account reconciliation at the year end. Investigate any unusual
non-standard journals, and determine how they occur.
X
X
Where we perform our substantive procedures at an interim date, repeat tests 1 or 2 above at the year
end, and compare the amount and types of reconciling items between the interim date and the year end.
X
X
*
4
If accounts are verified at an interim date, review the “roll-forward” of activity from the interim
date to the balance sheet date in a manner responsive to our combined risk assessment and
compare level of activity with prior periods. Investigate unusual items; consider confirming (at the
balance sheet date) significant new accounts and those accounts with significant increases or
decreases between the interim date and the balance sheet date.
Review movements between the interim and year end dates, such as:
• significant new customers
• lost customers
• volume of activity (compared to prior periods)
• cash received
• credit notes raised
• investigate significant items, vouching to source documentation or reconfirming with the customer if
considered necessary.
* Extent of testing increases as risk increases. However, roll-forward is not applicable at High CRAs, as we
do not perform our substantive procedures on account assertions with a High CRA prior to the balance
date. See page 8 for further guidance on roll-forward procedures.
Agree receivables subledger to the general ledger control account and investigate large and unusual
reconciling items.
* Extent of testing increases as risk increases. However, roll-forward is not applicable at High CRAs, as
we do not perform our substantive procedures on account assertions with a High CRA prior to the
balance date.
3. The AAM Dashboard allows data to be imported at three points in time (interim, final and prior year end), facilitating roll-forward of our work. Note that this guide does not cover roll-forward at High CRAs.
4. The AAM Dashboard enables the recording of a high-level control account reconciliation, the principle aim of which is to validate the data used in the AAM Dashboard and to provide visibility to any amounts not covered by the AAM.
Consideration should be given as to whether further investigation is required.
15
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
E – Trade receivables (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Review the summaries of activity for the month pre and post year end. Compare the activity to that
expected (particular attention to peaks in sales volumes) and with the same period in prior year
and budget. Where actual activity significantly differs from our expectation ascertain the reason for
this change.
X
X
5
Inspect a sample of transactions (for example >10-50% of TE) from the activity listing before and
after cutoff date. Inspect supporting documentation. Ensure that the transactions were recorded in
the proper period; compare the cutoff with cutoffs in related areas, eg. sales and cash.
X
X
5
X
X
5
Inspect a sample of transactions (for example >10-50% of TE) from the activity listing before and
after cutoff date. Inspect supporting documentation. Ensure that the transactions were recorded in
the proper period; compare the cutoff with cutoffs in related areas.
X
X
*
5
Repeat tests above and also compare activity between the year end and interim date.
X
X
*
5
Test Cutoff
Perform analytical procedures to identify peaks in sales volume in the last few days or weeks of
the year. Test cutoff by inspecting sales register, billings, shipping documents and other
supporting documents before and after the year-end date.
Test Cutoff
Where we perform substantive procedures at an interim date, we perform cutoff testing at that
date also.
Review the summaries of activity for the month pre and post the interim date. Compare the activity
to that expected (particular attention to peaks in sales volumes) and with the same period in prior
year and budget. Where actual activity significantly differs from our expectation ascertain the
reason for this change.
* Roll-forward is not applicable at High CRAs, as we do not perform our substantive procedures on
account assertions with a High CRA prior to the balance date.
5. The AAM Dashboard Cutoff test has the facility to support cutoff testing by summarising the activity by week or day together with the ability to drill down to underlying transactions. However, as based on the open item report, if an
item has been raised and paid for in the same period, it will not appear on the AAM Dashboard Cut-Off test. If this is considered a risk area, the Transactions AAM using the sales day book for the last month can be used to identify
such items.
16
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
E – Trade receivables (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Evaluate the adequacy of the allowance for doubtful accounts.
Consider the adequacy of bad debt provisions in the context of expectations in the industry, economic
climate etc. Compare to prior year and expense in the year. Extend enquiries as risk increases.
X
Discuss with management credit control and bad debt policies and procedures. Follow up as appropriate.
X
6
Review aged debt listing and confirm old debts (>90 days or other level for industry) have been
appropriately provided against.
X
6
7
Test receivables ageing by selecting a sample of invoices to ensure that the client's aged debt
listing is consistent with the supporting documentation.
X
6
8
X
7
6
Evaluate the adequacy of other adjustments to accounts receivables, such as rebates,
credit memos, discounts.
X
Consider the adequacy of provisions in the context of expectations in the industry, economic climate
etc. Compare to prior year and expense in the year. Extend enquiries as risk increases.
Discuss with management policies and procedures in relation to these issues. Compare to prior year
and expense in the year.
X
9
6
X
For other adjustments, obtain client schedules, test completeness and calculations. Increase sample
size of testing as risk increases. Review after date payments, credit notes etc. to support
completeness of schedules.
6
9
Review list of credit balances and investigate large items.
Review list of credit balances for large/unusual items.
X
X
10
Review list of credit balances for large/unusual items. Test completeness of listing.
X
X
10
Review list of credit transactions/balances for large/unusual items. Test completeness of listing.
Investigate why major credit balances have arisen and consider impact on year end receivables.
X
X
10
6. These risks should have been assessed in arriving at the CRA of Min or Low.
7. The AAM Dashboard reperforms the receivables ageing and the default bands (eg, 30/60/90 days overdue) can be changed to respond to specific client/ industry circumstances. The AAM Dashboard then allows the user to drill down
to the individual customer balances/invoices which make up the aged debt for subsequent verification. The AAM Dashboard also provides a summary of the top 5 old customers to aid the discussion with management.
8. The AAM Dashboard reperforms the receivables ageing. Manual verification that the system date matches the actual date is required in order to prevent any unwarranted reliance on the data. In a situation where IT general controls are
considered to be effective, a test of one (application control) would be sufficient.
9. Review the Ledger Quality and Ageing information on the AAM Dashboard to assist the review and identify potential risk factors. If credit notes are considered to be a particular risk, the Transactions AAM could be utilised to analyse
the volume and value of credit. notes over a period of time, in order to build an expectation for the likely level of required provision at the period end or to assist in identifying any major credit notes in the period or post year end.
10. The AAM Dashboard Ledger Quality test provides the total value of credit balances and transactions on the ledger at the period end, and provides the facility to quickly and easily drill-down to individual transactions.
17
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
E – Trade receivables (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Test appropriate valuation of accounts receivables in foreign currencies.
Review the translation of significant balances denominated in foreign currencies for reasonableness.
X
X
11
Reperform the translation of foreign currency balances > TE.
X
X
11
Reperform the translation of foreign currency balances > TE. Test the listing for completeness.
X
X
11
Test the casting of the sales ledger, and check for duplicate records
X
X
X
Review the bank reconciliation for items which may impact trade debtors.
X
X
X
Review the bank reconciliation in detail (for higher risks consider reperforming) for items which may
impact trade debtors.
X
X
X
12
12
11. If foreign currency balances are significant, and the underlying risks differ, consider using multiple AAM Dashboards, one for each foreign currency ledger. Analyse/Reperform the calculation using Excel, Access or ACL.
12. These risks should have been assessed in arriving at the CRA of Min or Low.
13. The AAM Dashboard control account reconciliation would check for casting errors. The data import procedure checks for duplicate data entries.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
18
13
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
F – Inventories
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
X
X
X
X
Ascertain management's policy for inventory at third parties. Obtain details of inventory held at third
parties and compare expected inventory levels with those on lead schedule.
X
X
X6
Ensure that the sample of locations confirmed or inventory physically verified is suitably based on the
risk assessment. Extend sample sizes as risk increases (see page 8 for guidance on testing thresholds)
X
X
X6
Compare inventory values and quantities (overall and for those items sampled for observation) at
interim and year-end and investigate any significant variations from expectations.
X
X
2
3
Examine new inventory lines, changes in the level of existing lines, deletions of inventory lines, and
other unexpected changes to the compilation of inventory between the interim and year end dates.
Where unexplained anomalies are noted, consider tracing to source documentation.
X
X
2
3
Understand movements in prices on existing inventory lines between interim and year-end dates.
Review any changes/absence of change in the roll-forward period.
X
X
2
3
Validate, by reference to purchase invoices and/or inventory count records, any significant changes in
the profile of inventory valuation.
X
X
2
3
Review the list of top 10 inventory lines, paying particular attention to any significant changes in the
list of major lines. Understand any significant changes in the composition of this list compared to
interim and prior year. Extend sample depending on CRA and coverage.
X
X
2
3
Consider extending review to cover inventory holdings >50-75% TE at year end.
X
X
2
3
Consider extending review to cover inventory holdings >25-50% TE at year end.
X
X
2
3
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of inventories per lead schedule by comparison with prior year, interim and
knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
AAM
Observe the taking of physical inventories ensuring that inventories owned by others are separated
and trace test counts to the inventory compilation.
Review adequacy of the client's inventory count procedures. Attend the inventory count. Test the
client’s inventory counts by tracing a sample (using Microstart where appropriate) from the floor to
the records and from the records to the floor. Where errors are noted, investigate and consider
extending the sample. Document the results of our attendance on the inventory count observation
checklist contained in the EY/GAM database. Identify any old, damaged or obsolete inventory.
Consider whether evidence has already been obtained from controls testing where applicable.
Review the client compilation of inventory count results. Trace test counts to final inventory valuation.
Investigate unusual items. Consider whether evidence has already been obtained from controls
testing where applicable.
1
If significant, confirm inventories held by others at the physical inventory date and trace confirmed
quantities to the inventory compilation; consider observing these physical inventories as well.
If inventories are taken at an interim date, review the "roll-forward" documentation in a manner
responsive to our combined risk assessment and investigate unusual items.
1. The Inventory AAM Dashboard can be used to identify duplicate inventory lines, significant inventory lines, and other anomalies in the inventory ledger which can then be investigated further.
2. These tests are not applicable for a High CRA as we do not perform the above procedures any more than a few days either side of year end, as the risk of material error going undetected is too great.
3. The Inventory AAM Dashboard can be used to compare the inventory listing at the interim and year end date to facilitate our roll-forward procedures. Movements in inventory can quickly and easily be viewed at a summary level, as well
as at an individual line item level. In particular the stockline churn, top 10 lines, impact of price changes and stock line value profile should be reviewed.
19
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
F – Inventories (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Whilst attending the inventory count, obtain information in respect of last goods received either side
of the cutoff date. Test the cutoff of inventory by comparing pre/post year end goods received notes
with the inventory ledger. Tie into our work on trade accounts payable and purchases. Our sample size
will increase according to our CRA.
X
X
Whilst attending the inventory count, obtain information in respect of last goods dispatched either
side of the cutoff date. Test the cutoff of inventory by comparing pre/post year end despatch notes
with the inventory ledger. Tie into our work on trade accounts receivable and revenue. Our sample size
will increase according to our CRA.
X
X
Where our work is performed at an interim date, cutoff procedures should be performed at the interim
AND year-end dates.
X
X
Review the client prepared control account reconciliation, at inventory count date and year end, and
investigate and large/unusual reconciling items.
X
X
5
Reperform the client prepared control account reconciliation at the inventory count date and year end.
Investigate any large/unusual reconciling items and determine how they occur.
X
X
5
Trace the cutoff information obtained during the physical observation to the accounting records of
sales and purchases.
4
Review the reconciliation of the valued physical inventory compilation with the general ledger account
balances and the perpetual inventory records. Investigate large and unusual reconciling items.
4. These tests are not applicable for a High CRA as we do not perform the above procedures any more than a few days either side of year-end, as the risk of material error going undetected is too great.
5. The inventory AAM Dashboard will automatically check the casting and cross-casting of the ledger, and highlight any issues. When using the AAM Dashboard you should always ensure that the data reconciles to the inventory listing and
hence the general ledger, and ensure differences are understood and tested as appropriate.
20
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
F – Inventories (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Build an expectation of the level of inventory (including provisions) per the lead schedule by
comparison with prior year, interim and knowledge of changes in the business.
X
X
X
6
As above, but drill down to individual product line, type etc. and investigate differences > 25% TE.
X
X
X
6
Build an expectation of price variances and purchase volumes and apply to standard costs to
determine actual cost. Compare to client valuation and investigate variances.
X
6
As above, but extend the test by looking at individual product lines.
X
6
Develop expectations of gross margins and compare to actual. Investigate significant variances.
Compare to post year end margins achieved.
X
Develop expectations of gross margins at product or geographical level and compare to actual.
Investigate significant variances. Compare to post year end margins achieved.
X
Select a sample of inventory lines (using Microstart if appropriate) and agree costs to purchase
invoices. Investigate all differences and extrapolate errors found in the representative sample.
X
Test the valuation of inventory to ensure that it is done in accordance with the client’s accounting
policy or applicable financial reporting framework.
Discuss with management whether there has been any change in accounting policy in the period with
respect to inventory valuation. Review the client's process for valuing inventory to ensure consistent with
the stated policy, the applicable GAAP, and correctly applied. Extend extent of review as CRA increases.
X
X
7
X
For long term contracts, in addition to the testing of cumulative costs and applicable payments on
account, review provisions for costs to completion for reasonableness. Review correspondence for
evidence of any contract disputes.
