1
Use
,
,
and
in every procedure.
Use the correct assertions as check list to formulate substantive procedures
Use accounting activities and documents (by name) in procedures
Say “inspect, enquire, reperform, recalc, confirm ……” and end with “follow up differences with management”
Assertions for Income Statement :
Assertions for Balance Sheet :
 occurrence
 existence
 completeness
 valuation and allocation
 accuracy
 rights and obligations
 cut-off
 completeness
 classification
Assertions for Presentation and Disclosure :
 occurrence
 completeness
 accuracy
 classification
 rights and obligations
 valuation and allocation
Occurrence – took place during period in question and belong to entity (validity)
Completeness
– no unrecorded / undisclosed items
Accuracy – recorded appropriately
Cut-off
– recorded and allocated to correct period
Classification – recorded at correct accounts
Substantive procedures – either :
 tests of detail – enquire
Existence
Valuation
– asset or liability exists at given date
– recorded at correct value
Rights and obligations – belongs to entity at that time
Presentation and disclosure – disclosed, classified as per Framework re-perform re-calc inspect
confirmation
 analytical procedures – ratios & trends (to other periods, info & industry standards)
Which is :
CUS / DOG
C
U
S
/ DOG
So must test credit balances from the source documents to the GL for verification
CUS
/ D
O
G
And must test debit balances (assets) from the GL to source documents for verification

2
 if overstatement then test from subsidiary books and trace to documents
 if understatement then test from docs to subsidiary books
- substantive procedures
Made up of numerous transactions so must start with GL account and :
 agree opening balance of GL with prior yr’s audit working papers
(COMPLETENESS & EXISTENCE)
 re-calc subsidiary lists and control accounts (VALUATION)
 agree closing balance in GL to TB (VALUATION)
 re-perform recons (VALUATION)
 agree balance with external confirmations (VALUATION, RIGHTS, CUT-OFF)
 perform analytical procedures (VALUATION & CUT-OFF)
 inspect financial statements and agree info with GAAP (DISCLOSURE)
– substantive procedures :
 long-term loan :
 send letter to creditor asking him to confirm the opening balance
 if not possible, then determine repayments from the contract and examine transactions during the year i.e. closing balance less transactions in current year will give you opening balance
 fixed assets / PPE :
 all transactions according to the ledger must be vouched by supporting doc to ensure they are valid
 work though minutes, cashbook and other docs to trace any unrecorded asset transactions
 use closing balance less movement for the year to give you the opening balance
 trade receivables / debtor’s :
 verify opening balances by vouching the payments made by debtors against the receipts issued
 letters of confirmation sent to debtors requesting they confirm opening balance (circularised)
 examine source docs that make up the balances
 bank :
 obtain statement, cashbook and bank recon for the opening balance
 send confirmation letter to the bank for opening balance
 compare balances on the recons with the ledger and the bank statement
 vouch every reconciling item and ensure they are valid
 if recon is correct then can accept opening balance is correct
 inventory :
 select docs that represent inflow and outflow of inventory and establish that inventory records have been kept
 select entries from inventory records for inflow and outflow of inventory and follow them through to source docs to ensure all the entries are valid
 analytical procedures like gross profit percentage and inventory revenue rate can verify opening balance
 if satisfied that internal control over inventory works then auditor can rely on the system and quantities of items in the inventory records as being correct
 verify cost price of inventory at year-start by comparing to purchase invoices
 apply cut-off procedures to opening inventory
 reconcile the opening balance of inventory with the closing balance of prior year
– substantive procedures :
 inspect bank and legal confirmations
 inspect minutes of meetings with shareholders and those charged with governance
 inspect other relevant docs (other 3 rd party confirmations, income tax returns, info supplied by entity to regulatory authorities, declarations of conflict of interest from management or directors, shareholder’s register, life insurance policies taken out on key personnel, internal auditor’s reports)
 be alert for significant transactions outside the normal course of business (complex equity transactions like mergers, restructuring, transaction with offshore entity operating in countries with weak corporate laws, leasing of premises, rendering of management services but where no

3 charge is levied, sales make with very generous terms – large discounts, extended payment periods, sales with commitment to repurchase)
 consider the business logic of transaction – arms length, designed to conceal misappropriation
 consider if the terms of the transaction are consistent with the explanation of the transaction
 consider if the transaction has been appropriately accounted for and disclosed.
substantive procedures :
 develop knowledge of essential characteristics of entity’s business operations including understanding potential involvement in litigation and claims e.g. environmental hazards
 review and discuss management’s procedures for identifying and recording litigation and claims
 review and discuss management’s procedures for identifying, controlling and recording legal expenses and associated revenues and expenses in the appropriate accounts
 obtain and discuss with management :
 list of litigation & claims (and description of matters / estimate of financial consequences)
 analysis of legal expenses
 review relevant documents e.g. correspondent with attorneys
 obtain written representation about the completeness of material outstanding litigation and claims from management
 examine contracts, loan agreements, leases, insurance policies and claims and other correspondence
 inspect minutes of meetings of the governing body, directors, audit committee, shareholders and appropriate committees
 obtain info from bank confirmations concerning guarantees
– substantive procedures
:
 rights – company holds rights to debtors & auditor must determine if they are factored, ceded or encumbered in any way by :
 inspecting prior year workpapers, minutes of directors meetings, loan agreements, bank
 confirmations
 enquires of management
 existence – debtors included in the balance actually exist and aren’t fictitious : debtor’s circularisation – with management’s consent
 see e.g. pg 10/32 of text book subsequent receipt testing – matching amounts owed at yr-end to payments received after yrend see e.g. pg 10/32 of text book
 cut-off test – inspect number of last invoices in sales journal for the year and confirm that delivery was actually made prior to yr-end
 valuation and allocation – debtors are shown in financials at appropriate amounts :
 gross amount :
 review debtors control account for unusual entries
 match total list of individual debtors to debtor’s control in the GL & TB, and trace amounts on dr’s balance list to individual accounts in the dr’s ledger
 review dr’s list for cr balances and follow up on what they are
 follow up on any dr’s circularisation queries for valuations problems
 cast dr’s list and control account
 if invoices in foreign currency : obtain sales amount in foreign currency from invoice and get the exchange rates from a bank at transaction date and at yr-end date and calc the R value with both these rates. If there is a difference then confirm that the dr’s account balance has been adjusted to the yr-end rate
substantive procedures :
 enquiry about managem ent’s method and procedures in estimating bad debt allowance
 establish and valuate authorisation procedure (e.g. should be independent of cr ’s control)
 assess if the basis of calc’ing the allowance is reasonable and consistent with prior yr-end
 reperform all calcs
 reperform small sample of dr’s aging and trace amounts owed back to the source docs to see if they are allocated to the correct month

