What must the auditor decide when designing substantive procedures?
consider which financial statement assertions the test needs to address
What is the audit procedures for existence assertion? How is it done? (non-current assets)
physical verification of assets selected from the non-current asset register
- take sample already counted by client and agree number of items in warehouse
What is the audit procedures for the rights and obligations assertion? (non-current assets)
i.e. inspection of:
- title deeds for property
- vehicle registration documents
- share certificates
- purchase invoices
What is the audit procedures for the completeness assertion? How is it done? (non-current assets)
- trace a sample of assets seen in use to the non-current assets register
- review repairs and maintenance account
How= take a sample in warehouse and count them
What is the audit procedures for the valuation assertion? (non-current assets)
- check purchase invoice
- check surveyor’s report for revaluations
- for self constructed assets:
1. labour costs
2. subcontractor invoices - consider appropriateness of depreciation policy
In what types of business will inventory be a key audit area?
manufacturing and retail
Why is inventory a key audit area?
- inventory can be highly material
- valuation is subjection
- affects statement of profit or loss and statement of financial position
How do you calculate inventory?
quantity X value
Why is it important the auditor has attendance at the inventory count?
- provides evidence about quantity
- provides evidence over valuation- ( some items maybe damaged so have a lower value)
What does the audit on receivables focus on?
whether the customer agrees with the recorded balance, and whether the debt if likely to be paid
are auditors about to use external confirmations as a form of audit evidence?
yes- these can be done in a positive or negative way
What does a positive confirmation do?
encourages definite replies from those being contacted
What does negative confirmation do?
- sent when a reply is only needed if the balance is disputed
When should negative confirmations be used?
-risk of misstatement is low
- controls are operating effectively
- large number of small balances are involved
- there is no reason to believe that customers will disregard the request
how can auditors check cash?
- bank confirmations directly from the bank
- the bank will only disclose once with written confirmation from the client
What confirmation might the auditor request from the bank/
confirmation of:
- year end balances
- loans and overdraft facilities and terms
- contingent liabilities e.g. guarantees given
- securitise belonging to the client
what matters should be referred to a senior member of staff?
- conclusions
- exceptional items
- unusual accounting entries
- indications of possible money laundering
-issues requiring further discussions with the client