X
For long term contracts, in addition to the testing of cumulative costs and applicable payments on
account, test provisions for costs to complete by agreeing a sample of items to third party
documentation. Review correspondence for evidence of any contract disputes or issues.
X
Build an expectation of the relative material, labour and overhead content of inventory based
upon the prior year mix and costs incurred in the year. Compare to the inventory valuations and
investigate differences.
X
6
Extend detail of above test by looking at product lines and check that the standards set are
reasonable in comparison with prior years and underlying data.
X
6
X
7
Select a sample of items using EY/Microstart and agree costs of component parts to purchase
invoices (or raw material inventory listings where previously tested) and other supporting
documentation for the labour and overhead content. Investigate all differences and extrapolate errors.
6. The Inventory AAM Dashboard can be used to provide detail on inventory line churn, top 10 inventory lines, roundings within the ledger, impact of price changes, price comparisons, and the ability to drill down to information on
individual inventory line items to assist with these procedures.
7. The Inventory AAM Dashboard test can be used to identify key items for selection for testing.
21
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
F – Inventories (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Build an expectation of the level of inventory provisions by projecting the expected inventory levels
and percentages from the prior year taking into account any changes in the business or market place.
Ensure compliant with client's accounting policy and applicable financial reporting framework.
X
X
X
As above, but extend the scope of the test by product line/type and investigate any differences
>10% of TE.
X
X
X
Review the client prepared reconciliation of provisions per the system to that booked, at interim and
year end. Investigate any large/unusual reconciling items.
X
X
X
8
Reperform the client prepared reconciliation of provisions per the system to that booked, at interim
and year end. Investigate any large/unusual reconciling items and determine how they occur.
X
X
X
8
Compare the level of year end raw materials inventory to projected usage on an overall basis and
consider whether further provisioning is required.
X
X
X
Build an expectation of future raw material inventory usage on a line by line basis from current and/or
prior year information and knowledge of changes in the business. Where the actual usage provision of the
inventory differs from our expectations based on the usage profile then investigate differences through
discussion with the client and consider the need for further provision. Extend test as CRA increases.
X
X
X
Compare the level of year end WIP and finished goods inventory to projected sales on an overall basis
and consider whether further provisioning is required.
X
X
X
Build an expectation of future WIP and finished goods inventory turn on a line by line basis from
current and/or prior year information and knowledge of changes in the business. Where the actual
slow moving inventory provision differs from our expectations based on the inventory turn profile then
investigate differences through discussion with the client and consider the need for further provision.
Extend test as CRA increases.
X
X
X
Consider the impact of technology, business or environmental changes that may indicate the need for
inventory provisions at a greater level than historic trends would suggest.
X
X
X
9
Build an expectation of the overall ageing profile of inventory from knowledge of inventory levels and
of the business. Compare to the actual ageing profile. Investigate any significant differences and
consider the need for further provision.
X
X
X
9
Test the allowances to reduce the valuation of inventory to net realisable value, e.g., reserves for
slow moving items, obsolescence or lower of cost or market.
Suggested substantive tests in respect of inventory provisions continue over the page.
22
9
8
8
9
8
8
8
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
F – Inventories (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Build an expectation of the ageing profile of the inventory on a line by line basis from prior year
information and knowledge of changes in the business. Where the actual ageing of the inventory
differs to our expectations of the ageing profile then investigate differences through discussion with
the client and consider the need for further provision. Extend test for higher risks.
X
X
X
From attendance at the client inventory take, record any old, damaged or obsolete inventory and
compare to the provisioning report.
X
X
Discuss pricing policies post year end with the Sales Director. Assess impact on NRV of inventories.
X
X
X
Discuss pricing policies post year end with the Sales Director. Test a sample of inventory items to
post year end sales to compare selling price with cost price. Extend sample for higher risks.
X
X
X
Consider the need for net realisable value provisions in light of gross margins and changes in gross
margins at a product line or group level.
X
X
X
Build an expectation of gross margin of inventory on a line by line basis from current year or forecast
sales information and knowledge of changes in the business. Where negative or low margins indicate
the need for a provision, compare to the client's provision and if this differs to our expectations the
investigate the difference through discussion with the client and consider the need for further
provision. Extend the test for high risks.
X
X
X
8
For inventory lines > 10% TE and where no inventory provision has been made, discuss with the client
and consider the need for further provision.
X
X
8
For inventory lines > 5% TE and where no inventory provision has been made, discuss with the client
and consider the need for further provision.
X
X
8
Test the allowances to reduce the valuation of inventory to net realisable value, e.g., reserves for
slow moving items, obsolescence or lower of cost or market. (continued)
8
8
8
9
As the drivers for inventory provisioning will vary by client you should consider, when designing your
substantive procedures, whether it is more appropriate to perform the inventory provisioning work by
classification (eg, raw materials, WIP, finished goods) or by nature (eg, slow moving, obsolescence, NRV).
Test the casting and cross-casting of the inventory ledger and check for duplicate records.
X
X
10
10
11
8. The inventory Provision AAM Dashboard can assist greatly with our audit work on the inventory provision by supporting the testing of NRVs, inventory turn, inventory ageing, and detailed drill down to an individual inventory line level. The
level of assistance will depend upon the data obtained from the client. Further guidance on the use of the Inventory Provision AAM Dashboard is contained in the EY/GAM database.
9. These risks will have already been assessed in arriving at our CRA of Min or Low.
10. The Inventory AAM Dashboard text can be used to identify key items for selection for testing.
11. The Inventory AAM Dashboard control account reconciliation would check for casting errors. The data import procedure checks for duplicate data entries.
23
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
G – Prepaid Expenses, Deferred Charges and Other Assets
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Agree to the
general ledger. Build an expectation of the level of prepaid expenses, deferred charges and other assets
per lead schedule by comparison with prior year, interim and knowledge of changes in the business.
X
X
X
Verify existence and carrying amounts through examination of supporting documents, or
confirmation or a combination of those procedures.
X
X
R&O
P&D
Min
Low
X
X
X
1
1
Review the prepaid expense account in the general ledger and trace significant items (>10-25% TE) to
supporting documentation (eg, invoice, contract or confirmation) to ensure that carrying amounts are
appropriate. Recompute the prepaid amount to test for accuracy.
X
X
X
X
1
1
Consider the impact on prepayments, deferred charges and other assets of changes in the business
(such as new locations (eg, rent), marketing, and capital expenditure).
X
Review the profit and loss account and cash book for evidence of significant expenditure which may
indicate a prepayment to be recorded at the balance date.
X
2
1
1
1. Consider the need to design separate substantive procedures for the major components of this significant account which focuses on specific risks or documents available for those components.
2. Consider obtaining the schedule of prepayments, deferred charges and other assets electronically (eg, in Excel) especially if separated by location, to assist in the identification of amounts for testing.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
24
AAM
8
X
X
High
X
Review the prepaid expense, deferred charges and other asset accounts in the general ledger and
investigate any unusual items. Trace significant items (>50-75% TE) to supporting documentation (eg,
invoice, contract etc) for reasonableness.
Inquire of management as to the completeness of the prepayments listing.
Mod
2
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
H – Investments, including Investments in Affiliates
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of investments per lead schedule by comparison with prior year, interim and
knowledge of changes in the business.
X
X
X
Verify the existence and ownership of recorded investments, including those in affiliates, through
confirmation or examination of evidence of ownership. Investigate unusual items.
X
X
For brought forward investments, confirm with management that these are still owned. For any
significant (>50-75%TE) new investments, agree to purchase documentation.
X
X
X
X
X
1
Select a sample (using Microstart where appropriate) of investments held at the year end (or interim)
date. Agree existence, ownership, and value of investments to supporting documentation (eg, share
register or confirmation with the Company secretary of the investee).
X
X
X
X
X
1,2
X
X
X
X
Review minutes (shareholders, board, executive committee, etc.), agreements and confirmation
replies for evidence of existence, liens, pledges or other security interests in investments; and of
commitments to acquire or dispose of investments.
X
Ensure that items identified have been correctly reflected in the financial statements.
X
Inspect market quotations, financial statements of investees and other evidence of current
value, cost or equity amount of investments and test that investments are carried in accordance
with the client`s accounting policies or applicable financial reporting framework including
foreign currency translations.
X
R&O
P&D
Min
Low
Mod
High
AAM
8
Inquire of management as to whether there have been any change in accounting policies, and
consider changes in accounting standards.
X
X
Compare the value of investments at current and previous period end, obtaining explanations for any
significant (>50-75% TE) unexpected movements and vouching to supporting documentation.
X
X
1
Select a sample (using Microstart where appropriate) of investments held at the year end (or interim)
date. Agree the value of investments to supporting documentation, and the accounting treatment to
the stated accounting policy. Where investments are denominated in foreign currency, reperform the
translation to sterling using published exchange rates at the period end rate.
X
X
1,2
Consider whether there are any indicators of impairment to the carrying value of investments
(eg, loss making businesses).
X
X
Review management's process for examining the carrying value of investments. Critically challenge
the assumptions made by management in performing their assessment of the appropriateness of the
carrying values. Ensure any indicators of impairment in value have been factored into management's
review of the carrying value of investments.
X
X
Use information obtained during the audit in determining whether management has identified
appropriate indicators of impairment and ensure that reserves carried forward from prior periods
are still appropriate.
1. If the investments are actively traded, the Inventory AAM Dashboard can be used used and the impact of changes in unit price in lines (investments) common to both the current and prior year and assist in identifying new and
deleted lines.
2. The AAM Dashboard can be used to assist in the selection of key items for testing (and/or entry into Microstart in order that it can calculate the required representative sample size).
25
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
I – Intercompany Balances and Transactions
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of intercompany balances per lead schedule by comparison with prior year,
interim and knowledge of changes in the business.
X
X
X
Obtain a complete list of affiliated companies and confirm or have client confirm receivables from
and payables to affiliates, or agree the account balances with those in the affiliates' records.
X
X
X
X
X
Test the carrying amounts of intercompany accounts, including those in foreign currencies.
X
X
X
X
X
Compare carrying amounts of intercompany balances with the prior year and investigate any
significant unexpected differences.
X
For items denominated in foreign currencies, review translation for reasonableness of calculation.
X
For intercompany balances greater than the chosen threshold level (which will be determined by the
CRA, and the nature of the balance – being asset or liability, refer page 8), review evidence of the
carrying value of the balance (eg, transaction clearing post year end) or asset value of the company
and recalculate the translation of balances denominated in foreign currencies using the published
year end exchange rate.
X
R&O
P&D
Min
Low
Mod
High
X
AAM
8
1
1
1
1
Test cutoff by inspecting sales register, billings, shipping documents and other supporting
documents before and after the year-end date.
X
Review the summaries of activity for the month pre and post year end. Compare the activity to that
expected (particular attention to peaks in sales volumes) and with the same period in prior year
and budget. Where actual activity significantly differs from our expectation ascertain the reason for
this change.
X
X
2
For any of the sample of intercompany balances, inspect a sample of transactions (for example >1050% of TE) from the activity listing before and after cutoff date. Inspect supporting documentation.
Ensure that the transactions were recorded in the proper period; compare the cutoff with cutoffs in
related areas, eg. sales and cash.
X
X
2
Evaluate the adequacy of the allowance for doubtful intercompany receivables considering the
ageing and findings from audit procedures performed in the area of investments.
Consider the adequacy of provisions in the context of our expectations (known disputes, financial
position of the affiliate etc). Compare to prior year and amount expensed in the year.
X
Discuss with management the policies and procedures around credit control of intercompany
receivables and confirm they have been appropriately applied.
X
Review the aged debt listing for old intercompany receivables and confirm that these have been
appropriately provided against.
X
3
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. The AAM Dashboard cutoff test has the facility to support cutoff testing by summarising the activity by day or week together with the ability to drill down to underlying transactions.
3. The Debtors AAM Dashboard reperforms the debtors ageing and the default bands (eg, 30/60/90 days overdue) can be changed to respond to specific client/industry circumstances. The Dashboard then allows the user to drill down
to the individual customer balances/invoices which make up the aged debt.
26
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
J – Long-Term Receivables, Non-Current Deposits, and other Long-Term Financial Assets
It is possible for an engagement to have more than one significant account which falls into this category. Typical examples may include loans, retentions on long-term
contracts, and pension surpluses. You should repeat these PSPs for each significant account within this category to ensure that appropriate focus is given to the testing.
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes.
Build an expectation of the level of long-term receivables, non-current deposits, and other long-term
financial assets per lead schedule by comparison with prior year, interim and knowledge of changes in
the business.
C
E
V
X
X
X
X
X
R&O
P&D
X
Min
Low
Mod
High
AAM
8
Verify the existence and ownership of long-term receivables through confirmation or examination of
supporting documentation.
Select a sample (using Microstart where appropriate) of open items on the long-term receivables
listing (or by customer balance) and verify the existence and ownership of long-term receivables
through confirmation or examination of supporting documentation. If performing a circularisation
– for disagreements, request client follow-up; for non-replies, agree to subsequent cash received (via
remittance advices), proof of delivery or proof of acceptance by the customer/other party.
Review work performed on Accounts Receivable and the cashbook review for evidence of any
long-term receivables not included on the client's listing.
