AUDIT AND ASSURANCE (ACCA)

SUBSTANTIVE PROCEDURES
Topic List
1) Trade Receivables
2) Trade Payables and Accruals
3) Purchase and Other Expense
4) Payroll Expense
5) Tax Payable
6) Provisions
7) Research and Development
8) Property, Plant and Equipment
9) Inventory
10) Revenue
11) Director Bonus and Remuneration
12) Cash and Bank Balance
13) Bank Loan
14) Issue of Shares
15) Going concern
16) Reconciliations
17) Subsequent Event

GENERAL TIPS
➢ Action words that can be used generally – Agree, Analyze, Assess, Compare, Enquire, Ensure,
Inspect, Observe, Obtain, Recalculate, Reperform, Reconcile, Review, Verify
➢ Question types are – General (Easy) and Assertion Specific (Hard). So finish off the easy ones
first.
➢ Every procedure is of 1 mark, and all procedures must contain ‘ACTION + SOURCE + PURPOSE =
ASP’
➢ Write down keywords and documents as part of brainstorming. Then build procedures on it.

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 RECEIVABLES

ESK Company
• Obtain a breakdown of the list of individual customer balances, cast and agree the total to
the trial balance/trade receivables account.
• Obtain the prior year aged list of individual customer balances and for significant
customers compare to the current year and prior year balances. Discuss with
management any missing receivables or significantly lower balances.
• Select a sample of trade receivables from the listing and prepare a receivables
circularisation.
• Review the after-date cash receipts and follow through to pre-year-end receivable
balances.
• Inspect the aged receivables report to identify any slow-moving balances, discuss these with
the credit control manager to assess whether an allowance or write down is necessary.
• For any old or slow-moving balances review customer correspondence to assess
whether there are any invoices in dispute.
• Review board minutes/discuss with management to assess whether there are any
significant concerns re recoverability of receivables.
• Select a sample of goods despatch notes from before the year end, agree to sales invoices
and to inclusion in the year-end list of individual customer balances.
• Review the list of individual customer balances for any credit balances and discuss with
management whether these should be reclassified as payables.
• Review customer correspondence to identify any balances which are in dispute or unlikely to
be paid and discuss with management.
• Recalculate the allowance for trade receivables and compare any potential irrecoverable
balances to assess if the allowance is adequate.

Insect4U Co
• Review the aged receivables listing to identify any old or slow-moving receivables balances,
discuss the status of these balances with the finance director to assess whether they are
likely to pay.
• Review customer correspondence to identify any balances which are in dispute or unlikely to
be paid.
• Review whether there are any after-date cash receipts for old/slow-moving receivables
balances.
• Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
• Calculate the potential level of receivables which are not recoverable and assess whether this
is material or not and discuss with management.
• Recalculate the allowance for credit losses/receivables and compare to the potentially

AA – SUBSTANTIVE PROCEDURES 2
 irrecoverable balances to assess if the allowance is adequate.
• Inspect post-year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.

Jasmine Co
• Obtain the aged receivables listing and agree to the balance on the trade receivables
account and trial balance.
• Review the aged list of customer balances to identify any old or slow-moving balances,
discuss the status of these balances with the credit controller to assess whether they are likely
to pay.
• Select a representative sample of trade receivables and review for any after- date cash
receipts. Ensure that a sample of old/slow-moving receivable balances is also selected.
• Review customer correspondence to identify any balances which are in dispute or unlikely to
be paid and discuss with management.
• Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
• Calculate the average receivables collection period and compare this to the prior year and
investigate any significant differences.
• Inspect post-year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
• Obtain a breakdown of the allowance for trade receivables, recalculate and compare to
any potentially irrecoverable balances to assess if the allowance is adequate.
• Select a sample of goods despatch notes (GDN) immediately before and after the year end
and follow through to the list of individual customer balances to ensure they are recorded
in the correct accounting period.
• Select a sample of year-end receivables balances and agree back to valid supporting
documentation of sales invoices, GDNs and sales orders to ensure existence.

Purrfect Co
Receivable due from Ellah Co (Specific Customer)
• Review correspondence with Ellah Co to establish if there was a discussion about payment
difficulties and whether Ellah Co intends to fully settle the outstanding amount.
• Review the age of the outstanding debt with Ellah Co and discuss the circumstances with
the credit controller to establish if it has exceeded the agreed credit terms and consider if
an allowance is required.
• Review post-year-end receipts from Ellah Co to establish how much of the debt was recovered
by the audit completion date and to assess how much of the year- end balance remains
outstanding.
• Inspect board minutes to identify whether there are any significant concerns in relation to
payments by Ellah Co.
• Discuss with management of Purrfect Co why no allowance has been made in respect of this
debt and assess the justification.

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Dashing Co
Assertions (Accuracy, Valuation, Allocation, Completeness, Rights and Obligations)
Accuracy, valuation and allocation

• Review the after-date cash receipts and follow through to pre-year-end receivable balances.
• Inspect the aged receivables report to identify any slow-moving balances and discuss these
with the credit control manager to assess whether an allowance or write down is necessary.
• For any old/slow-moving balances review customer correspondence to assess whether there
are any invoices in dispute.
• Review board minutes of Dashing Co to assess whether there are any material disputed
receivables.
Completeness
• Select a sample of goods despatch notes from before the year end, agree to sales invoices
and to inclusion in the year-end list of individual customer balances.
• Agree the total on the list of individual customer balances to the trade receivables account
and to the trial balance.
• Obtain the prior year aged receivables listing and for significant balances compare to the
current year receivables listing for inclusion and amount due. Discuss with management any
missing receivables or significantly lower balances.
• Review the list of individual customer balances for any credit balances and discuss with
management whether these should be reclassified as payables.
Rights and obligations
• Review bank confirmations and loan agreements for any evidence that receivables have
been assigned as security for amounts owed by Dashing Co.
• Review board minutes for evidence that legal title to receivables has been sold onto a third
party such as a factor.
• For a sample of receivables, agree the balance recorded on the list of individual customer
balances to the original name of the customer on a sales order or a contract.

Hawthorn Co
Assertions (Existence and Valuation)
• Review the aged receivable ledger to identify any old or slow-moving receivable balances,
discuss the status of these balances with the credit controller to assess whether they are likely
to pay.
• Select a significant sample of receivables and review whether there are any after-date cash
receipts, ensure that a sample of old/slow-moving receivable balances is also selected.
• Review customer correspondence to identify any balances which are in dispute or unlikely to
be paid.
• Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
• Calculate the average receivables collection period and compare this to prior year,
investigate any significant differences.

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• Inspect post-year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.
• Select a sample of goods despatch notes (GDN) before and just after the year end and follow
through to the list of individual customer balances to ensure they are recorded in the correct
accounting period.
• Select a sample of year-end receivable balances and agree back to valid supporting
documentation of GDN and sales order to ensure existence.

Harlem Co
Assertion (Valuation)

• Discuss with the finance director the rationale for not increasing the allowance for trade
receivables and review its overall adequacy.
• Obtain a breakdown of the opening allowance and consider if the receivables provided for in
the prior year have been recovered to assess the reasonableness of the prior levels of
allowances.
• Review the aged list of individual customer balances to identify any old or slow moving
receivable balances and discuss the status of these balances with the credit controllers to
assess whether they are likely to be received.
• Review whether there are any after-date cash receipts for old or slow-moving receivable
balances.
• Review customer correspondence with the significant customer and others to identify any
balances which are in dispute or are unlikely to be paid.
• Review board minutes to identify whether there are any significant concerns in relation to
payments by customers.
• Calculate the potential level of trade receivables which are not recoverable and assess
whether this is material or not and discuss with management.