4
 identify and discuss with management all long outstanding dr’s outside their credit terms
 inspect dr’s correspondence / legal files to identify disputed and handed over dr’s
 perform analytical reviews :
 comparison of % allowance to prior year
 comparison of bad debts written off during the year to prior year
 comparison of age analysis to prior yr (so is debt getting older?)
 calc of ratios and investigate changes year to year
 enquiry from management if there are any matters that might effect the allowance
 compare actual bad debt writeoff during current year to prior year’s allowance
 review all reports given to manag ement about debtors specifically those that suggest the debtor’s
 may have liquidity problems completeness – all dr’s that should have been recorded are recorded.
Not normally a concern but must do cut-off testing and analytical review of dr’s & related accounts to show that dr’s are complete
 cut-off testing :
 select first 20 invoices after yr-end (especially high amounts) and trace to supporting delivery notes to ensure goods sold after yr-end
 select last 10 delivery notes prior to yr-end and ensure that they were all for sales that were raised prior to yr-end
 use analytical procedures
 completeness of cr sales – if cr sales not recorded then dr’s balance isn’t complete :
 sequence test dispatch notes for missing notes (could be goods that were despatched but there wasn’t an invoice)
 investigate dispatch notes not matched to an invoice
 conduct analytical review :
 analysis of gross profit % fluctuations
 comparison of sales, dr’s to prior year
 analysis of recorded sales by characteristic for comparison to prior periods
 comparison of sales ratio to prior yr e.g. sales commission to sales revenue
 matching purchases with sales if possible (so amount purchased less amount sold should = stock on hand)
 obtained representation from management about completeness of sales
 presentation and disclosure – auditor must inspect financials and consider if :
 they are complete as per GAAP i.e. dr’s shown in current assets and any encumbrances have been disclosed
 are consistent with evidence gathered during audit
 amounts, facts, details etc are accurate and agree with evidence gathered
 classification of the info is appropriate
 working of disclosures is clear and understandable
 general – overall analytical review of dr’s must be performed e.g. :
 comparison to dr’s in prior year
 dr’s in relation to credit sales in prior year
 number and amount of dr’s by division, branch and product
substantive procedures :
 rights and existence – entity hold or controls right to bank balance and bank account actually exists (would use bank confirmation letter) see exactly how is done on pg 10/39 of text book
 completeness – all bank balances have been recorded :
 compare number and type of bank account from previous yr to current yr and follow up on closed accounts
 request bank to comment specifically if all accounts are included in the bank confirmation
 be alert to possibility of other bank accounts when doing routine audit procedures
 enquire from management about foreign bank accounts with entity imports and exports
 valuation – bank balances are included in financials at appropriate amounts :
 bank confirmations
 bank reconciliation – balance on confirmation letter won’t agree with cash book fig cos of outstanding items at year end so auditor must re-perform / test the bank recon (which will also provide evidence that cash and bank have been accurately processed) by :
 agreeing balance on recon to cashbook, bank statement and bank confirmation

5
 reperforming all casts on the recon and testing the logic of recon (i.e. o/s chqs added to c/b balance)
 select samples of receipts and payments from cash book and inspect that they are entered
 confirm by tracing o/s chqs and deposits on recon that they are in cash book before recon date or bank statement after recon date
 obtain cut-off number of last chq prior to yr-end and inspect yr-end bank statement to confirm that chqs lower then cut-off number also appears on the recon
 enquire about any long outstanding deposits and long outstanding chqs that should be written back
 obtain explanation and follow up on any unusual recon items by referencing supporting docs
 window dressing – when chq is written out to creditors before yr-end, but not posted until long after yr-end and so bank balance and cr’s in BS are both reduced. To test auditor must inspect bank statement and determine how long has passed after yr-end before chqs are banked and if necessary, insist that reversing entry be passed see example on pg 10/40 of text book
 transfers – electronic payments between entity’s different banks and related party accounts must be confirmed as being valid and must all be accounted for in the same period or must be included as o/s on bank recon. Will prevent “kiting”
 see example on pg 10/41 of text book presentation and disclosure – must inspect financials to ensure that bank balances are correctly presented according to GAAP and agree with other evidence collected on the audit
substantive procedures :
Valuations and existence of cash balances verified by conducting cash count, but must ensure :
 all cas h on hand must be counted simultaneously (so can’t move shortfalls from one float to another)
 cash must be counted in the presence of person responsible for the float
 auditor must never be alone with the cash
 results of the cash should be recorded on workpaper and cashier and auditor must acknowledge acceptance of count by signing
 all receipts and payments of cash must be supported by docs
 all docs must be scrutinised for validity and authority
 postings of cash transactions to ledger accounts must be tested and cash on hand must agree to
GL
- picture how the transaction flows e.g. must be authorised, accounting done properly, and then posted from subsidiary ledger to GL. For transaction can use :
 authorisation :
 inspect Memorandum of Incorporation)
 inspect minutes of director’s meeting (OCCURRENCE
 discuss policies with management
 accounting treatment :
 select specific docs (name docs and match them to other docs e.g. delivery note with invoice
(OCCURRENCE)
 re-calculate items on docs (ACCURACY)
 inspect doc dates to see they are in correct period (CUT-OFF)
 inspect numerical sequence of docs in subsidiary books (COMPLETENESS)
 posted :
 trace doc details to subsidiary books / journal (ACCURACY & CLASSIFICATION)
 re-perform calcs in subsidiary books / journals (ACCURACY)
 agree balance in GL to TB (ACCURACY)
 perform analytical procedures (COMPLETENESS)
 compare to budgets (COMPLETENESS)