X
1
X
Test the carrying amounts of long-term financial assets.
Review the carrying amounts of long-term receivables compared to the prior year end and our
knowledge of the business. Investigate any significant unexpected variations.
X
Discuss with management the recoverability of long-term receivables, and where any are overdue,
consider the adequacy of any provision for doubtful debts. Review correspondence with the relevant
customers, and meeting minutes/correspondence for evidence of any doubt over full and complete
recovery of the debt.
X
1. The Debtors AAM Dashboard can be used to select key items for testing (and/or entry into Microstart in order that it can be calculate the required representative sample size). Where verification is performed by reference to after-datecash, the dashboard can also be used to identify cleared items which can then be agreed to remittance advice, and open items which can be investigated further.
27
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
K – Property, Plant and Equipment and related Income Statement Accounts
Assertions
Balance Sheet
P&L Account
Nature of Substantive Procedure
C E
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of property, plant and equipment per lead schedule by comparison with
prior year, interim and knowledge of changes in the business.
R P
P
& &
&
V O D O M C D
X X X
CRA
Min
Low
Mod
High
AAM
X
Obtain a schedule of property, plant and equipment, including capitalised leases,
and related additions, disposals, reclassifications and depreciation, depletion
and/or amortisation (PPE subledger) and agree balances to the respective general
ledger accounts.
Agree the reconciliation of the fixed asset register (PPE subledger) to the general ledger for cost
and depreciation. Ensure that significant differences are treated appropriately.
X X X
X X
Reperform the reconciliation of the fixed asset register to the general ledger in detail and for cost
and depreciation (ie, agree to fixed asset register and general ledger by category). Investigate and
verify the appropriateness of significant reconciling items.
X X X
X X
For significant additions and disposals during the year, examine invoices, capital
expenditure authorisations, leases and other data that support these additions
and disposals.
At the planning stage, enquire of management to determine what assets have been acquired and
discuss plans for further additions for the remainder of the period. Review budgets and discuss
significant variations.
X X X
X
X
X
Select a sample of key items (additions) and agree to invoice or other supporting documentation.
Where amounts exceed our expectations with reference to budgeted expenditure and our knowledge
of the business, extend the sample.
X X X
X
X
X
1
Select a sample of additions (using Microstart where appropriate) and agree to supporting
documentation (eg, invoice). Extend the testing for higher risk assessments.
X X X
X
X
X
X
1
At the planning stage, enquire of management to determine what assets have been disposed of and
discuss plans for further disposals for the remainder of the period. Review budgets and discuss
significant variations.
X X
X
X
X
X
Select a sample of key items (disposals) and agree to invoice or other supporting documentation.
Where amounts exceed our expectations with reference to budgeted expenditure and our knowledge
of the business, extend the sample.
X X
X
X
X
X
1
Select a sample of disposals in the year and ensure profit and loss has been correctly calculated
(by reference to sales invoice) and asset removed from the fixed asset register. Extend the testing
for higher risk assessments.
X X
X
X
X
X
1
Verify the physical existence of significant additions to PPE. Consider performing this procedure at
the time of inventory count attendance. Observe whether other fixed assets are currently in use and
in good working order (and relate to work performed on depreciation and impairment).
X X
Inspect evidence of ownership (eg, title deeds for property, registration documents for vehicles) or
rights to use the PPE assets (eg, finance leases). Obtain direct confirmation of ownership if the
deeds are held by a custodian.
X
X
2
3
3
1. Consider use of the Inventory AAM Dashboard to identify ‘new’ and ‘deleted’ fixed assets compared to the prior period, or if suitable analyse the fixed asset register using Excel to identify additions and disposals.
2. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
3. These risks should have been assessed in arriving at the CRA of Min or Low.
28
1
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
K – Property, Plant and Equipment and related Income Statement Accounts (continued)
Assertions
Balance Sheet
P&L Account
Nature of Substantive Procedure
C E
R P
P
& &
&
V O D O M C D
CRA
Min
Low
Mod
High
AAM
Review and examine support for rentals under operating leases and for significant
charges to repairs, maintenance and other expense accounts to determine if they
should be capitalised as property, plant and equipment.
Compare amounts expensed as operating lease payments and related commitments in the current
and prior period and investigate any significant unexpected differences (>50%-100% TE).
X X
X
X
Review repairs and maintenance expense accounts and investigate individual items > 50-100% TE to
ensure properly expensed.
X X
X
X
Compare amounts expensed as operating lease payments and related commitments in the current
and prior period and investigate any significant unexpected differences (>10-50%).
X X
X
X
Review repairs and maintenance expense accounts and investigate individual items > 10-50% TE to
ensure properly expensed.
X X
X
X
Review reasonableness of depreciation, depletion and amortisation charge by
reference to the client’s accounting policy or applicable financial reporting
framework and expectation for current year.
X
Perform the above procedures at an overall level.
As above, but drill down to individual asset groups. Investigate unexpected variances >25% TE
X
X
X
5
X X X
5
5
As above, but drill down to individual asset groups. Investigate unexpected variances >10% TE
X
Review reasonableness of asset lives assigned, and consistency of methods and lives being used
compared to prior periods. Consider the results of work performed in physically verifying assets.
X
X
X
4
4
5
Use information obtained during the audit in determining whether management has
identified appropriate indicators of impairment.
Discuss with management their approach to identifying indicators of impairment, and actions taken
as a result of any potential impairments noted. If no impairment review is required, document our
rationale to support this view.
X
X
6
6
In addition to the test above, compare outcome of discussions with our expectations, and results of
other audit procedures performed. Include the results of observations during physical verification
and inspection. Investigate significant variations from our expectations.
X
X
6
6
If an impairment review/provision is required perform suitable additional procedures and ensure that
the requirements of the appropriate reporting GAAP(s) have been followed.
X
X
6
6
Where PPE assets have been revalued, ensure that the basis and result of the valuation is
reasonable; ensure revaluation surpluses/deficits have been properly accounted for. Ensure the
valuer is appropriately qualified, for the purpose of the reporting GAAP(s).
X
4
4
4
4
Review capital transactions around the year end to ensure PPE assets and the related
receivables/payables are accounted for in the correct period by reference to supporting documentation.
X X
4. These risks should have already been assessed in arriving at the CRA of Min or Low.
5. If suitable, analyse the fixed asset register using Excel or Access to reperform the depreciation calculation and identify assets being depreciated other than in accordance with the stated accounting policy.
6. It is unlikely that if an impairment review is required that our CRA will be Minimal or Low.
Where we perform our substantive procedures at an interim date – refer to Appendix A of this document for guidance in respect of performing our roll-forward procedures.
29
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
L – Intangibles, including Goodwill
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
Compare intangible asset balances (cost and accumulated amortisation) at the year end to prior year
end and investigate any significant unexpected variations.
X
X
X
X
Select a sample of additions (using Microstart where appropriate) to agree to supporting documentation,
confirming correct treatment in accordance with the client's accounting policy and GAAP requirements.
X
X
X
X
X
X
X
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of intangibles per lead schedule by comparison with prior year, interim and
knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
1
1
1
1
1
1
1
1
2
2
3
3
AAM
X
Obtain a schedule of intangibles, including goodwill, and test the bases on which
additions, amortisation and disposals are recorded. Examine invoices, authorisations,
contracts, agreements, and other data that support ownership of intangibles or
deferred charges capitalised and disposed of during the year.
Select a sample of disposals in the year and ensure profit/loss has been correctly calculated and
that the asset (and any associated amortisations) has been correctly removed from the balance
sheet. Vouch supporting documentation of the disposal.
Review appropriateness of asset lives assigned. Compare to prior year and obtain explanations
for variations.
X
Perform a review of amortisation charged in the year to ensure reasonable in light of asset lives
assigned and cost/NBV.
X
X
Test the need for depreciation according to the client's accounting policies or applicable
financial reporting framework to reflect impairment of the carrying amounts of intangible
assets or goodwill, which are not subject to regular depreciation.
Inquire of management as to whether there have been any indications of impairment in the value
of intangible assets in the period, and if so, how these have been reflected in the asset values.
Consider knowledge gained from our other audit work and assess whether we are aware of any (other)
indicators of possible impairment.
X
Review the client prepared impairment analysis and assess reasonableness of assumptions used,
clerical accuracy, and adequacy of any resulting impairment provision booked.
X
1
3
3
If an impairment review/provision is required perform suitable additional procedures and ensure that
the requirements of the appropriate reporting GAAP(s) have been followed.
X
1
3
3
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. It is unlikely that if an impairment review is required that our CRA will be minimal or low.
3. We need to ensure that the nature and timing of our work is appropriate in respect of the nature of the intangible asset and the driver for the impairment. As this will be very dependent upon client specific circumstances, no 'generic'
test has been included here.
30
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
M – Notes payable (ie, Short-term Payables)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of notes payable per lead schedule by comparison with prior year, interim
and knowledge of changes in the business. For significant changes, document the clients business
rationale for these changes (eg, new loans, repayments etc).
C
E
V
X
X
X
X
X
X
R&O
P&D
Min
Low
Mod
High
1
1
1
1
X
Inspect documentation of loan agreements or other short-term lending arrangements
(eg, factoring) to determine the terms, restrictions, revolving
lines of credit, and other pertinent provisions of notes payable.
Compare the listing of notes payable at the current and prior year end. Obtain supporting evidence
for any new items or significant variations.
X
Obtain information necessary for statutory financial statement disclosure of notes payable (eg.
interest rate, security etc).
X
Confirm notes payable or review supporting documentation as to amounts owed, terms, collateral
and restrictions and the debtor's compliance with the loan provisions and identify liens, security
interests, and assets pledged as loan collateral.
Select a sample (increasing as CRA increases) and obtain confirmation from the lender of the
elements of the loan noted above.
X
X
1
1
X
X
Discuss with management whether the terms of loans have been breached during the period (or
subsequent to year end).
X
X
X
4
4
Review relevant period end accounts (monthly, quarterly or half-yearly) for evidence of noncompliance with terms, covenants etc.
X
X
X
4
4
Obtain details of any covenants or other restrictive provisions of loan agreements, and perform
calculations designed to test whether the client has been in compliance throughout the period
under audit. In cases of non-compliance review evidence of waivers obtained and consider
appropriateness of classification of the debt in the financial statements.
X
X
X
Test calculations and other evidence relating to compliance with the terms,
restrictions, or other provisions of loan agreements.
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. These risks should have been assessed in arriving at the CRA of Min or Low.
31
21
22
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
N – Trade Accounts Payable
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
• Compare year end trade creditor profile with prior year and investigate significant changes.
X
X
• Drill down the above analysis to individual suppliers.
X
• Compare make-up of the ledger (transactions and supplier balances) and understand any
changes/absence of changes in volume, value and mix of credit and debit amounts.
X
R&O
P&D
Min
Low
Mod
High
AAM
X
*
*
1
X
X
*
*
1
X
X
*
*
1
*
*
1,2
Confirm our expectation of the level of trade accounts payable per lead schedule by comparison with
prior year and knowledge of changes in the business. Consider performing all or some of the following:
• Understand the reason for any large (>50-75% TE) debit transactions/balances on the ledger.
X
• Review the list of top 5 suppliers. Gain an explanation from management for any significant changes
from prior year.
X
*
*
1
X
*
*
1
• Review volatility of supplier base (eg. new suppliers as % of existing) and compare with our expectations.
X
X
* Extend Analytical Review as risk increases.
At Moderate and High CRAs, we expect errors to exist. Therefore, the purpose of the analytical review
procedures is to assist in the direction of subsequent work.
Agree the accounts payable subledger to the general ledger control account and investigate large and
unusual reconciling items.
Review the control account for evidence of any unusual non-standard items, and consider the need for
any further investigation and that treated correctly.
X
X
Re-perform the control account reconciliation at year end. Investigate any significant reconciling items
(including review for any non-standard journals) and understand how they occur and that they are
treated correctly. Extrapolate results.
X
X
Where we perform our substantive procedures at an interim date, repeat tests 1 or 2 above, and
compare the amount and types of reconciling items between the interim date and the year end.
X
X
* Extent of testing increases as risk increases. However, roll-forward is not applicable at High CRAs, as
we do not perform our substantive procedures on account assertions with a High CRA prior to the
balance date.
1. The AAM Dashboard allows data to be imported at three points in time (interim, final and prior year end), facilitating roll-forward of our work. Note that this guide does not cover roll-forward at High CRAs.
2. The Trade Payables AAM Dashboard provides a summary of debit and credit transactions and balances which can be used to assist in understanding reconciling items.
3. When using the AAM Dashboard, you should always ensure that the data reconciles to the trade accounts payable listing, and hence the general ledger and ensure differences are understood and tested as appropriate.
32
3
*
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
N – Trade Accounts Payable (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Review list of debit balances for large/unusual items and consider impact on year end accounts
payable/receivable.
X
X
X
X
X
4
Review list of debit balances for large/unusual items and consider impact on year end accounts
payable/receivable. Test completeness of the listing.
X
X
X
X
X
4
Review list of debit balances for large/unusual items. Test completeness of the listing.
Investigate why major debit balances have arisen and consider impact on year end trade accounts
payable/receivable.