Encore Co
Assertion (Valuation)
• Review the aged receivables listing to identify old or slow-moving balances. Discuss the status
of these balances with the credit controller to assess whether the customers are likely to pay
or if an allowance for credit losses/receivables is required.
• Review whether there are any after-date cash receipts for old/slow-moving receivable
balances.
• Review correspondence with customers in order to identify any balances which are in dispute
or unlikely to be paid and discuss with management whether any allowance is required.
• Review board minutes to identify whether there are any significant concerns in relation to
outstanding receivables balances and assess whether the allowance is reasonable.
• Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to
any potentially irrecoverable balances to assess if the allowance is adequate.

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• Review the payment history for evidence of slow paying by any customers who were granted
credit in the period when there was no credit controller and who may not, therefore, have
been properly scrutinised.
• Discuss with the finance director the rationale for maintaining the allowance at the same level
in light of the increase in the receivables collection period and the absence of a credit
controller.
• Inspect post-year-end sales returns/credit notes and consider whether an additional
allowance against receivables is required.

Spadefish Co
Allowance for credit losses/trade receivables
• Discuss with the finance director the rationale for not providing against any receivables and
consider the reasonableness of the allowance.
• Obtain a breakdown of the opening allowance of $125,000 and consider if the receivables
provided for in the prior year have been fully recovered as a result of the additional credit
control procedures or if they have now been fully written off.
• Inspect the aged list of individual customer balances to identify any old or slow- moving
receivable balances and discuss the status of these balances with the credit controllers to
assess whether they are likely to be received.
• Review whether there are any after-date cash receipts for identified old or slow- moving
receivable balances.
• Review customer correspondence to identify any balances which are in dispute or are unlikely
to be paid and confirm if these have been considered when determining the allowance.
• Inspect board minutes to identify whether there are any significant concerns in relation to
payments by customers and assess if these have been considered when determining the
allowance.
• Recalculate the potential level of trade receivables which are not recoverable and compare to
allowance and discuss differences with management.

Danube Co
Exceptions in the trade receivables circularisation

Nile Co

• For the non-response from Nile Co, with the client’s permission, the team should arrange to
send a follow-up confirmation request.
• If Nile Co does not respond to the follow up, then with the client’s permission, the auditor
should telephone the customer and ask whether they are able to respond in writing to the
confirmation request.
• If there is still no response, then the auditor should undertake alternative procedures to
confirm the balance owing from Nile Co. These would include detailed testing of the balance
by a review of after-date cash receipts and agreeing to sales invoices and GDN.

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Congo Co

• For the response from Congo Co the auditor should investigate the difference of $14,132, and
identify whether this relates to timing differences or whether there are possible errors in the
records of Danube Co.
• If the difference is due to timing, such as cash in transit, details of the difference should be
agreed to post-year-end cash receipts in the bank ledger account.
• If the difference relates to goods in transit, then details should be agreed to a pre-year-end
GDN.
• The list of individual customer balances should be reviewed to identify any possible
mispostings as this could be a reason for the difference with Congo Co.

Spadefish Co
Exceptions in the Positive trade receivables circularisation

Albacore Co

• For the non-response from Albacore Co, with the client’s permission, the team should arrange
to send a follow-up circularisation.
• If Albacore Co does not respond to the follow up, then with the client’s permission, the auditor
should telephone the customer and ask whether they are able to respond in writing to the
circularisation request.
• If there is still no response, then the auditor should undertake alternative procedures to
confirm the balance owing from Albacore Co. Such as detailed testing of the balance by
agreeing to sales invoices and goods despatch notes (GDN).

Flounder Co

• For the response from Flounder Co, with a difference of $5,850 the auditor should identify
any disputed amounts, and identify whether these relate to timing differences or whether
there are possible errors in the records of Triggerfish.
• If the difference is due to timing, such as cash in transit, this should be agreed to post-year-
end cash receipts in the bank ledger account.
• If the difference relates to goods in transit, then this should be agreed to a pre year-end GDN.

Menhaden Co

• The reason for the credit balance with Menhaden should be discussed with the credit
controller or finance department to understand how a credit balance has arisen.
• Review the list of individual suppliers to identify if Menhaden is a supplier as well as a
customer; if so, a purchase invoice may have been posted in error to the receivables rather
than payables.
• If the difference is due to credit notes, this should be agreed to pre-year-end credit notes

AA – SUBSTANTIVE PROCEDURES 7
 issued around the year-end date.
• The list of individual customer balances should be reviewed to identify any possible
mispostings as this could be a reason for the difference with Menhaden Co.

Dashing Co
Steps in undertaking a positive receivables circularisation

• Obtain consent from the finance director of Dashing Co in advance of undertaking the
circularisation.
• Obtain a list of trade receivables at the year end, cast this and agree it to the total on the trade
receivables account.
• Select a sample from the receivables list ensuring that a number of nil, old, credit and large
balances are selected.
• Circularisation letters should be prepared on Dashing Co’s letterhead paper, requesting a
confirmation of the year-end receivables balance, and for replies to be sent directly to the
audit team using a pre-paid envelope.
• The finance director of Dashing Co should be requested to sign all the letters prior to them
being sent out by a member of the audit team.
• Where no response is received, follow this up with another letter or a phone call and where
necessary alternative procedures should be performed
• When replies are received, they should be reconciled to Dashing Co’s receivables records, any
differences such as cash or goods in transit should be investigated further.

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 PAYABLES AND ACCRUALS

Insect4U Co
• Calculate the trade payables payment period for Spider Spirals Co and compare to prior years
and investigate any significant difference, in particular any decrease for this year due to the
payment run on 3 May.
• Compare the total trade payables and list of accruals against prior year and investigate
any significant differences.
• Discuss with management the process they have undertaken to quantify the misstatement
of trade payables due to the late payment run and cut-off error of purchase invoices and
consider the materiality of the error in isolation as well as with other misstatements found.

• Select a sample of purchase invoices received between the period of 1 and 7 May, ascertain
through reviewing goods received notes (GRNs) if the goods were received pre or post year
end, if post year end, then confirm that they have been excluded from the ledger or follow
through to the correcting journal entry.
• Review after-date payments; if they relate to the current year, then follow through to the
list of individual supplier balances or accrual listing to ensure they are recorded in the correct
period.
• Obtain supplier statements and reconcile these to the list of individual supplier balances, and
investigate any reconciling items.
• Select a sample of payables balances and perform a trade payables’ circularisation, follow
up any non-replies and any reconciling items between the balance confirmed and the trade
payables’ balance.
• Select a sample of GRNs before the year end and after the year end and follow through to
inclusion in the correct period’s payables balance, to ensure correct cut-off.

Blackberry Co
Assertion (Completeness)

• Obtain the trade payables leger, recalculate to confirm arithmetical accuracy and agree to the
financial statements.
• Perform supplier statement reconciliations for suppliers where statements are available.
Discuss any discrepancies with management.
• Perform a supplier circularisation for significant suppliers where no supplier statement is
available and agree the balance per the circularisation to the individual supplier balance.
• Agree a sample of pre-year-end GRNs to purchase invoices and into the list of individual
supplier balances.
• Calculate the trade payables payment period, compare with credit terms/prior year and discuss
significant differences with management.

