ACCA 1

AUDIT AND ASSURANCE

Payables and accruals

When testing payables, the auditor must focus on understatement.

Objective Example tests

(a) Existence
 Circularise/suppliers statements.
 Cut-off tests – purchases/credit

(b) Rights and obligations

 Circularise trade payables (the procedure is
similar to that used for trade receivables).
 Reconcile balance at year end to a
supplier's statement. The reconciling items
must be verified.

Both these tests also provide evidence of

completeness and valuation.

(c) Completeness
 Review payables analytically comparing to
previous year end or budgets.
 Review goods received notes around the
year end to ensure purchases correctly
treated.
 Review unpaid invoice files for liabilities not
provided.
 Review after date payments for liabilities
not recorded.
 Check the supplier statement
reconciliations to ensure that all outstanding
invoices are accrued.

(d) Allocation and valuation

 Check closing accruals calculated in
accordance with accounting policies and
are consistent.
 Check any provisions have been
recognised in accordance with IAS37.
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AUDIT AND ASSURANCE

Substantive procedures over year-end trade payables

– Ensure payables included in financial statements as current liabilities.

– Review the list of trade payables against prior years to identify any significant
omissions.

– Reconcile the total of purchase ledger accounts with the purchase ledger control
account, and cast the list of balances and the purchase ledger control account.

– Obtain supplier statements and reconcile these to the purchase ledger balances, and
investigate any reconciling items.

– Calculate the trade payable days and compare to prior years, investigate any
significant differences.

– Select a sample of payable balances and perform a trade payables’ circularisation,

follow up any non-replies and any reconciling items between balance confirmed and
trade payables’ balance.

– Review the purchase ledger for any debit balances, for any significant amounts
discuss with management and consider reclassification as current assets.

– Review after date payments, if they relate to the current year then follow through to
the purchase ledger or accrual listing to ensure completeness.

– Review after date invoices and credit notes to ensure no further items need to be
accrued.

– Select a sample of goods received notes before the year-end and follow through to
inclusion in the year-end payables balance, to ensure correct cut-off.

– Enquire of management their process for identifying goods received but not invoiced
or logged in the purchase ledger and ensure that it is reasonable to ensure
completeness of payables.
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AUDIT AND ASSURANCE

Non-current liabilities
This will include bank loans, debentures, and other loans repayable more than one year
after the balance sheet date.

Objective Example tests

(a) Existence
 Obtain confirmation from banks and other
lenders

(b) Rights and obligations

 Review confirmation letters from lenders

(c) Completeness
 Obtain breakdown of liabilities, compare to
prior year audit working papers and for any
items no longer included agree to
- Repayment amount in cashbook
- Inclusion as current liability if
reclassified
 Review board minutes for evidence of any
new borrowings which might not be recorded
(d) Accuracy
 Perform proof in total of finance charges
 Agree capital and interest amounts to
confirmation letters
 Recalculate finance charges agreeing
interest rates to loan agreements

(e) Classification and understandability

 Check that liabilities are correctly classified
as current/non-current by reference to the
repayment dates in the loan agreements
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AUDIT AND ASSURANCE

Tests on provisions and contingencies

For each material provision:

(a) Determine whether the company has a present obligation as a result of a past event
by:
(i) Review of correspondence and other documentation relating to the item.
(ii) Discussion with the directors. Have they created a valid expectation in other
parties that they will discharge the obligation? Review evidence of past
practices, published policies and statements made.

(b) Determine whether it is probable that an outflow of resources embodying economic

benefits will be required to settle the obligation by:
(i) Checking whether any payments have been made in the post balance sheet
period in respect of the item.
(ii) Review of correspondence with solicitors, banks, customers, insurance
company and suppliers both pre and post year end.
(iii) Sending a letter to the solicitor to obtain their views (where relevant).
(iv) Discussing the position with similar past provisions with the directors. Were
these provisions eventually settled?
(v) Review the board minutes to ascertain whether it is probable that the
payments will be paid.