X
X
X
X
X
4
Perform a review of the accounts payable subledger for unusual items, e.g., significant debit
balances in the accounts payable subledger or other unexpected amounts to verify proper
classification and valuation.
X
Perform a search for unrecorded liabilities at the year-end date by selecting subsequent
disbursements and unmatched invoices and receiving reports.
*
*
Build an expectation of the level of trade accounts payable on the lead schedule with prior year and
knowledge of changes in the business.
X
X
As above, but drill down to individual suppliers or component liabilities.
X
X
Review significant payments post year end, and for those relating to liabilities in existence at the
balance date, ensure a liability is recorded.
X
X
6
6
6
6
Review purchase invoices received post year end, and for those relating to liabilities in existence at
the balance date, ensure a liability is recorded.
X
X
6
6
6
6
Compare supplier balances post year end to those at year end and investigate unusual or
significant changes.
X
1
5
X
Compare key (>TE) supplier balances pre and post year end and verify completeness at year end
either by agreeing to supplier statement, ensuring that reconciling items have been treated correctly,
or by reviewing post year end invoices and/or payments.
X
X
5
Compare and investigate movement (>20% TE) in supplier balances between year end and post year
end and verify completeness at year end either by agreeing to supplier statement, ensuring that
reconciling items have been treated correctly. Extend sample sizes as risk increases (see page 8 for
guidance on testing thresholds).
X
X
5
4. The Trade Payables AAM Dashboard provides a summary of debit and credit transactions and balances which can be used to assist in reviewing the ledger for unusual items which can then be investigated further.
5. The Trade Payables AAM Dashboard can be used to identify significant accounts payable; new, existing and lapsed accounts payable; and tracking of new, cleared and old amounts per supplier.
6. Extent of testing increase as CRA increases.
33
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
N – Trade Accounts Payable (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High AAM
Review the summaries of activity for the month pre and post the cutoff date. Compare the activity to
that expected (particular attention to peaks in purchases volumes) and with the same period in
prior year and budget. Where actual activity significantly differs from our expectation ascertain the
reason for this change.
X
X
X
7
Inspect a sample of transactions (for example >10-50% of TE) from the activity listing before and
after cutoff date. Inspect supporting documentation. Ensure that the transactions were recorded in
the proper period; compare the cutoff with cutoffs in related areas.
X
X
X
7
Perform cutoff tests for goods and services received as well as for supplier credit
memos to ensure that transactions are completely recorded in the correct period.
Where our substantive procedures are performed at an interim date, in addition to the cutoff tests
described above, our substantive procedures should be rolled-forward to consider movements
between the interim and balance sheet dates. The extent of work performed on the transactions
occurring in the roll-forward period increases in line with our CRA.
*
* Roll-forward is not applicable at High CRAs, as we do not perform our substantive procedures on
account assertions with a High CRA prior to the balance date.
7. The Trade Payables AAM Dashboard cutoff test can assist in this procedure by reviewing activity recorded in the ledger on a daily or weekly basis. It is suggested that a post year-end ledger is obtained to assist in this review.
34
7
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
N – Trade Accounts Payable (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
AAM
Test appropriate valuation of accounts payable in foreign currencies
Review the translation of significant balances denominated in foreign currencies > TE.
X
Reperform the translation of foreign currency balances > 50%-75% TE.
X
Reperform the translation of foreign currency balances > 25% TE. Test the listing for completeness.
X
For a sample of suppliers, obtain reconciliations and investigate any large/unusual reconciling items.
X
X
X
For a sample of suppliers, reperform client reconciliations and investigate any large/unusual
reconciling items.
X
X
X
X
X
Test the casting of the purchase ledger.
Review the bank reconciliation for items which may impact trade accounts payable.
X
X
Review the bank reconciliation in detail (for higher risks consider reperforming) for items which may
impact trade accounts payable.
X
X
Review the listing of GRNI accruals and investigate large/unusual items.
X
Review the listing of GRNI accruals and investigate large/unusual items. Test the completeness of the
GRNI listing. Extend sample sizes as risk increases (see page [x] for guidance on testing thresholds).
X
8
10
10
9
10
10
10
8. If the ledger shows sterling and currency amounts, consider using the Trade Payable AAM Dashboard to assist in identifying the population. If foreign currency balances are significant, and the underlying risks differ, consider using
multiple AAM Dashboards, one for each foreign currency ledger. Alternatively, analyse/reperform the calculation using Excel, Access or ACL.
9. The Trade Payable AAM Dashboard, supplier summaries and drill down extracts, can be used to facilitate our work in this area.
10.. These risks will have been assessed in arriving at the CRA of Min or Low.
11. The Trade Payable AAM Dashboard, summary of imported files can be used to identify anomalies in the purchase ledger data.
12. The Trade Payable AAMDashboard, Transaction AAM Dashboard, or Excel/Access may assist in the identification of large items, debits or other unusual transactions.
35
10
11
12
12
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
O – Income Taxes, Deferred Taxes and Related Income Statement Accounts
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
Review adjustments to accounting profit made in the tax calculation and investigate (in conjunction
with the client and EY tax specialists) any significant unexpected adjustments.
X
X
X
Agree significant adjustments to accounting profit in the tax calculation to our audit working papers
(eg, depreciation/amortisation charge) or other supporting documentation (eg tax depreciation
schedule). Test mathematical accuracy of the reconciliation between accounting and taxable profit.
Agree balances and nature of reconciling items to prior year tax computations.
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of tax balances per lead schedule by comparison with prior year, interim and
knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
1
1
1
1
Test the reconciliation of the current year book/local GAAP/statutory and taxable income, validate
the split between permanent and timing differences, and compare reconciling items with those in
prior years and examine support.
Investigate potential impairments of deferred tax assets.
Review tax profit forecasts to support the utilisation of the deferred tax assets (both recognised and
unrecognised). Consider reasonableness of forecasts in line with our understanding of budgets and
accuracy of prior year forecasts.
X
X
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
36
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
O – Income Taxes, Deferred Taxes and Related Income Statement Accounts (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
1
1
1
1
Review the movement of income tax account balances from prior year
(including those currently payable or deferred) and valuation allowances for deferred
tax assets.
Obtain a rollforward of the current and deferred tax accounts and agree movements from the start
to the end of the year to supporting documentation (such as vouching cash payments to the cash
book). Review and discuss with management any amounts outstanding from prior years.
X
X
Obtain details of all open tax computations from prior years and discuss with management.
X
X
X
X
Test computations of provisions for current and deferred income taxes for the current
year and agree to appropriate income statement accounts.
Obtain an Analysis of:
• Current income tax
• Adjustments in respect of prior years
• Deferred tax
Examine significant items, investigate the amounts of and the reasons for adjustments, determine
the composition and computation of the accounts at the balance sheet date.
X
X
1
1
1
1
Obtain computations and analysis of any foreign tax provisions. Review for reasonableness and
determine that tax law changes have been accounted for where applicable. Consider verifying foreign
tax rates, withholding taxes and the effect on foreign tax rates.
X
X
1
1
1
1
Where applicable, ensure that the tax working papers and balances are reviewed by an EY tax
specialist, and sign-off obtained and retained on the audit working paper file.
X
X
2
2
2
2
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. Ensure that the level of tax involvement is determined using the Audit and Tax Service Level Agreement.
37
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
O – Income Taxes, Deferred Taxes and Related Income Statement Accounts (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
X
X
X
Min
Low
1
1
Determine whether provision should be made for any tax positions taken by the client
or other tax contingencies, e.g., as a result of related party transactions, that may be
challenged by tax authorities.
Discuss with management (and EY tax specialist as appropriate), the tax affect of any contingencies,
related party transactions, or other unusual transactions and/or tax positions. Consider the
adequacy of the provision for tax payable in light of this.
Obtain details of all open tax computations from prior years and discuss with management.
X
X
X
X
Review any correspondence with tax authorities during the year and consider the effect on the
tax provision.
X
X
X
X
X
X
X
Test that intercompany and other related party transactions have a valid business
reason and are recorded on an arm's length basis. If in doubt, consider the
involvement of appropriate specialists.
Document understanding of transfer pricing issues and consider appropriateness of provision, or
need for a provision. Extent of work performed will increase as risk assessment increases.
1. These risks will have already been considered in arriving at our CRA of Min or Low.
38
Mod
High
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
O – Income Taxes, Deferred Taxes and Related Income Statement Accounts (continued)
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
C
E
V
P&D
Min
Low
Mod
High
Compare significant other taxes at current period end with prior period end, and investigate any
significant unexpected variations.
X
X
X
X
For significant other tax balances, perform reasonability calculations based on the tax rate, and the
base balance/amount on which tax is due (for example, average NI% per employee).
X
X
X
X
Document our understanding of the types of transactions undertaken by the client and their impact
on VAT. Enquire of management of any non standard-rated VAT transactions. Consider involving an EY
VAT specialist where complex/unusual transactions are involved.
X
X
X
X
Obtain a reconciliation of the last VAT return to the General Ledger. Obtain an explanation for all
reconciling items and vouch to supporting documentation where appropriate. Consider the omission
of reconciling items in light of our understanding gained above.
X
X
X
X
1
1
1
1
Where the VAT return does not coincide with the period end under audit, obtain a roll forward
summary from the VAT return to the period end General Ledger and review for reasonableness in
terms of the volume of VAT as compared with net sales/purchases in the period. Obtain explanations
for significant variances from expectations.
X
X
X
X
2
2
Agree the period end VAT to subsequent payment. Investigate all differences.
X
X
X
X
2
2
Enquire as to the last VAT inspection and review reports issued by Customs.
X
X
X
X
1
1
1
1
Obtain a summary of input and output VAT over a month/quarter/year and compare to a summary of
sales and purchases over the same period. Investigate any unusual variations.
X
X
X
X
If you have determined the CRA is at this level, you will need to enlist the help of the relevant EY
specialist in designing appropriate audit work programs.
X
X
X
X
Review significant other taxes, e.g., property taxes, for correctness and
proper cutoff.
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. These risks will have already been considered in arriving at our CRA of Min or Low.
39
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
P – Provisions, Accrued and Other Liabilities, Deferred Income
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
X
X
For significant provisions/accruals, review supporting documentation to ensure that the liability
existed at the period end, and has been calculated correctly.
X
X
Confirm amounts have been posted in the correct period, paying particular attention to the timing of
when the event giving rise to the accrual/provision occurred.
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of provisions, accrued and other liabilities, and deferred income balances
per lead schedule by comparison with prior year, interim and knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
1
1
X
Review the schedule of provisions, accrued liabilities and deferred income for
accuracy and completeness, agree amounts to the general ledger accounts and
ensure proper Cut-off.
Obtain a detailed breakdown of any significant general ledger provision/accrual balances and
understand make-up of account. Investigate any significant unexpected provisions/accruals.
Agree to the general ledger.
Review other liabilities, including short term employee (tax) liabilities, to determine they are
appropriate. Determine that the amounts appear to be reasonable over time and under
consideration of your understanding of the clients business and changes to it
Review other liabilities, including short term employee (tax) liabilities at period end compared to the
prior period end and obtain explanations for any significant unexpected variations.
X
For significant provisions, obtain the client calculation; test for clerical accuracy and consider the
validity of the assumptions used in determining the provision. Agree to subsequent payment.
X
Consider the user of experts for specific and/or complex provisions (eg, environmental
rehabilitation)
X
40
1
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
P – Provisions, Accrued and Other Liabilities, Deferred Income (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
Ascertain the client's process for managing the pension scheme(s) and liaising with Actuaries.
X
X
Read the pension plan document and amendments. Inquire about:
• any significant changes in the plan, the accounting, the actuarial assumptions, the work force (eg,
redundancies) etc
• prohibited transactions or breaches of responsibilities under the applicable pensions regulations.
X
X
Determine that the pension accounting and disclosures are in accordance with the client's
applicable financial reporting framework.
X
X
In respect of defined benefit pension schemes:
• Request actuarial information from the actuary. Obtain an understanding of the significant data,
assumptions and valuation process. Determine that the information is complete and consistent
with the pension plan document.
• Evaluate the reasonableness of the actuarial assumptions and methods used and determine
that they reflect management's instructions. Identify and understand significant changes and
unusual items.
• Evaluate the actuary's professional qualifications, reputation and relationship to the client,
sufficient to enable us to conclude as to whether we are able to rely on their work.
• Test employee data supplied to the actuary, such as:
– reconcile active headcount provided to the actuary to the payroll records;
– reconcile retired headcount receiving benefits provided to the actuary to the pension
payment register;
– reconcile terminated vested headcount provided to the actuary with the employer's pension
benefit records.
X
X
R&O
P&D
Min
Low
1
1
Examine the composition and computation of pension and other employee related
long-term reserves for reasonableness and consider the use of specialists.
X
1. These risks will have already been considered in arriving at our CRA of Min or Low.
Remember – PGAP requires us to:
“document our considerations in respect of using the work of an expert”.
41
Mod
High
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
P – Provisions, Accrued and Other Liabilities, Deferred Income (continued)
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
R&O
P&D
Min
Low
Mod
High
Review lawyer confirmations, minutes and other documents to ensure that appropriate
reserves/accruals have been recorded by the client.