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Pacific Co
Assertion (Completeness)

• Calculate the payables payment period for Pacific Co, compare to prior years and investigate
any significant differences, in particular any decrease this year due to the inclusion of the
payment run on 1 June.
• Compare the total trade payables, or significant supplier balances, and good received not
invoiced (GRNI) accrual against the prior year and investigate any significant differences.
• Compare the list of accruals this year to the prior year to identify any missing items or unusual
fluctuations and discuss with management.
• Discuss with management the process they have undertaken to quantify the misstatement of
trade payables due to the payment run and consider the materiality of the error in isolation as
well as with other misstatements found.
• Review the journal entry processed to correct the misstatement of trade payables due to the
payment run to ensure all errors have been included.
• Select a sample of purchase invoices received around the year end. Ascertain, through
reviewing goods received notes (GRNs), if the goods were received pre or post year end. If post
year end, then confirm that they have been excluded from the ledger.
• Review after-date payments; if they relate to the current year, then follow through to the list
of individual supplier balances or GRNI accrual to ensure they are recorded in the correct
period.
• Reperform a sample of supplier statement reconciliations and agree these to the list of
individual supplier balances. Investigate any reconciling items.
• Select a sample of trade payables balances and perform a trade payables’ circularization. Follow
up any non-responses and any reconciling items between the balance confirmed and the trade
payables’ balance.
• Select a sample of GRNs before the year end and after the year end and follow through to
inclusion of the liability in the correct period’s payables balance to ensure correct cut-off.

Airsoft Co
Assertion (Completeness)

• Compare the total trade payables and list of accruals against prior year and investigate
any significant differences.
• Select a sample of post-year-end payments from the bank ledger account; if they relate to the
current year, follow through to the list of individual supplier balances or accruals listing
to ensure they are recorded in the correct period.
• Obtain supplier statements and reconcile these to the list of individual supplier balances, and
investigate any reconciling items.
• Select a sample of payable balances and perform a trade payables’ circularisation, follow up any
non-replies and any reconciling items between the balance confirmed and the trade payables’
balance.
• Review after-date invoices and credit notes to ensure no further items need to be accrued.
• Enquire of management their process for identifying goods received but not invoiced or
logged in the list of individual supplier balances and ensure that it is reasonable to ensure
completeness of payables.

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Audit software procedures - Trade payables and accruals.

• The audit team can use audit software to calculate the payables payment period for the year-
to-date to compare against the prior year to identify whether payables days have changed in
line with trading levels and expectations. If the ratio has decreased, this may be an indication
that payables are understated.
• Audit software can be used to cast the payables and accruals listings to confirm the
completeness and accuracy of trade payables and accruals.
• Audit software can be used to select a representative sample of items for further testing of
payables balances.
• Audit software can be utilised to recalculate the accruals for goods received not invoiced at
the year end.
• Undertake cut-off testing by assessing whether the dates of the last GRNs recorded relate to
pre year end; and that any with a date of 1 May 20X5 onwards were excluded from trade
payables.

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 PAYROLL

Castle Courier Co
• Cast a sample of payroll records to confirm completeness and accuracy and agree the total
wages and salaries expense per the payroll system to the trial balance.
• Recalculate the gross and net pay figures for a sample of employees and agree to the payroll
records.
• For a sample of wage payments, agree the total net pay per the payroll records to the bank
transfer listing and to the bank ledger account.
• Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay
increase/bonuses. Compare this to the actual wages and salaries expense in the financial
statements and investigate any significant differences.
• Compare the total payroll figure this year to the prior year, identify any significant differences
and discuss with management.
• Review monthly payroll charges, compare this to the prior year and budgets and discuss any
significant differences with management.
• Calculate overtime costs as a percentage of total wages. Compare this to the prior year and
discuss any significant differences with management.
• Agree a sample of individual wages and salaries per the payroll to personnel records and
records of hours worked per the clocking-in system.
• Reperform the calculation of statutory deductions and agree to supporting documentation
to confirm whether correct deductions for this year have been made in the payroll.
• Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate their first/last salary to ensure it is accurate.
• Recalculate holiday pay for a sample of employees and agree to holiday records and daily rate
applied.
• Select a sample of employees from HR records and agree salaries per HR records to the
payroll records to confirm the accuracy of the payroll expense.
• Agree the payroll account reconciliation to accounting records and investigate any
differences.

Bronze Co
Analytical Procedures

• Compare the total payroll expense to the prior year or budget and investigate any significant
differences.
• Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management any significant variances.
• Compare overtime pay as a percentage of factory normal hours pay to investigate whether it
is at a similar level to the prior year and within an acceptable range. Investigate any significant
differences.
• Perform a proof in total of total wages and salaries, incorporating joiners and leavers and any

AA – SUBSTANTIVE PROCEDURES 12
 pay increase. Compare this to the actual wages and salaries in the financial statements and
investigate any significant differences.
• Calculate statutory deductions as a percentage of gross pay and compare to the prior year to
assess the reasonableness of the statutory deductions. Investigate any significant variances.

Trombone Co
Assertions (Completeness and Accuracy)

• Agree the total wages and salaries expense per the payroll system to the trial balance,
investigate any differences.
• Cast a sample of payroll records to confirm completeness and accuracy of the payroll
expense.
• For a sample of employees, recalculate the gross and net pay and agree to the payroll records
to confirm accuracy.
• Recalculate the statutory deductions to confirm whether correct deductions for this year
have been made in the payroll.
• Compare the total payroll expense to the prior year and investigate any significant
differences.
• Review monthly payroll charges, compare this to the prior year and budgets and discuss with
management for any significant variances.
• Perform a proof in total of total wages and salaries, incorporating joiners and leavers and the
annual pay increase. Compare this to the actual wages and salaries in the financial statements
and investigate any significant differences.
• Select a sample of joiners and leavers, agree their start/leaving date to supporting
documentation, recalculate that their first/last pay packet was accurately calculated and
recorded.
• Agree the total net pay per the payroll records to the bank transfer listing of payments and
to the bank ledger account.
• Agree the individual wages and salaries per the payroll to the personnel records for a sample.
• Select a sample of weekly overtime sheets and trace to overtime payment in payroll records
to confirm completeness of overtime paid.

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 TAX LIABILITY

Freesia Co
Employment Tax Liability

• Compare the accrual for employment tax payable to the prior year, investigate any significant
differences.
• Agree the year-end employment tax payable accrual to the payroll records to confirm
accuracy.
• Reperform the calculation of the accrual for a sample of employees to confirm the accuracy.
• Undertake a proof in total test for the employment tax accrual by multiplying the payroll cost
for June 20X5 with the appropriate tax rate. Compare this expectation to the actual accrual
and investigate any significant differences.
• Agree the subsequent payment to the post-year-end bank ledger account and bank
statements to confirm completeness.
• Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due. If so, confirm they are included in the year-end accrual.
• Review any disclosures made of the employment tax accrual and assess whether these are in
compliance with accounting standards and legislation.

Trombone Co
Employment Tax Liability

• Agree the year-end income tax payable accrual to the payroll records to confirm accuracy.
• Recalculate the accrual to confirm accuracy.
• Agree the subsequent payment to the post-year-end bank ledger account and bank
statements to confirm completeness.
• Review any correspondence with tax authorities to assess whether there are any additional
outstanding payments due; if so, agree they are included in the year end accrual.
• Review any disclosures made of the income tax accrual and assess whether these are in
compliance with accounting standards and legislation.