6
– substantive procedures
( reasonableness at yr-end)
:
 obtain list of individual bad debts identified by client and cast list valuation & disclosure
 agree individual balances on list of bad debts to balances on age analysis. Query bad debts that are shown as current or less then 30 days
 discuss recoverability of bad debts with credit controller
 select sample of trade receivables and test correctness of ageing balances by vouching to sales invoices and receipts to ensure in correct period
 inspect receipts from trade receivables after yrend. Check these amounts aren’t included in bad debts list
 identify additional bad debts from age analysis and do procedures :
 review correspondence with debtor to identify valid disputes
 review attorney’s files for evidence of amounts to be recovered if handed over
 review debtor confirmations received back for indications of disputes
 add additional bad debts identified to list
 agree final provision to journal and GL balance
:
 discuss with management the policy they use to group debtors and how credit risk profile is monitored
 enquire from cr risk manager methods used by entity to measure and allocate dr’s to credit risk groups
 test controls behind client’s credit risk model classification system to evaluate how reliable it is
 perform trend analysis of bad debts as % of debtor’s group over period of yrs (analytical procedures)
 re-perform calcs
 agree final provisions to journal entry and GL balance
 if there is material different consider effect of the difference on audit report
 agree accounting policy with that of previous yr for consistency
 obtain management representation letter regarding value of provision for & write off of bad debts
 inspect annual financials to determine if the provision has been disclosed in terms of GAAP.
– substantive procedures
 occurrence (valid transaction that pertains to entity)
 inspect supporting docs to confirm :
 external docs (order, supplier delivery note, invoice) are made out to entity
 all docs are signed by designated authority (chief buyer, receiving clerk)
 all goods purchased are used by the company
 inspect cash payments records / pd chqs / bank statements to confirm that goods were paid for, payment was authorised and has correct payee and correct amount
 accuracy (amount of transaction has been recorded appropriately)
 re-calc all quantity x price items casts and discounts
 confirm prices and trade discounts used on invoice by inspecting order / purchase contract
 re-calc vat and inspect invoice to ensure discounts are taken off prior to calc of vat
 cut-off (purchase is recorded in correct accounting period)
 inspect date on supplier deliver note, GRN and invoice to confirm when they were delivered
(date on docs must coincide with month where purchase is recoded in the purchase journal)
 classification (purchase is recorded in proper accounts)
 inspect purchase order to determine where expense / asset should be allocated and posted
(buyer should put it on the order) and trace the posting from purchase journal to account in
GL
 establish description of the goods purchased from purchase docs and confirm that classification of the purchase is appropriate (so asset has been capex’d and not posted to expense account in GL)
 inspect purchase journal and invoice to confirm vat is correctly allocated and posted
 inspect supplier ’s account in cr’s ledger to confirm purchase was correctly posted from purchases journal

7
 completeness (all purchases that should have been recorded, have been recorded). Not for audit of individual purchases
 inspect supporting docs to confirm presences of :
 requisition from stores :
 signed by authorised official
 for type of goods used by the company
 official company order form:
 signed by authorised buyer
 cross referenced to requisition form
 agreeing to description of goods requisitioned
 made out to supplier on list of authorised suppliers
 copy of suppliers delivery note :
 signed by authorised official in receiving department
 agrees to description of goods ordered
 cross-referenced to official order number
 official Goods Received Note :
 cross-referenced dot order and supplier’s delivery note
 signed by person who checked quantity and quality of goods delivered
 agrees to suppliers name and description of goods ordered
 supplier invoice that has evidence (signature of clerk) that :
 arithmetically checked invoice
 checked pricing against the order or suppler price list
 checked invoice has been reconciled against supporting docs
 suppliers statement and recon :
 signed by clerk who performed the recon
 cross-referenced and same amount as chq requisition
 chq requisition that :
 is cross referenced to cr’s supporting doc (right name, date, amount)
 bears the number of the chq used for payment
 signed by senior cr’s clerk and financial accountant authorising payment
 re-perform to determine if :
 casts & extensions (arithmetic accuracy) have been checked where appropriate
 prices are correct (to price lists or to orders)
 recons have been correctly done
 obtain returned paid chq and inspect :
 if made out to correct creditor
 for correct amount (as per the requisition)
 appropriate crossing and dating
 signed by authorised signatures
 stamped by bank
 inspect to confirm that
 all external docs are addressed to company being audited
 supporting docs have been cancelled – stamped “paid” or “cancelled”
 all doc dates fall in the financial year under audit and dates on docs are reasonable in relation to each other
Trade Creditors – substantive procedures :
 obligation – creditors represent obligations to the entity.
Must inspect supporting docs to ensure they are made out to the company and are in respect of goods / services used by the company
 existence – creditors in the balance actually exist and aren’t fictitious.
Normally low risk assertion so, unless there is evidence to the contrary, auditor can assume that creditors do actually exist, but must still perform cut-off tests to confirm not overstated or prematurely raised (normally for material amounts)
Cut-off testing – auditor must :
 record number of the last GRN for the year
 select material purchases from the purchase journal entered in the last 2 weeks of the year and trace to the relevant invoice, GRN and supplier delivery note
 inspect docs to confirm GRN is lower then cut-off number & all docs are dated prior to yr-end.

8
 valuation – cr’s are included in financials at appropriate amounts.
Carrying value of cr’s is the full amount of cr’s and accruals cos there isn’t any adjustments for bad debts etc. Auditor must :
 agree list of individual cr’s balances to balance on cr’s control account
 agree sample of individual cr’s to list of cr’s in cr’s ledger
 agree total of accrual and cr’s control accounts in GL to TB
 reperform cast of cr’s control account and cr’s list
 identify dr balances on cr’s list and establish the reason why, and determine if should be trsf’d to dr’s
 select sample of c r’s and obtain yr-end recons performed by cr’s clerk and :
 re-perform casts of recon
 agree balances on recon to cr’s stmt and cr’s listing
 test logic of recon
 inspect supporting docs and enquire and confirm validity of recon’ing items
 obtain list of accruals from client and :
 cast the list
 agree total on list to account in GL, TB and BS
 agree amounts recorded on accrued list to invoices, statements etc & re-perform any calcs
 completeness – all cr’s and accruals which should have been recorded have been recorded.
Assertion that is most at risk – auditor concerned about what is NOT in the account that should be there and so most completeness tests focused on identifying unrecorded liabilities.
 compare list of cr’s for current yr-end to prior yr-end and identify :
 cr’s on prior yr list not on current list by enquiry & inspection determine
 cr’s balances that are much smaller at current yr-end reason for changes during year
 inspect cr’s correspondence file for unsettled disputes with suppliers and discuss with management if any adjustments should be made
 inspect list of GRN’s that were unmatched to invoices at yr-end. Confirm by inspection that journal done to raise corresponding cr’s at yr-end and that the amount is correct by obtaining price of goods received and re-computing the amount owed
 inspect file of unmatched GRN’s and see if any of them have a number lower then the cut-off number at year end and ensure that a corresponding cr accrual was raised.
 select sample of material purchases from purchase journal for the month following yr-end and trace to GRN to confirm is greater then cut-off number and dates on GRN and supplier delivery made after yr-end
 inspect bank statements after yr-end to determine if chq payments made before yr-end are cashed within reasonable time (if not then could be window dressing)
 inspect GL account to ensure that periodic expenses paid or accrued correctly i.e. 12 monthly transactions
 perform analytical procedures and follow up any material fluctuations :
 curren t yrs purchases, cr’s and accruals at yr-end to prior years
 trace cr’s as % of current liabilities
 cr’s days outstanding compared to prev yrs
 inspect cr’s control account for unusual dr entries
 if necessary obtain confirmation of balances direct from sample of cr’s (positive cr’s confirmation) for :
 nil balances
 major cr’s (to confirm balance isn’t being understated)
 balances that have significantly reduced since prior yr
 cr’s for which there aren’t any statements
 management’s representative letter must include reference to completeness assertion for trade cr’s and accruals
 presentation and disclosure – auditor must inspect disclosures and consider if :
 they are complete as per GAAP (e.g. bal is included in current liabilities)
 are consistent with evidence gathered on the audit
 amounts, facts and details are accurate and agree with evidence gathered
 any classification of the info is appropriate
 wording of the disclosures is clear and understandable.