X
X
X
X
X
1
1
1
1
Reperform the calculation of significant accruals/provisions and ensure that the computation is in line
with the underlying contract/agreement giving rise to the obligation.
X
X
X
2
2
Review lawyer confirmations as requested in the PGAP, minutes and other documents
to ensure that appropriate reserves/accruals have been recorded by the client.
Search for unrecorded reserves/accruals, e.g., related to employees, contracts (rent, lease),
finance (interest), sales (product and service warranties, commissions, returns), purchases (goods
and services, licenses, royalties), services received (audit, tax, legal, consulting).
Obtain a listing of purchases post year end. For significant purchases, revert to source documentation
to ensure that the liability has been recorded in the correct period.
X
X
X
Review the bank statement for payments made subsequent to year end. For significant payments, trace
to supporting documentation to ensure that the liability has been recorded in the correct period.
X
X
X
Review meeting minutes, contracts and other documents for evidence of possible unrecorded
liabilities at the period end.
X
X
X
2
2
With reference to our understanding of the client's business consider the need for provision accounts
for warranties, rebates, customer returns, price protection reserves etc.
X
X
X
2
2
Test appropriateness of utilisation of the provisions throughout the period.
X
X
X
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. These risks will have already been considered in arriving at our CRA of Min or Low.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
42
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
Q – Long Term Debt, Leases and Related Income Statement Accounts
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
X
X
X
Compare interest expense and principal outstanding balance per debt facility to the prior period end
and investigate any significant unexpected variations.
X
X
Perform a reasonableness check on the interest expense for the year based on average outstanding
balance and average interest rate applied.
X
X
X
X
X
X
X
X
1
1
Obtain support for principal payments made against debts by reference to the bank statement or
other supporting documentation.
X
X
X
X
1
1
Consider the use of T-Value to calculate the outstanding liability at the period end, and the expense in
the period.
X
X
X
X
1
1
For significant long term debts, recalculate year end debt position based on brought forward loan
balance, payments made, and interest charged.
X
X
X
X
1
1
X
X
X
X
X
X
2
2
1
1
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of long term debt per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
R&O
P&D
Min
Low
Mod
High
1
1
2
2
X
Review summary of Long-term debt & Interest prepared by the client for correctness of
calculations of interest expense and accrued interest including foreign currency
translations and agree schedules to general ledger. Test compliance with the terms,
maturities, restrictive covenants, or other provisions of debt agreements.
Obtain details of any covenants or other restrictive provisions of loan agreements, and perform
calculations designed to test whether the client has been in compliance throughout the period under
audit. In cases of non-compliance review evidence of waivers obtained and consider appropriateness
of classification of the debt in the financial statements.
X
For new agreements in the year under audit, inspect original or authenticated copies
of debt agreements, or other related documents to test the terms, restrictive
covenants and other pertinent provisions of long-term debt.
Identify liens, security interests, and assets pledged as collateral for debt, crossreference to the corresponding general ledger accounts and ensure proper disclosures.
X
Confirm long-term debt or review supporting documentation as to amounts owed,
terms, collateral, restrictions and the client's compliance with the provisions of
the agreements.
Obtain and review bank (or other such third party) confirmation for evidence of amounts owed, due
date, and compliance with provisions of the loan agreement.
X
X
X
Review summary of lease and rent contracts and test correct presentation (e.g., operating or
finance lease) in the financial statements.
Compare active lease and rental contracts at the period end with those at the prior period end and
investigate any significant unexpected variations in value or treatment.
X
X
For any new significant contracts, review the contract and ensure appropriate accounting treatment
has been applied.
X
X
Consider the use of T-Value to calculate the lease liability in the case of a finance lease.
X
X
1. These risks will have already been considered in arriving at our CRA of Min or Low.
2. Extent of testing will increase with our risk assessment.
43
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
S – Derivatives/Hedging/Commitments/Contingencies
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
C
E
V
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of derivative/hedging/commitments/contingency balances per lead
schedule by comparison with prior year, interim and knowledge of changes in the business.
X
X
X
Verify the existence and ownership of recorded derivatives through confirmation with
the broker/dealer or counterparty or examination of evidence of ownership. Confirm
both settled and unsettled transactions with the broker/dealer or counterparty.
Request the inclusion of other information about the derivative, such as whether
there are any side agreements.
X
X
X
Review minutes, contract agreements, and confirmation replies for evidence and
completeness of the existence of derivatives, of liens, pledges, or other security
interests in derivatives; and of commitments to acquire or dispose of derivatives.
X
Inquire about aspects of operating activities that might present risks hedged
by derivatives.
X
Identify any embedded or surprise derivatives not otherwise identified in the 3 PSPs
above, e.g., use the derivatives identifier tool (e.g., U-261 or IFRS).
X
R&O
P&D
Min
Low
Mod
High
1
1
1
1
1
1
1
1
X
X
X
X
Test the fair value of derivatives and the appropriate recording in the
financial statements.
Compare fair value of derivatives at current and prior period end and investigate any significant
unexpected variation.
X
Obtain client’s calculation of fair value of significant derivatives and where applicable agree to
supporting documentation, or assess reasonableness of assumptions and clerical accuracy.
X
Inquire of management for complete listing of significant commitments, e.g.,
purchase or sale contracts, fixed-priced or long-term agreements, service
guarantees, insurance policies and determine whether or not disclosures need
to be made.
Review the client prepared list of commitments for completeness based on knowledge from our
other audit procedures (such as minute review, legal confirmations etc). Obtain explanations for any
significant variations from our expectations, eg. missing commitments, or significant commitments
which we were not previously aware of.
X
X
X
Review adequacy of disclosure/recognition in the financial statements in respect of
these commitments.
X
X
X
Review lawyers confirmations and other appropriate documents for significant
contingencies and determine whether or not accruals need to be recorded and/or
disclosures need to be made.
X
X
X
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
44
X
X
1
1
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
T – Equity
Assertions
Balance Sheet
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of equity balances per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
C
E
V
X
X
X
R&O
P&D
X
Obtain an equity reconciliation schedule, including retained earnings, agree to
general ledger accounts and test movements from prior year end to current year end
to ensure proper accounting for changes in equity, (e.g., profit distributions, other
equity reductions or increases) and determine completeness and compliance with
laws and regulations including taxation issues.
Review the equity roll-forward schedule and obtain explanations for any significant unexpected
movements between prior and current period end and ensure treated appropriately.
X
X
X
Review the equity roll-forward schedule and agree all significant movements to supporting
documentation and ensure treated appropriately.
X
X
X
Where the client has a revaluation reserve, review entries made to the reserve during the period to
ensure that these are appropriate.
X
X
X
X
X
If more than one opinion is being given (e.g., group reporting and statutory opinion) ensure that the
reconciliation between opening net assets, profit for the period and closing net assets has been
prepared and any ‘late’ adjustments reflected in the second opinion last year have been reflected in
the results of the other opinion this year.
X
X
X
X
X
For accounts denominated in other currencies and for consolidation of foreign entities, ensure any
retranslations of foreign currency are appropriately reflected in reserves.
X
X
X
X
X
Inquire of management for any stock option agreements and determine appropriate
further audit procedures.
X
X
X
Ensure that all dividend payments are appropriately approved, declared and
disclosed and that tax regulations have been followed.
X
X
Review board of director, shareholder and committee meeting minutes as well as
changes to the articles of incorporation for issues affecting the financial statements
including the notes. If applicable, confirm all transactions with a transfer agent or
share registrar. Agree any changes in stock to the general ledger
Ensure relevant items are reflected within the financial statements and the reason for changes is
understood – refer to the Review of Minutes and Contracts section of the Programme for General
Audit Procedures.
45
X
Min
Low
Mod
High
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
UA – Revenue/Sales
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of revenue/sales per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
O
M
C
P&D
X
X
X
X
Min
Low
Mod
High
AAM
Perform an overall analytical review for all significant income statement accounts and
investigate in any significant changes or lack of expected changes, e.g. by means of
computer-assisted audit techniques (CAAT). Ensure to include those accounts not
already covered through balance sheet account testing.
Perform a high-level year on year comparison of income statement revenue accounts (at the GL code
or similar level) and obtain explanations for significant unexpected fluctuations.
X
X
XX
2
Perform analytical review of all significant revenue streams comparing the current period to prior
period and budgeted figures. Verify explanations obtained from management for significant fluctuations
with corroborating evidence. Vouch large transactions to supporting documentation as appropriate.
X
X
X
2
Perform revenue recognition procedures (if not already covered by tests of accounts
receivables, trade and intercompany), for example, analytical procedures using
disaggregated data (e.g., by month, by product line, by geographical area, by segment),
inquiry of sales and marketing personnel for any unusual transactions, or similar
items, review of the terms of sales agreements – including sales incentives – and
client’s policies for handling returns, to identify potential unusual transactions
or events.
X
X
X
1
1
1
1
2
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. The Transaction AAM Dashboard can assist this review by enabling you to view activity by month for the company as a whole or for specific customers. In addition it can be used to identify significant transactions including
reversals (ie, debits).
If Trade Receivables is not a significant account, the cutoff PSPs outlined on page 16 should form part of the Revenue/Sales substantive procedures.
46
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
UB – Other Income
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
O
M
C
P&D
X
X
X
X
Identify all significant miscellaneous income accounts and via discussion with management,
document our understanding of the use and contents of these accounts.
X
X
X
X
Obtain transaction listings for each significant miscellaneous income account and review for
unusual transactions. Where these are noted, obtain explanations from management and agree to
source documentation.
X
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of other income per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
Understand contents of miscellaneous income accounts. Investigate significant
unusual transactions, if not already covered by balance sheet account testings.
47
Min
Low
Mod
High
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
UC – Finance Income
Assertions
Profit & Loss A/C
Nature of Substantive Procedure
O
M
C
P&D
X
X
X
X
Compare interest and dividend income with the prior period and obtain explanations for any
significant unexpected variations.
X
X
X
X
Perform a reasonableness check on interest income by taking the average deposit balance in the
period and multiplying by the average interest rate received.
X
X
X
X
Agree dividend income to dividend statement, and/or bank statement.
X
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of finance income per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
Min
Low
Mod
High
Test interest and dividend income for significant investments and check
reasonableness by comparing with deposit balances.
Determine that changes in the value of investments is properly recorded in the
income statement.
Perform in conjunction with work on investments and ensure treatment adopted is consistent with
the reporting GAAP.
X
X
1
1
1
1
Confirm appropriate recognition in the correct period through testing cutoff.
X
X
1
1
1
1
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
48
AAM
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
VA – Cost of Sales
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
O
M
C
X
X
X
Perform a high-level year on year comparison of cost of sales accounts (at the GL code or similar
level) and obtain explanations for significant unexpected fluctuations.
X
X
X
X
Perform analytical review of all significant cost streams comparing the current period to prior period
and budgeted figures. Verify explanations obtained from management for significant fluctuations
with corroborating evidence. Vouch significant transactions as appropriate.
X
X
X
X
Review the appropriateness of large and unusual expenses.
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of cost of sales per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
P&D
Min
Low
Mod
High
AAM
1
1
1
1
2
Obtain detail of Cost of Sales accounts in comparison with the prior period.
Investigate and explain major changes, large or unusual transactions, or the lack of
expected changes, if not already covered through analytical review of sales accounts
including gross-margin analysis.
1. Perform the procedure in conjunction with the equivalent PGAAP entry within the Mandatory Procedures to Address Risk and Management Override section.
2. The Transaction AAM Dashboard can assist this review by enabling you to view activity by month for the company as a whole or for specific customers. In addition it can be used to identify significant transactions including
reversals (ie, debits).
If Trade Payables is not a significant account, the cutoff PSPs outlined on page 34 should form part of the Cost of Sales substantive procedures.
49
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
VB – Payroll
Assertions
Profit & Loss
CRA
Nature of Substantive Procedure
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes.
Build an expectation of the level of payroll balances per lead schedule by comparison with prior
year, interim and knowledge of changes in the business.
O
M
C
P&D
Min
Low
Mod
High
X
X
X
X
X
X
X
1
1
1
1
X
X
X
X
AAM
Compare the average pay per employee or hour to prior year including social security
contributions. Consider dis-aggregating to types of employees or by location.
Calculate average pay per employee based on staff numbers and payroll costs per the draft
statutory accounts (ensuring that these figures have been agreed to source documentation) and
compare to prior year. Investigate significant unexpected variations.
Perform detailed testing of individuals' payroll including starters and leavers.
2
Test correctness of journal entries in connection with pensions and post-retirement
expenses, current payments and for changes in pension reserves.
Review movements in the pension accounts throughout the period, and agree any significant
movements to supporting documentation. Perform in conjunction with the Pension Provision PSP
on page 41.
X
X
Where applicable, agree pension fund surplus/deficit to actuarial valuation.
X
X
1
1
1
1
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
2. The Payroll AAM Dashboard includes a number of tests which will assist in the review of payroll costs and changes in employees.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
50
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
VC – Selling and Distribution
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
O
M
C
X
X
X
Compare S&D expenses at the statutory account level with the prior year and obtain explanations
for any significant unexpected variation.