(c) Determine whether provisions represent the best estimate of liability by:
(i) Recalculating all provisions made.
(ii) Comparing the amount provided with any post year end payments and with
any amount paid in the past for similar items and considering opinions given
by independent experts.
(iii) In the event that it is not possible to estimate the amount of the provision,
check that this contingent liability is disclosed in the accounts.

Consider the nature of the client’s business. Would you expect to see provisions e.g.
warranties ?

 For all material provisions and contingencies obtain a management representation.

 Check that appropriate disclosures have been made in accordance with IAS 37
 Obtain a detailed analysis of all provisions showing opening balances, movements
and the closing balance. Also obtain details of all contingencies which have been
disclosed.
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AUDIT AND ASSURANCE

Purchase
Procedures to obtain evidence and an audit test relevant to purchases and other
expenses:

Inspection
Inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.

– Inspect a sample of purchase invoices and agree the amount is included correctly
within the purchase ledger.
– Inspect purchase orders for evidence of authorisation by a responsible official.

Observation
Observation consists of looking at a process or procedure being performed by others.

– Observe the process for logging purchase invoices into the system to ensure that all
invoices are entered completely and accurately.
– Observe the goods received department to assess whether goods received are
checked against purchase orders and reviewed for adequate quality.

Analytical procedures
Analytical procedures consist of evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data. Analytical
procedures also encompass such investigation as is necessary of identified fluctuations
or relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount.

– Calculate the operating profit margin/overhead ratio and compare it to last year and
budget and investigate any significant differences.
– Review monthly other expenses to identify any significant fluctuations and discuss
with management.
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AUDIT AND ASSURANCE

Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and
non-financial, within the entity or outside the entity.

– Discuss with management whether there have been any changes in the key suppliers
used and compare this to the purchase ledger to assess completeness and accuracy of
purchases.
– Inquire of department heads the process they follow in authorising orders to ensure
that it follows the specified company authorisation process.

Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.

– Recalculate the accuracy of a sample of purchase invoices.

– Recalculate the prepayments and accruals charged at the year end to ensure the
accuracy of the other expenses.

Reperformance
Reperformance involves the auditor’s independent execution of procedures or controls
that were originally performed as part of the entity’s internal control.

– Reperform the purchase ledger control account reconciliation to ensure accuracy.

– Select a sample of purchase orders and match them to the goods received notes and
purchase invoices to ensure completeness of the purchase cycle.

Capital and other issues

AUDIT PLAN: CAPITAL AND RELATED ISSUES

SHARE EQUITY CAPITAL

 Agree the authorised share capital with the statutory documents governing the
company's constitution.
 Agree changes to authorised share capital with properly authorised
resolutions.

ISSUE OF SHARES

 Verify any issue of share capital or other changes during the year with general
and board minutes.
 Ensure issue or change is within the terms of the constitution, and directors
possess appropriate authority to issue shares.
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AUDIT AND ASSURANCE

 Confirm that cash or other consideration has been received or receivable(s)

is included as called-up share capital not paid.

TRANSFER OF SHARES

 Verify transfers of shares by reference to:

– Correspondence
– Completed and stamped transfer forms
– Cancelled share certificates
– Minutes of directors' meeting

 Review the balances on shareholders' accounts in the register of members

and the total list with the amount of issued share capital in the general ledger.

DIVIDENDS

 Agree dividends paid and proposed pre year-end to authority in minute books
and reperform calculation with total share capital issued to ascertain whether
there are any outstanding or unclaimed dividends.
 Agree dividend payments with documentary evidence (say, the returned
dividend warrants).
 Test that dividends do not contravene distribution provisions by reviewing the
legislation.
 Inspect tax returns to insure that imputed tax has been accounted for to the
taxation authorities and correctly treated in the accounts.

RESERVES

 Agree movements on reserves to supporting authority.

 Ensure that movements on reserves do not contravene the legislation and
the company's constitution by reviewing the legislation
 Confirm that the company can distinguish distributable reserves from those
that are non-distributable.
 Ensure appropriate disclosures of movements on reserves are made in the
company's accounts by inspection of the financial statements.