9
substantive procedures :
 occurrence – auditor must obtain evidence that salaries are paid to genuine employees. Take sample of employees from salaries register and check validity of the employees by :
 inspecting docs in employee’s personnel file, contract, ID & tax forms etc
 compare employee’s signature in salaries register with that in file
 enquire of senior personnel to vouch for any staff that auditor doesn’t know
 perform positive identity of salary earners on surprise basis
 discuss with staff in personnel and examine employment and dismissal docs to confirm that staff re entered into and removed from salary register on correct date and docs are properly authorised by designated staff
 inspect copies of SARS returns for inclusion of the staff selected e.g. PAYE & UIF payments should match personnel records
 accuracy / cut-off / classification :
 inspect authorised list of employees to confirm employee’s gross salary from salary registered
 if salary changes, inspect latest increase authorisation list to confirm new salary is used
 compare all deductions to appropriate tables and enquire of any differences with personnel
 recompute deduction calcs and test arithmetical accuracy of salaries register (casts / crosscasts)
 inspect returned paid salary chqs for proper crossings and any endorsements and confirm correct amounts were paid (or confirm amount on EFT payment)
 re-perform and verify postings from salaries register to relevant accounts in GL are correct
 inspect dates and details on all entity returns and paid chqs to verify that payments to SARS etc done on time and that all salaries and deductions paid pertain to the period under audit
 general / analytical procedures :
 compare salaries on month-to-month basis in total and by cost centre / department and investigate any large fluctuations
 use month-to-month recon to verify movements in payroll e.g. increase in totals salaries could be new appointment or increases in salaries. Must be verified against employee docs
 carry out ratio and trend analysis like commission as % of sales and salary expense as % of total exps
 review payout ledger accounts for any unusual payment or entries e.g. lump sum payments
 presentation and disclosure
– salaries not disclosable item but auditor must consider if :
 are complete in terms of GAAP e.g. directors emoluments and post employment benefits are disclosed
 are consistent with evidence gathered on the audit
 amount, facts and details are accurate and agree with evidence gathered
 any classification of info disclosed is accurate
 wording of the disclosures is clear and understandable
– substantive procedures
 ascertain management policy regarding payments in advance and how money is collected for advance deposits
 agree final deposit entity in booking register
 retrace entry in visitor’s ledger
 retrace posting to payments in advance control account in detail
 extract a list of payments in advance on the last day of the financial year and confirm they all relate to future bookings
 agree totals of above list to relevant control account
 inspect past records for forfeited deposits and possible repayment liabilities. If liability is material then insist on provision
 inspect that only revenue for bookings that have actually occurred is shown in IS for the period under review
 obtain management representation letter regarding prepaid deposits
– substantive procedures
 confirm basis of calc for accruals by referring to prior year working papers (OCCURRENCE)
 discuss basis used with management to establish current year is consistent with prior year

10
 obtain management representation letter confirming that basis of calcs of accruals is consistent to prior year
 cast printout of short-term employee benefits and reperform the calcs
 agree total on printout of short-term employee benefits with TB and GL
 inspect payroll to confirm total employees tally to number of staff
 select sample of employees & inspect employment contracts to verify : (ACCURACY,
 days leave and sick leave as per company policy
 employees details as per printout of employee records
 gross rate of pay on the printout
 leave accrued has been carried forward from previous year correctly
CLASSIFICATION
& COMPLETENESS)
 employees exist by physically inspecting them
 select sample of new appointments / resignations and recalc the pro-rata benefits
 inspect employees leave records printout and agree number of days leave accrued
 perform analytical procedures to establish reasonableness of short-term employee benefits expensed for the year i.e. A
 sick leave = number of employees x average sick days taken x rate of pay per day
C
 leave pay = number of employees x average leave days taken x rate of pay per day
C
 provision for untaken leave = number of employees x number of untaken days
U
R
 x rate of pay per day provision for untaken sick leave = number of employees x number of untaken days
A
C x rate of pay per day
Y
 inspect annual financials and confirm that short-term employee benefits are disclosed correctly
– substantive procedures :
 rights (entity hold or controls the rights to the inventory) :
 enquire from management if there is any inventory held on consignment for other parties
 obtain listing of inventory imported goods in transit at yr-end and inspect terms of purchase to see if ownership has passed to the other party
 establish if inventory is encumbered (offered as security) by :
 discussion with management
 inspecting bank confirmations
 review of director’s minutes
 review of correspondence / contracts with suppliers and credit providers
 ensure all invoices and shipping charges etc made out to entity
 valuation and allocation (inventory is included in the financials at appropriate amounts). Test values of stock sheets are correct and then test inventory obsolescence
 arithmetic accuracy – test that auditor’s stock sheets quantities are the same as the entity’s and re-perform all calcs. Compare the total inventory value from the stock sheets to the GL and TB
 pricing locally purchased inventory – select sample and test invoice to ensure correct purchase price used to calc cost in terms of the cost formula. Enquire from costing clerk and by inspecting invoices that transport costs are included in unit cost calcs
 pricing imported inventory purchases – select sample of imported high value items and test invoices to ensure that unit cost calcs are correct. Verify that correct exchange rate was used, shipping, import and customs duties are included and have been allocated to individual inventory items reasonably
 pricing manufactured goods – enquire from staff and inspect docs used in costing to gain understanding of the costing method used. Determine if it is consistent with prior years and is still appropriate for the type of business. Also :
 inspect the costing schedules and supporting docs and agree description of materials used and their costs
 agree labour costs to the payroll records
 confirm allocation of overheads is only for fixed and variable production overheads based on normal capacity
 confirm costing is based on reasonable systematic basis
 reperform all casts and calcs
 lower of cost and net realisable value – select sample and verify selling price of item by reference to sales lists / invoices and then compare the sales prices on invoices made after yrend to the cost prices on inventory sheets