X
X
X
X
Perform analytical review of all significant S&D Expense streams comparing the current period to
prior period and budgeted figures. Verify explanations obtained from management for significant
fluctuations with corroborating evidence. Vouch significant transactions as appropriate.
X
X
X
X
Review the appropriateness of large and unusual expenses.
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of Selling and Distribution expense balances per lead schedule by
comparison with prior year, interim and knowledge of changes in the business.
P&D
Min
Low
Mod
High
AAM
1
1
1
1
2
Obtain detail of Selling and Distribution Expense accounts in comparison with the
prior period. Investigate and explain major changes, large or unusual transactions, or
the lack of expected changes.
1. Perform this procedure in conjunction with the equivalent PGAP entry within the Mandatory Procedures to Address Risk of Management Override Section.
2. The Transaction AAM Dashboard can assist this review by enabling you to view activity by month for the company as a whole or for specific customers. In addition it can be used to identify significant transactions including
reversals (ie, debits).
51
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
VD – Administrative and Other Expenses
Assertions
Profit & Loss A/C
CRA
Nature of Substantive Procedure
O
M
C
X
X
X
Compare Admin & Other expenses at the sub-classification/grouping level with the prior year and
obtain explanations for any significant unexpected variation.
X
X
X
X
Perform analytical review of all significant Admin & Other Expense streams comparing the current
period to prior period and budgeted figures. Verify explanations obtained from management for
significant fluctuations with corroborating evidence.
X
X
X
X
For significant transactions identified in the previous step, review underlying
documentation for reasonableness and business purpose.
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of Admin and Other expense balances per lead schedule by comparison
with prior year, interim and knowledge of changes in the business.
P&D
Min
Low
Mod
High
AAM
1
1
1
1
2
Understand contents of Administrative and Other expense accounts in the areas of
professional services fees, repairs and maintenance, leases and rents, management
compensation, political contributions and donations, and miscellaneous. Compare
with previous period and investigate in any unusual transactions.
Verify that all lawyers and in-house legal counsels, who handle significant litigation
or other claims, have been covered in the lawyers’ confirmation work.
Obtain an analysis of amounts charged to legal and professional and confirm that all lawyers paid
during the year have been considered for legal confirmations.
X
X
1. Perform this procedure in conjunction with the equivalent PGAP entry within the Mandatory Procedures to Address Risk of Management Override Section.
2. The Transaction AAM Dashboard can assist this review by enabling you to view activity by month for the company as a whole or for specific customers. In addition it can be used to identify significant transactions including
reversals (ie, debits).
52
S U B S TA N T I V E P RO C E D U R E S G U I D E
Primary Substantive
Procedures
AAM Dashboard
Contributions
CRA
Min
Low
Mod
High
Extensive
Partial
Not Applicable
Suggestive Substantive
Procedures
Nature
Nature & Extent
Extent
VE – Finance Expense
Assertions
Profit & Loss
CRA
Nature of Substantive Procedure
O
M
C
X
X
X
Compare loan balances and interest expense with prior period and investigate any significant
unexpected variations.
X
X
X
X
Perform a reasonableness check on all significant loan/interest balances by multiplying average
outstanding loan amount for the period with average interest rate charged.
X
X
X
X
Obtain or prepare a lead schedule of sufficient detail to enable us to ensure correct classification,
presentation and disclosure of items in the financial statements and corresponding notes. Build an
expectation of the level of finance expense per lead schedule by comparison with prior year, interim
and knowledge of changes in the business.
P&D
Min
Low
Mod
High
1
1
1
1
AAM
Review the reasonableness of interest expense for significant loans by comparing
with the related loan balances.
Determine that changes in the value of investments is properly recorded in the
income statement.
X
X
1
1
1. Extent of testing will depend upon the Combined Risk Assessment – refer to page 8 for guidance on testing thresholds.
Remember – ISA (UK & Ireland) 240, requires us to:
“incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures”.
53
S U B S TA N T I V E P RO C E D U R E S G U I D E
Appendix A – Roll-forward Procedures
At Planning
Make a Decision to Perform a Roll-forward EARLY
– based on our existing knowledge of the client and the risk environment. This should form part of the agenda at the Team
Planning Event.
Gain Client Buy-in
– the client needs to be prepared and open to a change in the timing and focus of our audit visits.
Determine the Audit Team
– bringing work forward impacts our staff bookings but may also enable us to consider different staff mixes. Also understand the
impact on input required from specialists eg, (TSRS), ISAAS.
Consider the Impact on Engagement Economics
– consider the impact on our WIP and the timing of our planned billing.
At Interim
Perform Interim Substantive Procedures
– nature, timing & extent based on our CRA (which leverages the work we have performed on control & inherent risk at interim)
– review balances at a date prior to year end – normally similar procedures to those preformed under a year end focused approach
– combination of Analytics & Substantive Procedures
– leverage existing guidance
Client Preparation
The client does not necessarily need to perform a hard close. Provided that their normal month end close procedures are suitably
robust, this will enable us to use their financial information as a basis for our work.
At Year End
Perform the THREE Key Components of Our Roll-forward Procedures
1. Update Our Understanding of the Control Environment
– to ensure that there have been no significant changes since our original review.
2. Perform Test of Cut-off
– in addition to having performed cut-off testing as part of our interim substantive procedures, we perform cut-off testing at year
end to ensure that the client is applying an appropriate and consistent approach to the timely recording of transactions.
3. Perform Analytical Review Procedures (ARP’s)
– that view and understand the activity between interim and year end to satisfy ourselves that there have been no significant
changes in the business or any transactions that would cause us to alter the opinion gained at the interim stage.
54
S U B S TA N T I V E P RO C E D U R E S G U I D E
Key Components of our Roll-Forward Testing
Introduction
Having performed our substantive audit procedures at an interim
date (ie prior to the year end), GAM Activity 10.2 outlines the
three procedures required at the year end to adequately cover
off the remaining audit risk for a particular significant
account assertion.
1. Update our Understanding of the Control Environment
Why do we need to update our Understanding of the Control
Environment?
Having arrived at our control risk assessment earlier in the audit,
we need to confirm that there have been no significant changes
during the roll-forward period in the internal controls at the entity
level or in the controls at the application/process level that are
relevant to the significant account(s) being audited. Any changes
provide greater audit risk as new procedures may not have been
adequately designed or properly implemented.
What does the update involve?
We can update our understanding of the control environment in
a number of ways. The range of approaches shown below mirrors
those available to us in making the initial assessment:
• Inquiry – discuss with management and/or relevant process owners
whether there have been any changes or breakdowns in the control
environment during the roll-forward period;
• Observation – observe the operation of key controls eg, preparation
of key reconciliations;
• Inspection – examine KPIs, other process indicators or outputs
(eg, reconciliations) to ensure that controls have prevented or
detected errors and understand whether those errors were
appropriately dealt with; and
• Re-performance – independently repeat the operation of the control.
The extent of our update procedures is a matter of judgement by
the engagement team executives. It should draw on, among other
things, our understanding of the inherent risks, our experience in
prior years and the change or volatility in the business and its
environment.
55
Typically for a minimum control risk assessment, observation
and inquiry would be sufficient. We should keep in mind that
the higher the degree of intended reliance on the controls
(to minimise our substantive procedures), the greater our need
to be satisfied that the controls operated as intended throughout
the period; and hence we may determine that walkthrough,
inspections or, in exceptional circumstances, re-performance
is required. Activity 7.3 of GAM provides a useful schedule of
procedures to perform when rolling forward our tests of controls.
What should we do if we find something that has changed?
If we discover that there have been changes in the design or
operation of a control, we need to form an opinion as to whether
these changes have an impact on our assessment of the control
risk for a particular significant account assertion. Where this is
the case, we need to:
• Test and evaluate the control;
• Re-evaluate the impact that the change has on our control risk
and hence overall CRA; and
• Ensure that we have planned sufficiently extensive substantive
audit procedures to address any additional risk encountered.
2. Perform Test of Cut-Off
Why do we perform cut-off testing?
The purpose of performing cut-off testing is to ensure that
the transactions and events have been recorded in the correct
accounting period and that any revenues have been matched to
their associated costs.
When do we perform cut-off testing?
We perform cut-off procedures at the date of both the interim
and the year end testing to ensure that the client is applying an
appropriate and consistent approach to the timely recording of
transactions. Where the client’s inventory count or timing of our
accounts receivable circularisation is different to the date of the
interim substantive audit procedures, we must also perform
cut-off testing at those dates.
Procedures to test cut-off may include analytics, tests of
underlying transactions (including key items before and after
each cut-off date) or a combination of these techniques.
S U B S TA N T I V E P RO C E D U R E S G U I D E
What risks are we covering off by performing cut-off testing?
Why must we review cut-off in ‘related areas’?
Cut-off errors arise either as a result of ‘accidental’ errors or
management intent. Separate consideration should be given to
both sources of error. Some of the potential risks include:
One of our objectives of performing cut-off testing is to ensure
activity is ‘matched’ ie revenues are booked in the same period as
associated costs. Simply looking at cut-off in one area, say
accounts receivable/sales, will not give us a full picture of
whether such activity has been matched with inventory/cost of
sales. We therefore need to make links between the various views
of cut-off we establish (through our significant account level
testing) to fully understand the period end position.
Manipulation of Operating Results – which could take one of
two forms:
• Manipulating the timing of activity – this could involve the
client recognising income and the related margin earlier either
by ‘pushing’ sales (dispatching and invoicing products early
with or without the customer’s agreement) or by processing the
sale prior to the physical transfer of the goods or services. This
may lead to sales being reversed in future periods if customers
reject or dispute deliveries. Alternatively, the client may wish to
hold back activity to improve future results.
• Mismatching costs and revenues – this could involve
recognising the revenue of a sale in one period but the related
costs in a subsequent period, or vice-versa.
Distortion of Key Ratios – Management may be under pressure to
deliver certain ratios to meet market expectations, satisfy loan
covenants or improve balance sheet presentation.
How do we perform cut-off testing?
Traditional methods of performing cut-off testing have often
focused on reviewing transactions immediately pre and post year
end. Although this may provide adequate evidence, it may be
limited, as transactions may have gone on outside of this short
period that may distort or misrepresent true client activity.
A more effective method may be to take a “top-down” analytical
review based approach to understand whether there are any
material cut-off issues and extending our procedures to more
detailed testing, eg, key item review, only where there are
indicators of a problem.
An illustration of a possible approach to reviewing cut-off is given
in Appendix C. It relies on reviewing activity pre and post year
end at a macro level and drilling down into further detail where
there are indicators of a potential issue.
56
3. Perform Analytical Review Procedures
Why do we need to perform roll-forward analytical review
procedures?
Whenever we perform substantive procedures prior to the year
end, we perform roll-forward analytical review procedures as part
of the update of our audit findings from the time of our interim
procedures to year end.
These allow us to view and understand the activity and changes
in the business between these two points and assess the impact
that this has on the year end balances and our opinion gained at
interim.
What alternative approaches are there to performing roll-forward
analytical procedures?
This guide describes two alternative approaches to performing
roll-forward analytical review procedures:
1. AAM Dashboard Roll-Forward
The AAM Dashboard is designed to allow us to roll-forward our
analytical review procedures from an interim date to the year end.
This provides us with an efficient means of updating our
understanding of changes in the business during the roll-forward
period.
The AAM Dashboards contain a mixture of analytical review
content together with relevant support for test of details.
S U B S TA N T I V E P RO C E D U R E S G U I D E
2. Manual Roll-Forward
Year End Roll-Forward Procedures
These procedures are based around the creation of a manual
roll-forward schedule, similar to the one shown below:
The following table summarises the work required when we
perform our substantive procedures prior to the year end and so
are therefore required by GAM to update our understanding of
the control environment, and our cut-off testing.
PY
Prior Year
Δ
£
£ or %
Current Year
£
Opening balance at XX of XXX (Interim)
X
S, W
X
X
Additions to balance
X
S
X
X
Deductions from balance
(X)
S
(X)
X
Other/Non-routine activity adjustments
(X)
S
(X)
X
Closing balance YY of YYY (Year End)
X
S
X
X
Activity in period:
Key: S – Agreed to subledger/schedule; W – Agreed to Interim Working Papers;
PY – Agreed to prior year audit file
Note: The roll-forward schedule does not replace our lead schedule. It represents
the gross movements within each given significant account. Additional analysis
and procedures need to be planned and performed to deal with other adjustments
between the detailed subledger, control account and the reporting pack eg,
provisions, reallocations and valuation adjustments.
Activity 10.2 of the GAM suggests the procedures that we would
normally perform on the activity overview. Their nature and
extent will vary as our CRA increases.
An example of the extent of our Analytical Review Procedures
when performing a roll-forward under different Combined Risk
Assessments is provided in the following section.
However, the guidance does not cover a high CRA.
The required nature and extent of work in such a situation is a
matter of judgement and will depend heavily on the nature of the
risks leading us to this risk assessment. Any approach should be
developed with the full and active participation of senior
members of the audit team.
57
S U B S TA N T I V E P RO C E D U R E S G U I D E
Appendix B – Extent of Analytical Review
Procedures – An example
This example, looking at a roll-forward of Trade Accounts Receivable, is based on a
fictitious company called ABC Ltd that operates in the widget-manufacturing sector.