Hyacinth Co
Sales Tax Liability

• Agree the year-end sales tax liability in the trial balance to the tax return/ reconciliation
submitted to the tax authority and cast the return/reconciliation.
• Agree the quarterly sales tax charged equates to 15% of the last quarter’s sales as per the
detailed sales day listing.

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• Recalculate the sales tax incurred as per the reconciliation is equal to 15% of the final
quarter’s purchases and expenses as per the detailed purchase listing.
• Recalculate the amount payable to the tax authority as being sales tax charged less sales tax
incurred.
• Compare the year-end sales tax liability to the prior year balance or budget and investigate
any significant differences.
• Agree the subsequent payment to the post-year-end bank ledger account and bank
statements to confirm completeness and that it has been paid in line with the terms of the
tax authority.
• Review any current and post-year-end correspondence with the tax authority to assess
whether there are any additional outstanding payments due. If so, confirm they are included
in the year-end liability.
• Review any disclosures made of the sales tax liability to ensure that it is shown as a current
liability and assess whether disclosures are in compliance with accounting standards and
legislation.

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 PURCHASES AND OTHER EXPENSES

Comet Publishing Co
• Calculate the operating profit and gross profit margins and compare them to last year and
budget and investigate any significant differences.
• Review monthly purchases and other expenses to identify any significant fluctuations and
discuss with management.
• Discuss with management whether there have been any changes in the key suppliers used
and compare this to the detailed purchase listing to assess completeness and accuracy of
purchases.
• Recalculate the accuracy of a sample of purchase invoice totals and related taxes and ensure
expense has been included in the correct general ledger code.
• Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of
the expense charge included in the statement of profit or loss.
• Select a sample of post-year-end expense invoices and ensure that any expenses relating to
the current year have been included.
• Select a sample of payments from the bank ledger account and trace to expense account to
ensure the expense has been included and classified correctly.
• Select a sample of goods received notes (GRNs) from throughout the year; agree them to
purchase invoices and the detailed purchase listing to ensure the completeness of purchases.
• Select a sample of GRNs just before and after the year end; agree to the detailed purchase
listing to ensure the expense is recorded in the correct accounting period.

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 PROVISIONS

Pacific Co
Provision for legal claims
• Enquire with the directors or inspect relevant supporting documentation to confirm if a
present obligation exists at the year end.
• Discuss with directors how the mislabelling of ingredients is alleged to have occurred and
whether it is likely that any other customers have been affected.
• Discuss the claim with management and review the internal investigation report in order to
gain an insight into the circumstances which led to the mislabelling.
• Inspect board minutes to ascertain whether payment is probable.
• Inspect post-year-end bank statements to identify whether any payments have been made
in respect of the claim.
• Review correspondence with Pacific Co’s lawyers or with the client’s permission, contact the
lawyers and obtain confirmation regarding the claim to assess whether a provision should be
recognised and whether the amount of the provision is material.
• Review correspondence or discuss with lawyers the likelihood and amount of other potential
future claims.
• If evidence indicates that it is only possible that the claim will be successful, inspect the
financial statement for contingent liability disclosures to ensure compliance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
• Obtain a written representation from management confirming their view that they have an
obligation at the year end in respect of the claim and that it is appropriate to include a
provision.

Purrfect Co
Contamination – Legal Claim

• Review customer correspondence to establish the details of the claims and the amounts
being claimed.
• Review correspondence with Purrfect Co’s lawyers or, with the client’s permission, contact
the lawyers to establish the likely outcome of the customer claims made to date.
• Discuss with the lawyers the likelihood and amount of potential future claims.
• Inspect board minutes to establish details of the circumstances of the contamination and to
ascertain management’s view as to the likelihood that the existing claims will be successful
and the extent of possible future claims.
• Compare levels of returns and claims to date against sales volumes of the product to assess
the potential level of future claims.
• Review post-year-end payments for damage settlements and compare with any amounts
provided at the year end to assess the reasonableness of the provision.

AA – SUBSTANTIVE PROCEDURES 17
• Obtain written representations from management that there have been no other
contamination incidents and no other product liability claims of which management are
aware and for which provision may be required.
• Review the draft financial statements to establish that the legal claims have been
appropriately provided for or disclosed in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.

Pineapple Beach Hotel

Food Poison – Legal Claim (No written representation)

• Review the correspondence from the customers claiming food poisoning to assess whether
Pineapple has a present obligation as a result of a past event.
• Send an enquiry letter to the lawyers of Pineapple to obtain their view as to the probability
of the claim being successful.
• Review board minutes to understand whether the directors believe that the claim will be
successful or not.
• Review the post-year-end period to assess whether any payments have been made to any of
the claimants.
• Discuss with management as to whether they propose to include a contingent liability
disclosure or not, consider the reasonableness of this.
• Review the adequacy of any disclosures made in the financial statements to ensure they are
in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Sagittarii Co
Restructuring Provision

• Cast the breakdown of the restructuring provision to ensure it is correctly calculated and
agree the total to the trial balance.
• Review the board minutes where the decision to restructure the production process was
taken and confirm the decision was made in March 20X5.
• Review the announcement to shareholders and employees in late March, to confirm that this
was announced before the year end.
• Obtain a breakdown of the restructuring provision and confirm that only direct expenditure
relating to the restructuring is included.
• Review the expenditure to confirm that there are no retraining costs of existing staff included.
• For the costs included within the provision, including acquisitions of plant and machinery,
agree to supporting documentation, such as purchase invoices, to confirm validity and value
of items included.
• Review post-year-end payments/invoices relating to the expenditure and compare the actual
costs incurred to the amounts provided to assess whether the amount of the provision is
reasonable.

AA – SUBSTANTIVE PROCEDURES 18
• Obtain a written representation confirming management discussions in relation to the
announcement of the restructuring and to confirm the completeness of the provision.
• Review the adequacy of the disclosures of the restructuring provision in the financial
statements and assess whether these are in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.

Dashing Co
Redundancy provision

• Discuss with the directors of Dashing Co as to whether they have formally announced their
intention to close the production site and make their employees redundant, to confirm that
a present obligation exists at the year end.
• If announced before the year end, review supporting documentation to verify that the
decision has been formally announced.
• Review the board minutes to ascertain whether it is probable that the redundancy payments
will be paid.
• Obtain a breakdown of the redundancy calculations by employee and cast it to ensure
completeness and agree to trial balance.
• Recalculate the redundancy provision to confirm completeness and agree components of the
calculation to supporting documentation such as employee contracts.
• Review the post-year-end bank ledger account to identify whether any redundancy payments
have been made, compare actual payments to the amounts provided to assess whether the
provision is reasonable.
• Obtain a written representation from management to confirm the completeness of the
provision.
• Review the disclosure of the redundancy provision to ensure compliance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

Danube Co
Provision and Receivable arising from sale of defective goods

• Review the correspondence with Kalama Kids Co and establish the details of the claim to
assess whether a present obligation as a result of a past event has occurred.
• Review correspondence with Thames Co, the supplier of the hoverboards, to assess whether
they accept liability for the defect.
• Review correspondence with Danube Co’s legal advisers or, with the client’s permission,
contact the legal advisers to obtain their view as to the probability of either the legal claim
from the customer and the request for reimbursement from the supplier being successful as
well as any likely amounts to be paid or received.
• Discuss with management/enquire of the legal adviser as to whether any other customers of
Danube Co have experienced problems with sales of hoverboards and therefore the

AA – SUBSTANTIVE PROCEDURES 19
 likelihood of any potential future claims.
• Review board minutes to establish whether the directors believe that either claim will be
successful or not.
• Review the post-year-end bank ledger account to assess whether any payments have been
made to the customer or cash received from the supplier and compare with the amounts
recognised in the financial statements.
• Discuss with management why they have included a receivable for the claim against the
supplier as this is possibly a contingent asset and should only be recognised as an asset if the
receipt of cash is virtually certain. Consider the reasonableness of the proposed treatment.
• Obtain a written representation confirming management’s view that the lawsuit by Kalama
Kids Co is likely to be successful and the claim against Thames Co is virtually certain and
hence a provision and a receivable are required to be included.
• \ Review the adequacy of the disclosures of the lawsuit and supplier claim in the draft
· financial statements to ensure they are in accordance with IAS 37.