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 inventory obsolescent allowance :
 discuss with management how they determine their obsolescence allowance and evaluate if it is reasonable and consistent with prior years
 establish if there are specific events that may have occurred during the year that might reduce value of stock or any items that may be obsolete
 perform analytical procedures to give idea of reasonableness of the allowance compared to prior years
 assess indicators of obsolescence problems like no recent sales of specific item and products that have received sell by dates after yr-end
 inspect correspondence about inferior products sold to customers
 reperform ageing of inventory by tracing items back to the source docs
 compare allowances raised in prior yrs to actual write offs in current year
 review yr-end stock counts to ensure that inventory items identified as damaged / obsolete
/ slow moving have been included in the allowance
 reperform any calcs for obsolescence allowance and determine the reasonableness of the allowance in terms of the evidence that has been gathered. Discuss with management
 completeness and existence (all inventory that should have been recorded has been recorded and inventory included in the BS actually exists and isn’t fictitious) – done by attending the stock count and by performing cut-off tests. Can also use analytical review
 general – perform analytical review of inventory by comparing current yr figs and ratios to prior year figs and requesting that inventory assertions and allowance for obsolescence be addressed in management representative letter
 presentation and disclosure – inspect disclosure and determine if :
 they are complete in terms of GAAP for encumbrances on inventory,
 accounting policies
 cost formula
 consistent with evidence gathered on the audit
 amounts, facts and details are accurate and agree with evidence gathered
 classification of info is appropriate e.g. either work in progress or completed goods
 working of the disclosures is clear and understandable e.g. for reversal of impairment
– substantive procedures :
 perform analytical tests (comparisons with previous yr) and calc the inventory turnover and gross profit %. Obtain explanations for deviations
 inspect final inventory list analytically for unusual or unexpected items, codes, large or small quantities, prices or values
 cast the inventory list
 re-calc value of individual items on final inventory list by calc ’ing quantity x unit price
 select sample off final inventory list and test quantities by :
 matching details on final inventory list with computerised records
 inspecting inventory record analytically for unusual or unexpected items or transactions
 following details through to inventory count sheets and confirming the quantity counted
 confirm unit price at yr-end by :
 inspecting details recorded on relevant production records
 confirming quantity and cost of raw materials used with relevant details like raw material inventory records
 confirming allocated labour costs with approved wages info from wages department
 confirming allocated manufacturing overheads with approved allocation basis and using accurate info pertaining to normal operating capacity
 evaluating manufacturing overhead allocation basis for reasonableness and discuss with financial manager
 re-calc ’ing unit price at yr-end according to FIFO and reference transactions info and relevant supporting docs
 select sample of inventory items from count sheets and confirm the details with final inventory list (2 way list)
 inspect previous yrs financials and confirm that the accounting policy has remained constant
 audit net realisable value of inventory by :
 enquiring of management / sales staff, inspect minutes and correspondence and determining if any to the inventory is on sale / special offer

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 obtaining approved sales price list at yr-end and for reasonable period after yr-end and confirming individual prices of inventory items compared to the cost prices on inventory list
 if selling price is lower then cost price for material value, request that management adjust the value to net realisable value
 inspecting inventory count sheets and inventory records for obsolete inventory and discuss creating a provision with management
 agree total of final audited inventory list to the balance of the inventory in the GL
 re-calc the casting and balancing of the inventory control account and agree to the final TB
 obtain management representation letter for the inventory value at yr-end
– substantive procedures :
 obtain list of inventories at various locations with full descriptions, quantities and values.
Compare it to perpetual inventory records
 check arithmetical accuracy of extensions and additions to the list and reconcile total of list with the inventories control accounts
 review GL inventories control accounts that show consigned or warehouse material
 trace entries in the GL to source docs (delivery notes)
 send confirmation letters to all consignees and warehouses requesting complete descriptions and quantities of merchandise held on behalf of entity at yr-end
 account for and reconcile any material differences in the confirmation letters
 observe the count of consignment inventories at selected warehouse and at premises of certain consignees at yr-end
 review delivery records and GRN is to check cut-off and confirm that transactions are recorded in the correct period
 examine consignment account sales and cash receipts records for consignment payments and agree to consignments outstanding at year-end
 review insurance policies to ensure adequacy of coverage and also to confirm that consignment is bona fide
 determine entity’s policy regarding consignment sales and warehousing and enquire about the pledging of merchandise
– substantive procedures
:
 obtain sufficient understanding of entity to ensure that can recognise inventory which is no longer useful to client and review procedures that management has established to do this
 review perpetual records for slow-moving items
 discuss quality of inventory with management and inspect minutes of meetings
 ask questions of Technical Product Manager during physical inventory observation about the extent of use or non-use of inventory items
 during physical inventory count look out for signs that might indicate obsolete inventory e.g. damage, inventory out of the way or in unusual locations, excessive dust on inventory, sell by dates past, signs of age
 identify inventory which is tagged obsolete, spoilt, damaged or has been set aside during stock take and ensure it is included in the obsolete inventory list
 examine obsolescence reports, scrap sales and other records in subsequent period that might indicate inventory that should have been included at reduced cost or excluded from the stock take
 calc inventory ratios (by type of inventory if possible) and compare it them to prior years and with industry standards
 review customer correspondence file and identify customer complaints
 assess indications of obsolescence problems like no recent sales or purchases of a specific item
 obtain management representation letter confirming obsolete inventory has been identified and excluded from physical inventory or is included at a reduced cost.
- substantive procedures :
 inspect prior year working papers and financials to confirm opening bal agrees with closing bal
 occurrence :
 inspect Memorandum of Incorporation to determine if :
 entity authorised to issue debentures