The company manufactures widgets for the car industry. It faces increasing local
competition from XYZ plc, who have recently invested heavily in new products.
It has a turnover of £15.5 million and tolerable error (TE) has been set at £100k.
The approach to analytical review procedures over the roll-forward period is described
for each CRA in turn:
Minimal CRA
Schedule covers the three-month period between September interim and December year
end and looks at activity from a transactional viewpoint.
Trade debtors ROLL-FORWARD schedule
PY
20X5
20X4
Δ
Opening balance at 30 Sept
2,841
s,w
3,135
(294)
Add: Invoiced Sales
4,641
S
4,788
(147)
Less: Cash Receipts
(5,684)
S
(4,509)
(1,175)
Less: Credit notes issued
(140)
S
(198)
58
Less: Debtors written-off
(20)
S
(34)
14
Less: Other adjustments
240
S
–
240
1,878
S
3,182
(1,304)
Year End Closing balance 31 Dec
Key: S – Agreed to subledger/schedule; W – Agreed to Interim Working Papers; PY – Agreed to prior year audit file
All values in £’000’s
TE = £100k
58
S U B S TA N T I V E P RO C E D U R E S G U I D E
Key Characteristics:
“We have considerable evidence that errors of audit importance
are unlikely to occur.”
Hence our procedures are aimed at confirming that activity is
within our expectations.
• GAM allows roll-forward of up to six months, but we can
choose any period within this range – in this case, three months.
• Schedule should display a GROSS picture of the activity in the
period, ie, no netting-off of transactions, to fully represent the
level of activity within the significant account and allow it to be
assessed in terms of the tolerable error we have set.
• Schedule covers an entire three-month period in one go – it
may, however, be more practical to create the schedule on a
monthly basis, for vouching purposes or because the
information is provided by the system in that format.
• Where possible, leverage key performance ratios to gain an
overall understanding and corroborate observations.
• Consider adding a column comparing to the budgeted
movements (if available) to aid the review.
Typical Analytical Review Procedures (as suggested by the
GAM Activity 10.2)
Review non-standard entries eg, journals, to ensure
reasonableness
“The ‘other adjustment’ of £240k in the current year relates to a
journal transferring into the company’s books the outstanding
debts from Bob’s Hardware, a local partnership bought by ABC
Limited during the last three months of the year. A review of these
debts at year end showed that £190k had been settled and the
remaining £50k were within 90 days and hence no further work
has been performed on these amounts.
A review of the year end control account reconciliation showed
no large or unusual reconciling items.”
Compare account balances at the interim date to the balances at
year end and the prior year end
“There is a year on year reduction in debtors of 41% at year end.
The key factor impacting year end debt has been the improved
credit control and reduced payment terms (as already mentioned)
introduced by the business. In addition, there is also a marginal
reduction in overall sales volumes, reflecting the hardening
economy and increasingly competitive environment. Although not
as pronounced, a similar reason underlies the 9% fall in total
debtors at September (new credit controller was engaged in
late July).”
Update and review key ratios eg, debtor’s days, debtors ageing
Review the activity in the account from the interim date to the
balance sheet date.
“Invoiced sales in the roll-forward period have fallen year on
year by £147k. This is in line with expectations, developed
through discussions with the Sales Director and supported by
recognition of the hardening economy and increased local
competitive marketplace.
Cash receipts have improved by £1,175k year on year. This
reflects management’s concentration on cash collection and
reduction in credit terms given to three major customers (per
discussion with Credit Controller).
Credit notes issued have fallen by £58k – the prior year balance
was impacted by warranty issues surrounding the TwistyTM
widget brand which have since been resolved. This is as supported
by discussions with the manufacturing foreman and the reduction
in warranty activity per activity report.”
“The debtor day position has improved markedly from ye 20X4
(73 days), through interim (68) to the current year end position of
45 days. This reflects the stronger emphasis of management on
cash collection and reformation of credit terms on some
previously late payers in the customer base.”
An alternative approach, at a Minimal CRA, is to review the
month end closing positions during the roll-forward period. The
procedures necessary would include:
• Compare account balances at interim, intervening month ends
and year end with prior periods and our expectations in order to
obtain a view on the level of activity in the account during the
roll-forward period and gain a view on changes in the overall
balance between the interim and the prior year.
• Update and review key ratios at each month end eg, debtor
days, debtor ageing profiles.
• Review non-standard entries on the ledger eg, journals and
other adjustments between the control account and the
reporting package.
59
S U B S TA N T I V E P RO C E D U R E S G U I D E
Low CRA
As we move to a Low CRA, the extent of testing performed
increases. A Low CRA can result from two different assessments:
• Higher inherent risk coupled with an assessment that controls
are effective based on a test of those controls; or
• Lower inherent risk coupled with an assessment that controls
are effective although we have not tested them beyond a
walkthrough.
Whilst the CRA is the same in both cases the focus of the audit
testing will vary slightly in order to address the differences in the
specific risks and levels of comfort already gained in arriving at
the underlying CRA assessment.
Trade debtors ROLL-FORWARD schedule
Opening balance at 30 Sept
Add: Oct Invoiced Sales
Less: Oct Cash Receipts
Less: Oct Credit notes issued
Less: Oct Debtors written-off
Less: Oct Other adjustments
Balance at 31 Oct
Add: Nov Invoiced Sales
Less: Nov Cash Receipts
Less: Nov Credit notes issued
Less: Nov Debtors written-off
Less: Nov Other adjustments
Balance at 30 Nov
Add: Dec Invoiced Sales
Less: Dec Cash Receipts
Less: Dec Credit notes issued
Less: Dec Debtors written-off
Less: Dec Other adjustments
Year End Balance at 31 Dec
20X5
2,841
1,547
(1,421)
(140)
–
240
3,067
1,547
(1,421)
–
(220)
–
2,973
1,547
(2,842)
–
200
–
1,878
S,W
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
PY
20X4
3,135
1,596
(1,503)
(100)
–
–
3,128
1,596
(1,503)
(98)
–
–
3,123
1,596
(1,503)
–
(34)
–
3,182
Δ
(294)
(49)
82
(40)
–
240
(61)
(49)
82
98
(220)
–
(150)
(49)
(1,339)
–
234
–
(1,304)
Key: S – Agreed to subledger/schedule; W – Agreed to Interim Working Papers; PY – Agreed to prior year audit file
All values in £’000’s
TE = £100k
60
S U B S TA N T I V E P RO C E D U R E S G U I D E
Key Characteristics
“We have evidence that leads us to expect no errors of audit
importance will occur; however, our evidence is not sufficient to
conclude that it is unlikely they will occur.”
Hence our procedures are more extensive than Minimal and are
aimed at satisfying ourselves that no errors of audit importance
have occurred.
• Maximum roll-forward period at a Low CRA is three months –
again, this can be reduced if desired
• Schedule shows breakdown of activity by month in the rollforward period – this enables the more detailed analytical
review to be performed.
Typical Analytical Review Procedures
In addition to the procedures performed for a Minimal CRA, the
GAM Activity 10.2 suggests that we should increase the extent of
testing to include the following tests:
Compare the account balances or ratios during the roll-forward
period (at month ends) with those of the prior periods
“A keying-in error (£220k rather than £20k) writing off a debt in
November was reversed in December. Taking this distortion into
account, the month end debt in December showed a significant
fall in comparison with the same period last year. This reflects
management’s increased focus on credit control.
The main variation in the other transaction flows in the period is
the high level of cash receipts in December. As referred to
previously there was a new credit controller appointed and it
took until the push towards the year end for him to make a real
change in the cash collection. We looked at the cash cutoff at the
year end and are satisfied that this was correctly applied.”
Perform tests of the intervening activity – examine original
documents (sales invoices) for key items (invoices >50-75% TE)
to ensure transactions are complete and exist.
Whilst the GAM suggests that the final test above is
appropriate to address the risks at a Low CRA, in the case of
Minimum CR and Higher IR, if the specific inherent risks
that have driven the Low CRA are not addressed by this
customised solution, consideration should be given to
performing alternative procedures.
61
For example, consider the Inherent Risk factor “The economic
environment impacting the client’s customer base increases the
risk of customers delaying or defaulting on their debts”. Based
upon the extent of testing already performed at the interim to
address those risks, a suitable test may be:
“Compare the receivables ageing at the year end to that at the
interim and consider the impact upon the year end bad debt
provision. Specifically determine the appropriateness of the
treatment adopted for individual debtors >75% TE”.
Where we have arrived at a CRA based on Lower IR and
Moderate CR, it may be more appropriate to do the following
vouching (in recognition of the lower level of controls work we
have performed):
“7 invoices, 12 cash receipts and one credit note in the period
exceeded 75% TE. Each was agreed to sales invoice/credit note,
despatch/receipt note and cash remittance. No debts written-off in
the period were above 75% TE.”
It should be noted that the above approach reviews both the
transactions and balances during the roll-forward period. This is
essentially a combination of the two alternative approaches
suggested for a Minimal CRA.
S U B S TA N T I V E P RO C E D U R E S G U I D E
Moderate CRA
You should begin by considering whether it is appropriate to
perform your customised solutions at an interim date. The extent
of work (more extensive follow-up) required at both interim and
final, and the close timing of interim and final, might make the
approach inefficient. However, if there is a tight reporting
deadline after the year end with a minimal hindsight period it may
be appropriate to perform roll-forward procedures to reduce the
overall audit risk.
Trade debtors ROLL-FORWARD schedule
PY
20X5
20X4
Δ
Opening balance at 30 Nov
2,973
S,W
3,123
(150)
Add: Invoiced Sales
1,547
S
1,596
(49)
Less: Cash Receipts
(2,842)
S
(1,503)
(1,339)
Less: Credit notes issued
–
S
–
–
Less: Debtors written-off
200
S
(34)
234
Less: Other adjustments
–
S
–
–
1,878
S
3,182
(1,304)
Year End Closing balance 31 Dec
Key: S – Agreed to subledger/schedule; W – Agreed to Interim Working Papers; PY – Agreed to prior year audit file
All values in £’000’s
TE = £100k
Key Characteristics:
“We have evidence that leads us to expect few errors of
audit importance.”
Although we expect few errors, our substantive tests are
sufficiently extensive to determine if errors of audit importance
have occurred, and if errors are detected, to estimate their
potential monetary effects.
• The suggested maximum roll-forward period is up to one
month
• Whilst the numbers used in the above example are the same as
for the others in this section, for this illustration we are
assuming that there is a less rigorous control and/or inherent
risk environment. As a result, we approach the schedule with a
higher level of scepticism surrounding the likelihood of errors.
62
S U B S TA N T I V E P RO C E D U R E S G U I D E
Typical Analytical Review Procedures
In addition to the procedures performed for a Minimal CRA,
if we decided that a roll-forward was appropriate, we would
increase the extent of testing to include the following tests
suggested by GAM Activity 10.2:
Compare the account balances or ratios during the roll-forward
period (at month ends) with those at the prior period
“There has been a significant increase in cash receipts during
the month, up £1.3m on the same period last year. Part of this
increase relates to seven significant invoices (totalling £1,080k)
being settled in the period. These related to a bulk shipment made
to Woggle Toggle Trucks Ltd in October. The remainder of the
increase is attributable to a more robust approach being taken
by ABC Ltd on cash collection and reduced credit terms.
Some £200k of debtors have been written-back in the month.
A keying-in error (£220k rather than £20k) writing off a debt
in November was reversed in December. Internal correspondence
detailing this issue and resolution has been reviewed and the
specific debt to which the original write-off was applied (£20k
against Plumb Bob’s Retail Ltd) supports this write-back.”
Perform tests of the intervening activity – examine original
documents (sales invoices and shipping documentation) for key
items (transactions >25-50% TE) to ensure transactions were
complete and existed.
“24 invoices, 23 cash receipts and no credit notes in the period
exceeded 50% of TE. Each was agreed to sales invoice/cash
book/credit note. £200k of debts were written back during the
period. This is an adjustment for a keying-in error in November
(see interim audit working papers). No errors were noted as a
result of this testing.”
In place of the above test, as described for the Low CRA,
alternative substantive procedures may be required to address and
update our assessment on the specific inherent risks impacting
the significant account (eg, increased bad debt risk).
63
S U B S TA N T I V E P RO C E D U R E S G U I D E
Appendix C – Example of year end cut-off procedures
The following example demonstrates how to perform the trade
receivables cut-off PSP for a wholesaler:
Perform analytical procedures to identify peaks in sales volume in
the last few days or weeks of the year. Test cut-off by inspecting
sales register, billings, shipping documents and other supporting
documents before and after the year-end date.
A possible extent of the substantive procedure is “Compare actual
sales pre and post cutoff date with expected, prior year and
budgeted sales. Also consider the level of sales returns in the
period paying particular attention to changes in the level of
returns pre and post the cut-off date.”
An example analysis table for a wholesale client is shown below.
We are interested in any unusual fluctuations or absence of
expected changes.