Encore Co
Potential breach of Transport regulations
• Review correspondence with the transport authority to establish details of the complaint and
the number of times the breach has allegedly occurred.
• Enquire of the directors why they are unwilling to provide or make disclosure, whether they
accept that any breaches took place but believe that the effect is immaterial or whether they
dispute their occurrence.
• Review Encore Co’s policies and procedures to record driving hours and rest periods and
compare to the regulations to determine the likelihood that breaches have occurred and how
frequently.
• Review correspondence with the transport authority to establish if there have been
discussions about other instances of potential non-compliance.
• Review correspondence with Encore Co’s legal advisers or, with the client’s permission,
contact the lawyers to establish their assessment of the likelihood of the breach being proven
and any fines that would be payable.
• Review the board minutes to ascertain management’s view as to the likelihood of payment
to the transport authority.
• Obtain a written representation to the effect that the directors are not aware of any other
breaches of laws or regulations that would require a provision or disclosure in the financial
statements.
• Inspect the post-year-end bank ledger account and bank statements to identify whether any
fines have been paid.

AA – SUBSTANTIVE PROCEDURES 20
Scarlett Co
Redundancy provision

• Review the board minutes for evidence of the decision to discontinue the brand of chemicals
prior to the year end.
• Review supporting documentation to confirm that the decision to discontinue the brand was
notified to the four members of staff prior to the year end.
• Obtain details of the redundancy calculated by employee, cast the schedule and agree to the
trial balance/financial statements.
• Recalculate the redundancy provision to confirm completeness and agree components of the
cost to supporting documentation such as employee contracts.
• Agree the redundancy payments made in July 20X5 to the bank ledger account/payroll
records and compare these to the provision in the financial statements.
• Obtain a written representation from management confirming the completeness of the costs.
• Review the disclosures included in the financial statements to verify they are in compliance
with requirements of IAS 37 Provisions, Contingent Assets and Contingent Liabilities.

AA – SUBSTANTIVE PROCEDURES 21
 Research and Development

Peach Co
• Obtain a schedule of capitalised costs within intangible assets, cast it and agree the closing
balance to the general ledger, trial balance and financial statements.
• Select a sample of capitalised costs and agree to invoices, payroll records or other source
documentation in order to confirm that the amount is correct and that the cost relates to the
project.
• Discuss with the directors the decision to capitalise the costs from 1 November 20X4 onwards
and assess whether this is based on the project meeting all of the conditions for capitalisation
in IAS 38.
• Review a breakdown of the nature of the costs capitalised to identify if any research costs
have been incorrectly included. If so, request that management remove these and include
within profit or loss.
• Select a sample of costs recorded as research expenses and development costs and agree to
supporting documentation confirming the date of the expenditure to ensure that costs were
allocated correctly.
• Review market research reports to confirm that there is a market for the new process and
that the selling price is high enough to generate a profit.
• Review feasibility reports as at 1 November 20X4 and discuss with directors their view that
the process was technically feasible at that date.
• Review the budgets in relation to the development project and the cash flow forecast in order
to assess whether Peach Co had access to adequate cash resources to complete the project
as at the date of capitalisation. Agree the budgets to supporting documentation.
• Discuss with the finance director the rationale for the useful life being applied, consider its
reasonableness and agree to supporting documentation.
• Recalculate the amortisation charge and confirm that it covers the period for May to August
20X5.
• Review the disclosures for intangible assets in the draft financial statements in order to
confirm that they are in accordance with IAS 38.

Hyacinth Co
• Obtain and cast a schedule of intangible assets, agree the closing balances to the general
ledger, trial balance and draft financial statements.
• Discuss with the finance director the rationale for the four-year useful life and consider its
reasonableness.
• Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm that it is in line with the amortisation policy of straight line over four
years and that amortisation only commenced from the point of production.
• For the three new computing software projects, discuss with management the details of each

AA – SUBSTANTIVE PROCEDURES 22
 project along with the stage of development and whether it has been capitalised or expensed.
• For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
• For those capitalised as development, agree costs incurred to invoices.
• Confirm technically feasible and intention to complete the project by discussion with
development managers or review of feasibility reports.
• Review market research reports to confirm Hyacinth Co has the ability to sell the product
once complete and probable future economic benefits will arise.
• Review the costs, projected revenue and cash flow budgets for the each of the three projects
to confirm Hyacinth Co has adequate resources to complete the development stage and that
probable future economic benefits exist. Agree the budgets to supporting documentation.
• Review the disclosures for intangible assets in the draft financial statements to verify that
they are in accordance with IAS 38 Intangible Assets.

Gooseberry Co
• Obtain and cast a schedule of intangible assets, detailing opening balances, amounts
capitalised in the current year, amortisation and closing balances.
• Agree the closing balances to the general ledger, trial balance and draft financial statements.
• Discuss with the finance director the rationale for the three-year useful life and consider its
reasonableness.
• Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is in line with the amortisation policy of straight line over three
years and that amortisation only commenced from the point of production.
• For the nine new projects, discuss with management the details of each project along with
the stage of development and whether it has been capitalised or expensed.
• For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
• For those capitalised as development, agree costs incurred to invoices and confirm
technically feasible by discussion with development managers or review of feasibility reports.
• Review market research reports to confirm Gooseberry Co has the ability to sell the product
once complete and probable future economic benefits will arise.
• Review the disclosures for intangible assets in the draft financial statements to verify that
they are in accordance with IAS 38 Intangible Assets.

Andromeda Co
• Obtain and cast a schedule of intangible assets, detailing opening balances, amount
capitalised in the current year, amortisation and closing balances.
• Agree the opening balances to the prior year financial statements.
• Agree the closing balances to the general ledger, trial balance and draft financial statements.

AA – SUBSTANTIVE PROCEDURES 23
• Recalculate the amortisation charge for a sample of intangible assets which have commenced
production and confirm it is line with the amortisation policy of straight line over five years.
• For the five new projects, discuss with management the details of each project along with the
stage of development and whether it has been capitalised or expensed.
• For those expensed as research, agree the costs incurred to invoices and supporting
documentation and to inclusion in profit or loss.
• For those capitalised as development, agree costs incurred to invoices and confirm
technically feasible by discussion with development managers or review of feasibility reports.
• Review market research reports to confirm Andromeda has the ability to sell the product
once complete and probable future economic benefits will arise.
• Review the disclosures for intangible assets in the draft financial statements are in
accordance with IAS 38 Intangible Assets.