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 issue has in any way contravened entity’s borrowing powers
 decisions to issue debentures was made correctly i.e. inspect minutes of the meetings and take note of number and amount of debentures, who issued to, interest rate and date and what type of debenture etc
 inspect register of debenture holders to confirm addition of new debenture holders
 inspect cash receipts journal and bank statements for evidence of receipt of correct amounts
 initial recognition / on issue :
 reperform all calcs and casts to confirm cash received is in accordance to debenture agreement (ACCURACY)
 trace receipt of cash to GL to confirm posted to debenture liability account (CLASSIFICATION)
 inspect dates on all docs to confirm fall into accounting period under audit (CUT-OFF)
 subsequent measurement :
 recalc effective interest rate based on terms of debenture agreement and compare to effective interest rate used by client when calc’ing amortisation (ACCURACY)
 inspect journal entry raising finance cost and increasing debenture liability account and agree amounts to amortisation calc (ACCURACY)
 completeness :
 confirm by enquiry of directors / minutes that no other debenture issues have taken place
 agree closing balance on debenture account to the TB
 presentation and disclosure – auditor must inspect disclosures and consider if :
 they are complete as per GAAP (e.g. details of any security granted to debenture holders is disclosed and also dates and conditions of any redemptions or conversion options)
 are consistent with evidence gathered on the audit
 amounts, facts and details are accurate and agree with evidence gathered
 any classification of the info is appropriate
 wording of the disclosures is clear and understandable
 obtain 3 rd party confirmation from debenture holders confirming interest rates, amount of debenture, redemption premium etc
– substantive procedures :
 obtain loan agreement from entity and :
 confirm entity is the borrower and bank is the lender
 confirm amount of loan, interest rate and terms of repayment of the loan agrees with the minutes where loan was authorised
 confirm loan agreement was signed by authorised parties and witnesses. Date of signing the agreement mustn’t be later then the date that the loan was paid out
 examine the covering bond / security on the bond :
 confirm the covering bond is in safe custody by the lender
 confirm covering bond is in the name of the entity
 confirm amount of covering bond isn’t less then the amount of the loan (normally add 10% to cover costs of arrear interest)
 confirm mortgage is registered with Registrar of Deeds and that hypothecated property belongs to the entity and isn’t bonded in any other way. Title deed should be endorsed with the details of the covering bond
 ensure market value of secured property isn’t less then covering bond :
 obtain independent assessment of value of property by sworn appraiser at date as near as possible to BS date. Must compare value with municipal valuation as well as value of similar property in the area
 determine marketability of property through direct enquiry of estate agents and auctioneers
 discuss matter with management if market value of the property is lower then covering bond
 obtain written confirmation of the outstanding amount of the loan directly from the bank and agree to the figure in BS
 determine reasonableness of loan amount by determining initial loan less capital already paid
 obtain management representation letter that management accepts amount of the loan to be fair
 check disclosures and note that :
 the investments are correctly stated in BS
 installments for the coming financial year are shown under current liabilities
 there is a note stating that this is a secured loan giving the amount of the security, director’s valuation of the security, rate of interest, repayment period and terms of the repayment.

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If company has raised a loan and repaid a loan then will audit by :
Opening balance - compare to prior year’s closing balance in working papers
New loan
Repayment
Subsequent measurement adjustment
Closing balance
- vouch as transactions ( occurrence, accuracy, cut-off, classification and completeness )
- vouch as a transaction ( occurrence, accuracy, cut-off, classification and completeness )
- e.g. If an amortisation of a debenture redeemable at a premium adjusting journal has been done then must vouch for the transaction
( occurrence, accuracy, cut-off, classification and completeness )
- cast account and confirm that the appropriate presentation and disclosure has been achieved
– substantive procedures :
 obtain understanding of how entity determines fair value measurement and the control activities so can identify and assess the risk of material misstatement at assertion level
 evaluate if the fair value measurements and disclosures are in accordance with IAS
 if “intention” of directors is important in how asset / liability is measured and disclosed then auditor must :
 consider management’s history when carrying out its stated intentions
 review written plans and other docs e.g. minutes, budgets etc to clarify and confirm management’s intentions
 consider the logic and reasonableness of management’s reasons for choosing particular course of action
 consider management’s ability to carry out the intended course of action
 evaluate if entity’s method of fair value measurement is applied consistently
 if expert assisted with fair value then comply with IAS 620
 if measurement of fair value has assumptions or forecasts e.g. valuation of private company then must evaluate if :
 assumptions are reasonable
 appropriate valuation model was used
 underlying data was relevant and reliable
 perform audit procedures on data used for fair value measurement and disclosure to determine that it is accurate, compete and relevant
 consider effect of subsequent events on fair values
 obtain written management representations pertaining to fair values used e.g. reasonableness of significant assumptions
 if applicable, discuss fair values either those charged with governance e.g. if significant use of fair values
– substantive procedures :
Existence :
 extract a sample of assets from the fixed asset register (including some additions for the year)
 enquire of senior staff if major equipment has replaced old equipment and follow up to see if it was disposed of
 physically inspect the assets selected and match them to description in asset register using serial numbers. If asset cannot be physically verified then must seek corroborating evidence to verify it
 conduct search of unrecorded disposals by :
 analysing the sundry revenue account / cash receipts journal from receipts for disposals and confirm that the item that was sold is included in the list of disposals
 during physical inspection of assets take note of any evidence of fixed equipment which has obviously been revamped and follow up to determine if a disposal has taken place
 inspect correspondence with the insurance company to identify any fixed assets that have been removed from the list of insured items
 look for evidence of expenses related to PPE which are no longer being paid or are significantly reduced (e.g. rates, vehicle license fees) and confirm that the assets to which these expenses applied were disposed of.
 reconcile disposals per the capital budget with the client’s list of disposals

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Completeness :
 inspect repairs and maintenance for material items which represent acquisition of plant and equipment that have been allocated as expenses
 if physically verifying assets for existence then select sample of fixed assets and trace them to the fixed asset register agreeing description, asset numbers etc
 review creditors and cash payments for fixed asset purchases and confirm that purchase is recorded as fixed asset
 review lease agreements and enquire of senior personnel for evidence of assets which have been leased in terms of finance leases but which haven’t been capitalised
Rights :
 determine if there are any changes in the rights of assets held at the beginning of the financial year (in opening balances) by enquiry of management and inspection of the director’s minutes
 confirm that additions are in the name of the client by inspecting purchase documentation and documents of title
 confirm that the client is not behind in payment if the assets are still being paid for by inspecting payment records and supplier statements and enquiring from the financial manager / seller (cos rights may be jeopardised)
 inspect lease agreements for assets that have been capitalised to ensure rights and rewards of ownership have passed to the client
 obtain evidence of any encumbrances on fixed assets (e.g. offered as security) by enquiry of management and inspection of prior year working papers, minutes, loan agreements and bank and other 3 rd party confirmations.
Valuation / cost :
 agree the opening balances on the summary schedules to prior year work paper / general ledger
 reperform all casts and extensions in the fixed asset register, summary schedules and supporting lists of additions and disposals
 reperform reconciliation of the fixed asset register to the fixed asset accounts and accumulated deprecation accounts in the GL following up on all reconciling items
 agree by inspecting the closing balances on the summary schedules to the GL and financials .
Substantive Procedures :
Occurrence :
 select a sample of additions from the fixed asset register and trace to capital budget, minutes of directors meetings and purchase requisitions for evidence of authority for the acquisition
 inspect the asset itself and cross reference description, serial number etc to purchase documentation
 inspect the purchase documentation (invoice / contract) to confirm that it is made out to the client, is for that asset and is signed
 inspect payment records to confirm that payment was made for the asset
Accuracy, classification, cut-off :
 by inspection of the purchase documentation confirm that the cost of the asset includes the correct cost price, correct shipping charges, import duties etc and costs of installing and commissioning the fixed asset
 if asset is imported then use reperformance to confirm that :
 it has been raised in the company’s records at the spot rate on transaction date
 all relevant shipping costs, import charges etc have been included in the cost and converted from the foreign currency at the correct rate (transaction date)
 if entity has split significant parts of one item then confirm that the allocation is fair by enquiring with the directors and inspecting the relevant documentation from the supplier
 if asset has been installed then obtain a schedule of the installation costs and :
 agree it to the cost calculation for the asset
 discuss reasonableness of any other expenses included with the financial director
 inspect the supporting documentation in respect of materials and wages used in installation for valid, accurate and complete inclusion (especially to be sure there are no non-relevant expenses e.g. repairs)
 by inspection of purchase documentation and ledger accounts ensure that vat hasn’t been included in the cost if client is a vendor