Actual
Sales
20X5
October
Actual
Sales
20X4
%
v’s
PY
Budgeted
%
Sales
Sales
v’s Returns
20X5 Budget 20X4
35,093 32,868
6.8%
35,000
0.3%
352
November 39,228 35,782
9.6%
35,000
12.1%
526
December 26,032 30,254 -14.0% 32,000
-18.7%
1177
January
31,342 27,989 12.0% 29,000
8.1%
1041
February
29,983 28,342
-0.1%
600
5.8%
30,000
7,000
6,000
Total Amount
When we have established that there are indicators of cutoff
issues, we should begin to look at activity in greater detail.
We can add a further level of focus to our testing by
disaggregating information by division, customer or week. An
example of a weekly, comparative analysis is shown in the graph.
With this more detailed analysis, we can focus our discussions on
specific areas to understand the fluctuations, enabling us to
challenge management explanations with more detailed evidence.
In this example there are no obvious indicators of cutoff errors,
although we should try to understand why the activity in
December 20X5 is lower than in September and the previous
December.
This could include reviewing key (ie >TE or unusual) transactions
form the sales listing (pre and post cutoff date) to establish
whether they have been recorded in the correct period. Our
overall analytical review should be used to help focus our sample
selection.
8,000
5,000
4,000
In the case of trade accounts receivable, this would involve
obtaining invoices for this sample and tracing them to despatch
documentation, sales order (or some other form of customer
acceptance) and other supporting documentation.
3,000
2,000
1,000
Final Week
FW-1
31/12/20X5
64
We would investigate the reason for the significant increase in
sales (vs PY and budget) in January and what looks to be a
compensating fall in sales in December. There also appears to be
an increase in sales returns after the November peak, which
appears to persist into the New Year. This may indicate that a
portion of November sales have been credited back post-period
end.
Perform detailed testing: Review Key Transactions (or a sample
of transactions) Pre and Post Cut-off Date
All values in £’000’s
0
In this example, the cutoff date is 31 December. Being a
wholesaler, the client normally experiences higher demand in the
months prior to December when it supplies its various distributors
in the run-up to Christmas.
FW-2
30/09/20X5
FW-3
FW-4
31/12/20X4
Where levels of sales returns post period end exceed expectations,
we would consider investigating key items in this population to
consider the impact on any year end sales provision.
S U B S TA N T I V E P RO C E D U R E S G U I D E
Appendix D – Documenting our use of the AAM Dashboard
The following example demonstrates a ‘best-practice’ approach to
documenting our audit evidence when utilising the Trade
Accounts Receivable AAM Dashboard. The example aims to
provide guidance over the nature and extent of our documentation,
such that this approach can be adapted for whichever of the AAM
Dashboards is being used.
In this example, the client is XYZ Limited and the year end date
is 31 December 2005, which for the purposes of this example has
planning materiality of £160,000 and tolerable error of £120,000.
The example shows the work that we would perform for the
roll-forward analytical review PSP, and how this would be
documented, given a CRA of Low over the Trade Accounts
Receivable Completeness, Existence and Valuation assertions
where we have performed some interim substantive procedures on
trade accounts receivable.
Planned procedures – Nature and Extent of testing
Review the “roll-forward” of activity from the interim date (November)
to the balance sheet date in a manner responsive to our combined risk
assessment (of Low) and compare level of activity with prior periods.
Investigate unusual items; consider confirming (at the balance sheet date)
significant new accounts and those accounts with significant increases or
decreases between the interim date and the balance
sheet date.
Review movements between the interim and year end dates.
Investigate items over 1/4 TE (£30,000):
•
•
•
•
•
•
significant new customers
lost customers
volume of activity (compared to prior periods)
cash received
credit notes raised
investigate significant items, vouching to source documentation or
reconfirming with the customer if considered necessary.
Agree sales ledger (receivables subledger) to the general ledger control
account and investigate large and unusual reconciling items.
Repeat test performed at the interim at the year end, and compare the
amount and types of reconciling items between the interim date and the
year end.
Where we perform substantive procedures at an interim date, we perform
cutoff testing at that date also.
Review the summaries of activity for the month pre and post the interim
date. Compare the activity to that expected (particular attention to peaks
in sales volumes) and with the same period in prior year and budget.
Where actual activity significantly differs from our expectation ascertain
the reason for this change.
65
S U B S TA N T I V E P RO C E D U R E S G U I D E
Our Audit Working Paper – An Example
XYZ Limited
Results of specific procedures
Customer churn
Year Ended 31 December 2005
Roll-forward of Debtors Dashboard
As anticipated there have been no significant changes in the
customer base since November.
Account Reconciliation
The largest ‘lapsed’ customer is ‘Lost Customer’ who paid the
full amount of this balance (£30,365 on 29/12/05 and £5,426 on
24/12/05). These balances had been outstanding from August
2005/October 2005 and no further trade has taken place since
with this sister company.
The balances at 30 November and 31 December agreed to the trial
balance and the reporting package. The ‘other adjustments’ relate
to the bad debt provision (see E4 for details). Note the mid-month
15 October balance was agreed to the G/L at the time that the data
was down-loaded.
The remainder of the lapsed customers are mainly inter-company
and collectively below the key items threshold therefore no
further work is considered necessary.
Refer to ageing analysis for discussion of anomalies.
The top 5 customers are consistent with those at 30 November
2005, which is considered reasonable, and as per our expectations
these account for around 70% of the year end balance. Due to the
Christmas shut-down the absolute value of these (and the
remaining debtors) is lower than at the end of November, this is
consistent with sales activity (see U2).
As a reminder as this is the first year that we have obtained the
data electronically, this review does not compare to prior year (see
the November Interim file for comparison)
Ledger quality
The ledger quality is consistently to that noted at November 2005.
There are no net credit balances within the debtor’s ledger as at 31
December 2005 requiring reclassification.
As noted at the interim, the majority of the credit balances (£80k)
relate to warranty and pricing credit notes for Big Company
Limited whom have not yet deducted these from their payments.
See P5 for further discussion of the warranty issues.
A review of the underlying transactions listed in the AAM did not
identify any individually significant items. Accordingly no
detailed credit note review is considered necessary
66
Top 5 customers
See also the more detailed comparison performed at the interim
to sales activity and prior year.
Ageing analysis
The ageing shows £710 in future which is unexpected. This
relates to a journal for write offs that totalled £707 mainly against
ABC GmbH (a/c 100) and £109 against DEF Ltd (a/c 056). The
total of £816 is the net of £1,526 (anomalies excluded by the
AAM for further analysis since they have the same reference of
W) less the £710 above. This appears reasonable and as
immaterial has not been investigated further.
S U B S TA N T I V E P RO C E D U R E S G U I D E
The current balances have decreased due to a fall in the overall
debt caused mainly by a fall in sales during December 2005 noted
above. The percentages appear reasonable to prior periods.
Per E4 the unpaid balance as at 31 December 2005, after taking
into account after date receipts, is £99k. This shows that Major
Customer is continuing to pay current balances on a timely basis.
The majority of long outstanding debt relates to Major Customer
Inc (151) and its sister company (123) as below:
Top 5 customers with debts over 90 days
Major Customer Inc (151)
The majority of these have been selected for after date cash
testing – refer to E4. Also refer to receivables roll forward below.
Receivables/Debtor Roll forward
Also refer to after date cash testing on E4.
The detailed drilldown highlights that uncleared items mainly
relate to the following:
Big Company Limited (165)
Major Customer’s account 151 has a credit term of 90 days
therefore, as can be see from the numbers and graphs above, there
is £12,218 considered overdue. Per E10 £8,494 of this amount is
due to be paid and Major Customer’s treasury have been
instructed to pay this amount. This leaves £3,724 that is covered
by the credit note provision. The improvement in the profile from
November and October is due to the efforts of the financial
controller in resolving the credit note issues noted at the interim.
This is a sister company. The uncleared amounts relate to
October and November (see drill down list below – note only
large items visible on screen shot) invoices that are considered
reasonable since the credit term is 90 days from group
companies. £54k has been received during January 2006 as part
of the netting arrangements (agreed this to the inter company
netting statement).
(123)
Major Customer Inc (151) & (123)
Refer to comments above re debtors ageing and also after date
cash testing E4.
Account 123’s 91 – 150 days balances have decreased mainly due
to the balances moving to 151-180 days since they still haven’t
been paid. This was considered recoverable at the hard close and
subsequently Major Customer has sent a summary of receivables
and their status.
Per the summary on E10, Major Customer have confirmed that
payment will be made for £35,649 of the long outstanding debt
although this has not yet been received. The further £9,008 will be
paid net of a credit note of £412.
67
S U B S TA N T I V E P RO C E D U R E S G U I D E
Sampled PLC (112)
Sampled have paid £75,833 post year-end that has been agreed to
the bank statements.
Large Customer PLC (038)
£189,390 has been received on the 7 January 2004 – refer to E4.
Cut off review
The cut off review appears reasonable given that XYZ were
closed during the final week of December (from 19 December
2005). See paper profile E8 for the comparison of cut-off activity
to prior year activity, activity similar to current year and given
level of activity in last 2 weeks relative to TE no further work
performed.
68
S U B S TA N T I V E P RO C E D U R E S G U I D E
Appendix E – example manual
roll-forward schedules
The type of activity within the roll-forward schedule will differ
depending on the significant account being observed. A list of
sample roll-forward schedules for common significant accounts is
given below. These proformas will need to be altered to cater for
differences in client, industry terminology/practices and account
activity.
Stock Raw Materials
20X5
X
Opening balance at x/x
X
X
X
X
X
Add: Purchases
X
X
X
(X)
(X)
(X)
Less: Tsfr to WIP/COGS
(X)
(X)
(X)
Less: Damaged stock
(X)
(X)
(X)
Less: Damaged stock
(X)
(X)
(X)
Stock take gains/(losses)
(X)
(X)
(X)
Stock take gains/(losses)
(X)
(X)
(X)
Adjustments to standard costs/price changes
(X)
(X)
(X)
Other stock adjustments
(X)
(X)
(X)
Adjustments to standard
costs/price changes
(X)
(X)
(X)
Closing balance at y/y
X
X
X
Other stock adjustments
(X)
(X)
(X)
Closing balance at y/y
X
X
X
Stock Finished Goods
20X5
20X4 Change
Opening balance at x/x
X
X
Add: Purchases/Tsfr from WIP
X
Less: Cost of goods sold
Trade Debtors
20X5
20X4 Change Turnover
Stock Work in Progress
20X5
Opening balance at x/x
X
X
X
Opening balance at x/x
X
X
X
–
Add: Tsfr from RM
X
X
X
Add: Invoiced Sales
X
X
X
X
Less: Tsfr to FG
(X)
(X)
(X)
Less: Cash Receipts
(X)
(X)
(X)
–
Less: Absorbed labour & o/heads
(X)
(X)
(X)
Less: Credit notes issued
(X)
(X)
(X)
–
Less: WIP w/off
(X)
(X)
(X)
Less: Debtors written-off
(X)
(X)
(X)
–
Stock take gains/(losses)
(X)
(X)
(X)
Foreign exchange adjustments
(X)
(X)
(X)
–
Other stock adjustments
(X)
(X)
(X)
Other adjustments
(X)
(X)
(X)
–
Closing balance at y/y
X
X
X
Closing balance at y/y
X
X
X
–
69
20X4 Change
20X4 Change
S U B S TA N T I V E P RO C E D U R E S G U I D E
Trade Creditors
20X5
20X4 Change
Fixed Assets (by category)
Opening balance at x/x
X
X
X
Cost
Add: Invoiced Purchases
X
X
X
Opening cost at x/x
X
X
X
Less: Cash Payments
(X)
(X)
(X)
Add: Additions
X
X
X
Less: Debit notes received
(X)
(X)
(X)
Add: Transfers in
X
X
X
Less: Creditors written-back
(X)
(X)
(X)
Less: Transfers out
(X)
(X)
(X)
Foreign exchange adjustments
(X)
(X)
(X)
Less: Disposals
(X)
(X)
(X)
Other adjustments
(X)
(X)
(X)
Other adjustments
(X)
(X)
(X)
Closing balance at y/y
X
X
X
Closing cost at y/y
X
X
X
Depreciation
Goods Received Not Invoiced (GRNI)
20X5 20X4 Change
20X5
20X5
20X4 Change
20X4 Change
Opening depreciation at x/x
X
X
X
Add: Depreciation in period
X
X
X
Opening balance at x/x
X
X
X
Add: Transfers in
X
X
X
Add: Accruals for goods rcvd
X
X
X
Less: Transfers out
(X)
(X)
(X)
Less: Invoices received
(X)
(X)
(X)
Less: Depreciation on disposals
(X)
(X)
(X)
Other adjustments
(X)
(X)
(X)
Closing depreciation at y/y
X
X
X
Material price variance
adjustments/rate changes
(X)
(X)
(X)
Foreign exchange adjustments
(X)
(X)
(X)
Other adjustments
(X)
(X)
(X)
Closing balance at y/y
X
X
X
70
E R N S T & Y O U N G LLP
www.ey.comeg/uk
© Ernst & Young LLP 2006. Published in the UK. All rights reserved.
1 More London Place, London SE1 2AF.
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with
registered number OC300001 and is a member practice of Ernst & Young Global.
50733 2/06 Designed by Williams Lea creative solutions.