AA – SUBSTANTIVE PROCEDURES 24
 PROPERTY, PLANT AND EQUIPMENT

Danube Co
Land and Buildings

• Obtain a schedule of all land and buildings, cast and agree to the trial balance and financial
statements.
• Consider the competence and capability of the valuer, by assessing through enquiry their
qualification, membership of a professional body and experience in valuing these types of
assets.
• Review the assumptions and method adopted by the valuer in undertaking the revaluation
to confirm the reasonableness and compliance with principles of IAS 16.
• Agree the schedule of revalued land and buildings to the valuation statement provided by the
valuer and to the non-current assets register.
• Agree all land and buildings on the non-current assets register to the valuation report to
ensure completeness of the land and buildings valued to ensure all assets in the same
category have been revalued in line with IAS 16.
• Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.
• Recalculate the depreciation charge for the year and confirm that for assets revalued at July
20X4, the depreciation was based on cost before the revaluation and based on the valuation
after on a pro rata basis.
• For a sample of land and buildings from the non-current assets register, physically verify to
confirm existence.
• For a sample of land and buildings trace back to the non-current assets register and general
ledger to confirm completeness.
• Review the financial statements disclosures relating to land and buildings to ensure they
comply with IAS 16.

Pear International Co
Addition and Disposal of PPE

Additions

• Obtain a breakdown of additions, cast the list and agree to the non-current asset register to
confirm completeness of plant & equipment (P&E).
• Select a sample of additions from the breakdown and agree the cost to supplier invoice to
confirm valuation.
• Verify rights and obligations by agreeing the addition of plant and equipment to a supplier
invoice in the name of Pear International Co.
• Review nature of the items included on the list of additions to confirm that they relate to
assets rather than repairs and maintenance.

AA – SUBSTANTIVE PROCEDURES 25
• For a sample of additions recorded in on the breakdown, physically verify them on the factory
floor to confirm existence.

Disposals

• Obtain a breakdown of disposals, cast the list and agree all assets have been removed from
the non-current asset register to confirm existence.
• Select a sample of disposals from the breakdown and agree the sale proceeds to supporting
documentation such as sundry sales invoices.
• Recalculate the profit/loss on disposal and agree to the income statement.

Encore Co
Addition and Disposal of Vehicles

• Cast the schedule of additions to vehicles, cast it and agree the total to the disclosure note
for property, plant and equipment. Agree the cost of the vehicles given in part-exchange to
the disclosure note to confirm that they have been removed from cost carried forward.
• For a sample of new vehicles on the schedule of additions agree the cost to the purchase
invoice, ensuring that the recorded cost includes the cash amount paid plus the trade-in
allowance for the old vehicle. Confirm that the invoice is made out to Encore Co.
• Physically inspect a sample of additions, confirming that the registration number of the
vehicle agrees to that on the non-current assets register.
• Review the non-current assets register to confirm that the 20 old vehicles were removed and
that the 20 new vehicles were included.
• Recalculate the loss on disposal of $1.1 m ($1.8 – ($4.6m – $3.9m) and agree to the trial
balance and statement of profit or loss.
• Agree the cash payment of $3.9m to the bank ledger account and bank statement.
• Recalculate the depreciation expense, confirming that the depreciation expense was based
on the old vehicles until 1 February and on the cost of the new vehicles after that date.
• Recalculate accumulated depreciation on the vehicles disposed of and confirm that this has
been removed from accumulated depreciation carried forward.
• In light of the loss on disposal, review depreciation rates on existing vehicles to establish if
the carrying amount of other vehicles may be overstated.
• Discuss with management Encore Co’s history of vehicle replacement to establish if vehicles
are being used for the entire period of their estimated useful life.
• Discuss with management why trade-in allowances were so much lower than the carrying
amounts of the vehicles to provide further evidence as to whether depreciation policies are
reasonable.
• Review the notes to the financial statements to ensure that disclosure of the additions and
disposals is in accordance with IAS 16 Property, Plant and Equipment.

AA – SUBSTANTIVE PROCEDURES 26
Harlem Co
Disposal of Plant and Machinery

• Obtain a breakdown of disposals, cast the list and review the non-current assets register to
confirm that all assets have been removed.
• Select a sample of disposals and agree sale proceeds to supporting documentation such as
sundry sales invoices.
• Recalculate the profit/loss on disposal and agree to the trial balance and statement of profit
or loss.
• Recalculate the depreciation charge for a sample of disposals to confirm the calculations are
correctly applied as per the company policy of a pro rata basis or a full year in the year of
acquisition and none in the year of disposal.
• Review the disclosure of the disposals in the draft financial statements and ensure it is in line
with IAS 16 Property, Plant and Equipment.

Elounda Co
Revaluation of PPE

• Obtain a schedule of all PPE revalued during the year and cast to confirm completeness and
accuracy of the revaluation adjustment and agree to trial balance and financial statements.
• Consider the competence and capability of the valuer, Martin Dullman, by assessing through
enquiry his qualification, membership of a professional body and experience in valuing these
types of assets.
• Consider whether the valuation undertaken provides sufficiently objective audit evidence.
Discuss with management whether Martin Dullman has any financial interest in Elounda Co
which along with the family relationship could have had an impact on his independence.
• Agree the revalued amounts to the valuation statement provided by the valuer.
• Review the valuation report and consider if all assets in the same category have been
revalued in line with IAS 16 Property, Plant and Equipment.
• Agree the revalued amounts for these assets are included correctly in the non- current assets
register.
• Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.
• Recalculate the depreciation charge for the year to ensure that for the assets revalued during
the year, the depreciation was based on the correct valuation and was for 12 months.
• Review the financial statements disclosures relating to the revaluation to ensure they comply
with IAS 16.

AA – SUBSTANTIVE PROCEDURES 27
Gooseberry Co
Matters identified regarding depreciation of PPE

• Discuss with management the rationale for the changes to property, plant and equipment
(PPE) depreciation rates, useful lives, residual values and depreciation methods and ascertain
how these changes were arrived at.
• Confirm the reasonableness of these changes, by comparing the revised depreciation rates,
useful lives and methods applied to PPE to industry averages and knowledge of the business.
• Review the asset expenditure budgets for the next few years to assess whether the revised
asset lives correspond with the planned period until replacement of the relevant asset
categories.
• Review the non-current asset register to assess if the revised depreciation rates have been
applied.
• Review and recalculate profits and losses on disposal of assets sold/scrapped in the year, to
assess the reasonableness of the revised depreciation rates.
• Select a sample of PPE and recalculate the depreciation charge to ensure that the non-current
assets register is correct and ensure that new depreciation rates have been appropriately
applied.
• Obtain a breakdown of depreciation by asset categories, compare to prior year; where
significant changes have occurred, discuss with management and assess whether this change
is reasonable.
• For asset categories where there have been a minimal number of additions and disposals,
perform a proof in total calculation for the depreciation charged on PPE, discuss with
management if significant fluctuations arise.
• Review the disclosure of the depreciation charges and policies in the draft financial
statements and ensure it is in line with IAS 16 Property, Plant and Equipment.

Pineapple Beach Hotel

Depreciation

• Review the reasonableness of the depreciation rates applied to the new leisure facilities and
compare to industry averages.
• Review the asset expenditure budgets for the next few years to assess whether there are any
plans to replace any of the new leisure equipment, as this would indicate that the useful life
is less than 10 years.
• Review profits and losses on disposal of assets disposed of in the year to assess the
reasonableness of the depreciation policies.
• Select a sample of new leisure equipment and recalculate the depreciation charge to ensure
arithmetical accuracy of the charge.
• Perform a proof in total calculation for the depreciation charged on the new equipment,
discuss with management if significant fluctuations arise.
• Review the disclosure of the depreciation charges and policies in the draft financial
statements.