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 inspect the dates on all documentations to confirm that transaction is in the correct accounting period (cut-off)
 trace the posting from source to the GL to confirm that the transaction has been recorded in the proper accounts (classification)
– substantive procedures :
Occurrence :
 inspect the supporting documentation used to approve the disposal for an authorising signature
 by reference to the capital budget, confirm authority for the disposal
 trace the proceeds of the sale to the receipts records / deposit slip / bank statement
Accuracy, classification, cut-off :
 obtain original cost / revalued cost of the disposed asset, dates of acquisition and disposal from the fixed asset register and :
 recalculate accumulated depreciation to date of disposal
 recalculate the profit / loss on sale (if there was an impairment loss then not loss on sale, but if no impairment assessment then the loss is a loss on sale)
 inspect the dates on all documents to confirm that the disposal has been recorded in the correct accounting period (CUT-OFF)
 confirm by inspection that the asset account and accumulated depreciation account in the GL have been correctly amended and that the disposal has been correctly and completely recorded in the fixed asset register (ACCURACY AND CLASSIFICATION)
 confirm by enquiry of directors that the accounting policy for depreciation is consistent with prior years
 if component method of depreciation is used then confirm that the allocation of the cost of the components is fair and reasonable by enquiry of management, scrutinising of purchase documents or enquiry of the supplier
 obtain a representation letter from management confirming that they have reassessed the useful life and residual value of the assets including the separate component if applicable
 review the changes to useful life and residual values and assess if reasonable. Obtain reasons from management and, if needed, consult with an expert to confirm
 when physically inspecting the assets enquire about damaged or not in use assets and establish if the items should be written down
 extract a sample of assets that were acquired some years prior (4 or 5) and compare their physical condition to their depreciated values
 inspect and analysis the profits / losses on disposals of fixed assets and consider if the deprecation method is reasonable (i.e. estimates of useful life and residual value are appropriate)
 reperform the depreciation calculations for the year to ensure accuracy and compliance with the depreciation policy and that the amounts are correctly posted
 discuss the reasonableness of the depreciation allowance with management and enquire into the approval procedures adopted (e.g. does the financial director review the allowance)
 perform an analytical review on the allowance e.g. comparing prior years by asset grouping and in relation to the additions and disposals for the year
 discuss with senior personnel if there has been anything that might effect the useful life of an asset
:
 evaluate process by which the entity identifies and quantifies impairments
 inspect and evaluate any documentation which might support the directors on impairments with regard to assumptions made, methods or bases of quantification and rates or percentages used
 discuss with management :
 any assets whose market value has declined significantly more then would be expected
 any significant changes that might have taken or might be about to take place which would adversely effect the entity in the technological market, economic or legal environments in which the entity operates
 any evidence obtained on the obsolescence or physical damage to assets identified during the audit
 assets lying idle

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 plans to discontinue certain operations
 evidence from internal reports (e.g. monthly management reports) that suggest that the economic performance of an asset is worse then expected
– substantive procedures :
 rights and existence :
 inspect docs that show entity’s right to asset e.g. letters, patent and certificates of registration for trademarks
 inspect docs for registration in name of entity and for any endorsements that might impinge on rights
 inspect physical part of intangible asset if possible e.g. franchise, computer software
 completeness :
 risk of understatement is reasonably low so completeness test limited to :
 enquire of management about research and development projects that are underway
 review minutes, correspondence and disbursement records to identify expenditure on intangibles
 obtain written representation from directors
 occurrence, accuracy, cut-off, classification :
 acquired intangible asset (cost price and any direct attributable costs of preparing the asset for intended use) :
 inspect director’s minutes, capital budgets for authority to purchase
 inspect purchase agreements, invoices and payment records to confirm are in the name of entity, amounts and descriptions agree and all costs are directly attributable costs (NOT promotional or general admin costs)
 confirm transaction is recorded in the correct accounting period
 internally generated intangible asset (cost of expenditure incurred during development stage of asset) :
 inspect director’s minutes, capital budgets for authority to purchase
 inspect purchase agreements, invoices and payment records to confirm are in the name of entity, amounts and descriptions agree and all costs are directly attributable costs (NOT promotional or general admin costs)
 confirm transaction is recorded in the correct accounting period
 confirm by inspecting supporting docs that costs aren’t research costs that mustn’t be included.
 valuation – amortisation. If entity assesses that intangible asset’s useful life is finite then intangible asset must be amortised. Auditor must :
 discuss and evaluate grounds on which useful life of intangible asset was determined
 if useful life is finite :
 confirm method of amortisation reflecting pattern of how the intangible assets economic benefits will be consumed by the entity, or if not possible, use straight line method
 reperform all amortisation calcs
 if useful life is infinite then discuss with directors or inspect supporting docs to confirm that intangible assets have been tested for impairment and that their useful life has been reassessed
 presentation and disclosure :
 must be complete in terms of GAAP and must disclose :
 if useful lives are indefinite or finite and reasons supporting assessment that intangible asset has indefinite life
 amortisation rates and methods
 gross carrying amounts and accumulated amortisation
 recon of carrying amount at beginning and end of period showing additions, increase or decreases from revaluation, impairments and amortisation
 are consistent with evidence gained on the audit
 amount, facts, details etc are accurate and agree with evidence gathered
 classification of info disclosed is appropriate
 wording of the disclosure is clear and understandable