AA – SUBSTANTIVE PROCEDURES 28
 INVENTORY
Spinach Co
Before and During Inventory Count

Before the count

• Review the prior year audit files to identify whether there were any particular warehouses
where significant inventory issues arose last year.
• Discuss with management whether any of the warehouses this year are new, whether any
significant changes have occurred this year with regards to inventory items or if any
warehouses have experienced significant control issues.
• Decide which of the six warehouses the audit team members will attend, basing this on
materiality and risk of each site.
• Obtain a copy of the proposed inventory count instructions, review them to identify any
control deficiencies and, if any are noted, discuss them with management prior to the counts.
• Discuss with management whether third-party inventory is stored in any of the other
warehouses and what the procedures are for ensuring that third-party inventory is omitted
from the counts.

During the count

• Observe the counting teams of Spinach Co to confirm whether the inventory count
instructions are being followed correctly.
• Select samples of inventory and perform test counts from inventory sheets to physical
inventory and from physical inventory to inventory sheets.
• Observe the counts in order to confirm that the procedures for identifying and segregating
damaged goods are operating correctly and inspect inventory for evidence of any damaged
or slow-moving items.
• Observe the procedures for movements of inventory during the counts, in order to confirm
that all movements have ceased.
• Discuss with the internal audit supervisors how any raw materials quantities have been
estimated. Where possible, reperform the procedures adopted by the supervisors.
• Obtain a copy of the completed sequentially numbered inventory sheets for follow up testing
at the final audit.
• Obtain copies of the last goods received notes (GRNs) and goods despatch notes (GDNs) for
31 July and request copies of GRNs and GDNs raised on 1 August in order to perform cut-off
procedures as at the year end.
• Observe the procedures carried out by Spinach Co’s staff in identifying third party inventories
are operating correctly and review the completed inventory count sheets to confirm no third-
party inventory is included.

AA – SUBSTANTIVE PROCEDURES 29
Andromeda Co
Before and During Inventory Count

Before the count

• Review the prior year audit files to identify whether there were any particular warehouses
where significant inventory issues arose last year.
• Discuss with management whether any of the warehouses this year are new, or have
experienced significant control issues.
• Decide which of the 12 warehouses the audit team members will attend, basing this on
materiality and risk of each site.
• Obtain a copy of the proposed inventory count instructions, review them to identify any
control deficiencies and if any are noted, discuss them with management prior to the counts.

During the count

• Observe the counting teams of Andromeda to confirm whether the inventory count
instructions are being followed correctly.
• Select a sample of inventory and perform test counts from inventory sheets to warehouse
aisle and from warehouse aisle to inventory sheets.
• Confirm the procedures for identifying and segregating damaged goods are operating
correctly, and assess inventory for evidence of any damaged or slow-moving items.
• Observe the procedures for movements of inventory during the count, to confirm that all
movements have ceased.
• Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up
testing on the final audit.
• Identify and make a note of the last goods received notes and goods despatch notes for 31
July in order to perform cut-off procedures.
• Discuss with the internal audit supervisor how any raw materials quantities have been
estimated. Where possible, reperform the procedures adopted by the supervisor.

Lily Window Glass Co

During Inventory Count

• Observe the counting teams of Lily Window Glass to confirm whether the inventory count
instructions are being followed correctly.
• Select a sample and perform test counts from inventory sheets to warehouse aisle and from
warehouse aisle to inventory sheets.
• Confirm the procedures for identifying and segregating damaged goods are operating
correctly.
• Select a sample of damaged items as noted on the inventory sheets and inspect these
windows to confirm whether the level of damage is correctly noted.
• Observe the procedures for movements of inventory during the count, to confirm that no
raw materials or finished goods have been omitted or counted twice.
• Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up

AA – SUBSTANTIVE PROCEDURES 30
 testing on the final audit.
• Identify and make a note of the last goods received notes (GRNs) and goods despatch notes
(GDNs) for 31 December in order to perform cut-off procedures.
• Observe the procedures carried out by the warehouse manager in assessing the level of work-
in-progress and consider the reasonableness of any assumptions used.
• Discuss with the warehouse manager how he has estimated the raw materials quantities. To
the extent that it is possible, reperform the procedures adopted by the warehouse manager.
• Identify and record any inventory held for third parties (if any) and confirm that it is excluded
from the count.

Audit Software Procedures - Inventory cycle and year-end inventory balance

• The audit team can use audit software to calculate the inventory holding period for the year-
to-date to compare against the prior year to identify whether inventory is turning over more
slowly, as this may be an indication that it is overvalued.
• Audit software can be utilised to produce an aged inventory analysis to identify any slow-
moving goods, which may require write down or an allowance.
• Cast the inventory listing to confirm the completeness and accuracy of inventory.
• Audit software can be used to select a representative sample of items for testing to confirm
net realisable value and/or cost.
• Audit software can be utilised to recalculate cost and net realisable value for a sample of
inventory.
• Verify cut-off by testing whether the dates of the last GRNs and GDNs recorded relate to pre
year end; and that any with a date of 1 August 20X5 onwards have been excluded from the
inventory records.
• Use audit software to confirm whether any inventory adjustments noted during the count
have been correctly updated into final inventory records.

Recorder Communication Co
Continuous (Perpetual) Inventory Count

• Attend at least one of the continuous (perpetual) inventory counts to review whether the
controls over the inventory count are adequate.
• Confirm that all of the inventory lines have been counted or are due to be counted at least
once a year by reviewing the schedules of counts undertaken/due to be undertaken.
• Review the adjustments made to the inventory records on a monthly basis to gain an
understanding of the level of differences arising on a month by month basis.
• Discuss with management how they will ensure that year-end inventory will not be under or
overstated. If significant differences consistently arise, this could indicate that the inventory
records are not adequately maintained.
• Consider attending the inventory count at the year end to undertake test counts of inventory
from records to floor and from floor to records in order to confirm the existence and
completeness of inventory.

AA – SUBSTANTIVE PROCEDURES 31
Hyacinth Co
Valuation of Inventory

• Obtain the breakdown of WIP and agree a sample of WIP assessed during the inventory count
to the WIP schedule, agreeing the percentage completion to that recorded at the inventory
count.
• For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and
agree raw material costs to recent purchase invoices, labour costs to time sheets or payroll
records and confirm overheads allocated are of a production related nature.
• Examine post-year-end credit notes to determine whether there have been returns which
could signify that a write down is required.
• Select a sample of year-end finished goods and compare cost with post-year- end sales
invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
• Discuss the basis of WIP valuation with management and assess its reasonableness.
• Select a sample of items included in WIP at the year end and ascertain the final unit cost price
by verifying costs to be incurred to completion to relevant supporting documentation.
Compare to the unit sales price included in sales invoices post-year-end to assess NRV.
• Review aged inventory reports and identify any slow-moving goods, discuss with management
why these items have not been written down or if an allowance is required.
• For the defective batch of product Crocus, review board minutes and discuss with
management their plans for selling these goods, and why they believe these goods have a NRV
of $90,000.
• If any Crocus products have been sold post year end, review the sales invoice to assess NRV.
• Agree the cost of $450,000 for product Crocus to supporting documentation to confirm the
raw material cost, labour cost and any overheads attributed to the cost.
• Confirm if the final adjustment for the damaged product is $360,000 ($450,000 – $90,000) and
discuss with management if this adjustment has been made. If so, follow through the write
down to confirm.