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substantive procedures:
 reviewing procedures adopted by management to identify events after BS date
 reviewing minutes of directors, management, audit committee meetings after financials’ date
 obtain update from entity ’s legal representatives on outstanding legal matters
 review entity’s latest financial info (cash flow forecasts, budgets, monthly management reports and interim financial statements)
 scrutinise financial records for post BS period
 s crutinise prior year’s work papers to identify types of events that have occurred previously
 obtain management representation of events after BS date
 made specific enquiries of management about :
 status of items accounted for tentatively e.g. bad debt allowance
 new commitments / borrowings / guarantees
 planned sale / disposal / abandonment of assets
 realisation / recoverability of assets at less then BS values
 share issues / mergers / liquidations
 assets destroyed, impaired or appropriated
 developments in previously identified risk areas
 unusual accounting adjustments that have been made
 any event that might effect appropriateness of accounting policies at yr-end
 going concern of entity
- substantive procedures to determine if it complies with IAS 10 (i.e. is it an adjusting or non-adjusting event) :
 establish if event existed at BS date (adjusting) – CANNOT rely on entity’s interpretation without gathering evidence
 evaluate evidence event after BS date (non-adjusting) e.g. if new commitment then must inspect the contract
 re-perform casts or calcs
 if adjustment to be made then must inspect that it has been correctly accounted for
 if disclosure required then must inspect Notes / Director’s Report to ensure is compliant to
IAS 10 (i.e. must disclose nature, estimate of financial effect or statement that impossible to estimate financial effect
– substantive procedures :
 discuss and review management’s plans for future actions to address and resolve problem
 obtain sufficient audit evidence that management’s plans are specific and feasible
 investigate management’s underlying assumptions used in their plans (are they appropriate, reasonable and suitably supported)
 consider the negative effect of the plan on resources
 obtain written representation from directors regarding their intentions to commit to the plan
 consider any additional facts or info available since going concern assessment was made
 analyse and discuss cash flow, profit and other relevant forecasts with management
 analyse and discuss entity’s last available interim financials
 review loan agreements to determine if they have been breached and if the conditions can be met
 read minutes of shareholders, those charged with governance, directors and other committees to see if there are any references to financial difficulties
 consider the entity’s plans to deal with unfilled customer contract orders e.g. failure to perform
 enquire of the entity’s lawyers about any litigations or claims and evaluate management’s assessment of the financial implications of them
 confirm existence, legality and enforceability of arrangements to provide / maintain financial support with related and 3 rd parties and assess the financial ability of the parties to provide the additional funds
 review events after yr-end for transactions or events that will mitigate or aggravate conditions effecting entity’s ability to continue as a going concern.

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Comparative figures Substantive Procedures :
 compare accounting policy in current year to accounting policy in previous yr for consistency
 match comparative figs with figs of prior yr’s financials
 if financials of previous yr were audited by another auditor then follow procedures for predecessor auditor
 perform additional procedures if aware of material misstatements in comparatives during current year’s audit
.
Reporting on comparative figures
Management will amend financials
Audit the amendment
Re-perform subsequent event identification
Issue new report with new date
Prior yr’s audit report was unqualified
No reference made to comparative figs in auditor’s report
Prior yr’s audit report was qualified and matter still unresolved
If effects current yr’s financials
Qualify audit opinion for both yrs
Auditor has financials and report
If doesn’t effect current yr’s financials
Qualify the opinion only for comparative figs
Prior yr’s audit report was qualified, but matter properly dealt with & resolved in current yr
No reference to prior qualification
But if material in current yr
– Emphasis of Matter paragraph
If matter resolved & comparatives re-stated, confirm agree with amended financials & obtain written representation
Original financials need to be amended or revised
Entity has financials but hasn’t released them
Material misstatement detected in current yr which existed in prior yr’s financials
If corresponding figs not re-stated or no appropriate disclosures
– modify opinion in current financials for comparatives
Financials have been issued
Management won’t amend financials
Qualify, re-date and re-sign report
Management will amend financials
Audit the amendment
Re-perform subsequent event identification
Issue new report with new date
Management won’t amend financials
Take steps to prevent reliance on report
Management will amend financials
Re-perform subsequent event identification
Emphasis of
Matter –
Other Matter paragraph
Audit the revision
Issue new report with new date
Management won’t amend financials
Take steps to prevent reliance on report

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 discuss modification with those charged with governance and give them opportunity to provide further info or to amend financials for that matter
 if still need to modify report then consider if can use “lesser” qualification – so re-consider if matter is only material or if it is material and pervasive

DO NOT compromise standards
Auditor’s report – either :
Unmodified

auditor has no doubt about appropriateness of going concern basis

unmodified standard audit report issued
Unqualified (unmodified) Qualified / adverse opinion
with Emphasise of Matter based on disclosure problems

the going concern assumption is

given when the going concern basis is appropriate but there is a material uncertainly which is properly disclosed.

Emphasis of Matter paragraph must highlight existence of material uncertainly and draw attention to the note in the financials appropriate but there is a material uncertainly and is HASN’T been disclosed or is INADEQUATELY disclosed

this is a disagreement with directors about disclosure and so must be either
“ except for ” or “ adverse ” opinion
Auditor uses his professional judgment to decide on which opinion to use
“ Except for ” opinion :
G iven when auditor’s judgment is that disagreement for the disclosure is NOT so material and pervasive that it will require an adverse opinion
MATERIAL
“ Adverse ” opinion :
Given when effect of failure to disclose or adequately disclose the going concern problem is so material and pervasive that auditor thinks except for qualification of the report isn’t adequate to reflect how misleading and incomplete the financials are.
MATERIAL & PERVASIVE
Auditor must use judgement to determine if the omission or lack of disclosure makes the financials incomplete or misleading. If so then must give adverse opinion
Qualification based on limitation of scope
If auditor is limited in his scope when auditing the going concern concept e.g. management won’t supply relevant info
Disclaimer of opinion
Given when financials are presented on going concern basis and there has been proper disclosure, but auditor can’t form an opinion if it is appropriate cos of multiple significant uncertainties
Adverse opinion - inappropriate basis
Given when financials are presented on going con cern basis but the auditor’s opinion is that this is not appropriate regardless of if there is disclosure of a going concern problem or not.
MATTERS THAT DO NOT EFFECT
THE AUDITOR’S OPINION
MATTERS THE DO EFFECT
THE AUDITOR’S OPINION
EMPHASIS OF MATTER MATERIAL MATERIAL &
PERVASIVE
DISCLAIMER
OF OPINION
ADVERSE
OPINION

DISAGREEMENT
(misstatement)
Material
“Except for” qualification
Basis for Qualified
Opinion
– gives clear & concise explanation of the disagreement
Opinion paragraph :
“in our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financials present fairly …”
Material and
Pervasive
Adverse opinion
Basis for Adverse
Opinion
– gives clear & concise explanation of the disagreement
Adverse Opinion :
“in our opinion, because of the effects of the matter in the Basis of
Adverse Opinion paragraph, the financials do not present fairly in all respects the financials position ….”
LIMITATION OF SCOPE
(insufficient appropriate evidence)
Material
“Except for” qualification
Material and
Pervasive
Disclaimer opinion
Basis for Qualified
Opinion
– gives clear & concise explanation of the limitation of scope
Opinion paragraph :
“in our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion paragraph, the financials present fairly …”
Basis for Disclaimer of Opinion
– gives clear & concise explanation of the limitation of scope
Disclaimer of Opinion :
“because of the significance of the matter described in the
Basis for Disclaimer of Opinion paragraph we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly we do not express an opinion ….”
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