Elounda
Valuation of Inventory

• Obtain a schedule of all raw materials, finished goods and work in progress (WIP) inventory
and cast to confirm completeness and accuracy of the balance and agree to trial balance and
financial statements.
• Obtain the breakdown of WIP and agree a sample of WIP assessed during the count to the
WIP schedule, agreeing the percentage completion as recorded at the inventory count.
• For a sample of inventory items (finished goods and WIP), obtain the relevant cost sheets and
confirm raw material costs to recent purchase invoices, labour costs to time sheets or wage
records and overheads allocated are of a production nature.
• For a sample of inventory items, review the calculation for equivalent units and associated
equivalent unit cost and recalculate the inventory valuation.
• Select a sample of year-end finished goods and review post-year-end sales invoices to
ascertain if net realisable value (NRV) is above cost or if an adjustment is required.
• Select a sample of items included in WIP at the year-end and ascertain the final unit cost price,
verifying to relevant supporting documentation, and compare to the unit sales price included
in sales invoices post year end to assess NRV.

AA – SUBSTANTIVE PROCEDURES 32
• Review aged inventory reports and identify any slow-moving goods, discuss with management
why these items have not been written down or if an allowance is required.
• For the defective chemical compound E243, discuss with management their plans for
disposing of these goods, and why they believe these goods have a NRV of $400,000.
• If any E243 has been sold post year end, agree to the sales invoice to assess NRV.
• Agree the cost of $720,000 for compound E243 to supporting documentation to confirm the
raw material cost, labour cost and any overheads attributed to the cost.
• Confirm if the final adjustment for compound E243 is $320,000 (720 – 400) and discuss with
management if this adjustment has been made; if so follow through the write down to
confirm.
• Review the financial statements disclosures relating to inventory and WIP to ensure they
comply with IAS 2 Inventories.

Purrfect Co
Matters identified regarding the inventory valuation
• Obtain and cast the inventory listing of Vego Dog products and agree the total cost of $2.4m
to inventory records.
• Agree the quantity of Vego Dog products shown as held at the year end to the year-end
inventory count records.
• Request a breakdown of the cost calculation of each unit of this product and discuss with
management how the standard cost was derived.
• Recalculate the cost calculations to confirm that the quantity multiplied by the standard cost
is $2.4m.
• For a sample of finished goods items, obtain standard cost cards and agree:
➢ raw material costs to recent purchase invoices
➢ labour costs to time sheets or wage records
➢ overheads allocated to invoices and that they are of a production nature.
• Compare sales prices over time to establish if the price has been reduced because of falling
demand to determine whether an allowance is required.
• Compare actual sales units per month to budgeted sales per month from before and after the
year end to establish how much lower actual sales are than expected and discuss with
management.
• Select a sample of items included in inventory of Vego Dog and review post- year-end sales
invoices to ascertain if net realisable value (NRV) is above cost or if an adjustment is required.

Darjeeling Co
Faulty Inventory
• Obtain a breakdown of the damaged goods held in inventory and returned from customers
and cast to confirm its accuracy.
• From the breakdown, agree the damaged goods quantities manufactured since June to
production records; and agree to sales records the quantities sold.
• Agree on a sample basis the returns from customers as per the breakdown back to sales

AA – SUBSTANTIVE PROCEDURES 33
 returns documentation to confirm the existence of the returns quantities.
• Discuss with management the current status of their plans for this product line and whether
they are able to rectify the damage and then sell the goods on. If so, agree the costs of
rectification to supporting documentation.
• If the damaged inventory has been rectified and sold post year end, agree to the sales invoice
to assess NRV in line with the new cost of the product.
• Agree the cost of damaged goods to supporting documentation to confirm the raw material
cost, labour cost and any overheads attributed to the cost.
• Discuss with management if the goods have been written down; if so, follow through the write
down to the inventory valuation to confirm.
• Inspect monthly board meeting minutes from June 20X5 onwards to obtain further
information regarding the faulty paint and its possible resale value.

AA – SUBSTANTIVE PROCEDURES 34
 REVENUE
Darjeeling Co
• Compare the overall level of revenue against prior years and budget for the year and
investigate any significant fluctuations.
• Perform a proof in total calculation for revenue, creating an expectation of the average price
for the main paint products multiplied by the increased sales volumes for this year. This
expectation should be compared to actual revenue and any significant fluctuations should be
investigated.
• Obtain a schedule of sales for the year broken down into the main product categories and
compare this to the prior year breakdown and for any unusual movements, discuss with
management.
• Calculate the final gross profit margin for Darjeeling Co and compare this to the prior year and
investigate any significant fluctuations.
• Select a sample of sales invoices for customers and agree the sales prices back to the price list
or customer master data information to ensure the accuracy of invoices.
• For a sample of invoices, recalculate invoice totals including discounts and sales tax.
• Select a sample of credit notes raised, trace through to the original invoice and ensure the
invoice has been correctly removed from sales.
• Select a sample of customer orders and agree these to the despatch notes and sales invoices
through to inclusion in the detailed sales listing and revenue general ledger accounts to
ensure completeness of revenue.
• Select a sample of despatch notes both pre and post year end and follow these through to
sales invoices in the correct accounting period to ensure that cut-off has been correctly
applied.
• For sales made under the price promise, compare the level of claims made to date with the
refund liability recognised and assess whether it is reasonable.
• For a sample of sales invoices issued between June and the product recall, trace to
subsequent credit notes to confirm that the sale has been removed from revenue.

Heraklion Co
• Compare the overall level of revenue against prior years and budgets and investigate any
significant fluctuations.
• Obtain a schedule of sales for the year broken down into the main product categories and
compare this to the prior year breakdown and for any unusual movements discuss with
management.
• Calculate the gross profit margin for Heraklion Co and compare this to the prior year and
investigate any significant fluctuations.
• Select a sample of sales invoices for customers and agree the sales prices back to the price list
or customer master data information to ensure the accuracy of invoices.
• Select a sample of credit notes raised, trace through to the original invoice and ensure the
invoice has been correctly removed from sales.
• Select a sample of customer orders and agree these to the despatch notes and sales invoices
through to inclusion in the detailed sales listing and revenue general ledger accounts to
ensure completeness of revenue.
• Select a sample of despatch notes both pre and post year end and follow these through to

AA – SUBSTANTIVE PROCEDURES 35
 sales invoices in the correct accounting period to ensure that cut-off has been correctly
applied.

Spinach Co
• Cast a breakdown of revenue and agree to the general ledger, trial balance and draft financial
statements.
• Compare the overall level of revenue against prior year/budget and investigate any significant
fluctuations.
• Obtain a breakdown of sales analysed by month and compare this to the prior year/month.
Investigate any significant fluctuations.
• Obtain a schedule of sales for the year disaggregated into the main product categories/by
type of customer by month and compare this to the prior year breakdown. Discuss any
unusual movements with management.
• Perform a proof in total calculation for revenue by taking the prior year revenue and
increasing it for the three new product lines launched in February 20X5 and the price rise in
line with inflation from September 20X4 and other known factors. This expectation should be
compared to actual revenue and any significant fluctuations should be investigated.
• Calculate the gross profit margin for Spinach Co for the year, compare this to the prior year
and investigate any significant fluctuations.
• Select a sample of sales invoices for wholesale customers and agree the sales prices back to
the price list or customer master data information, noting whether the price was pre or post
the price increase, to confirm the accuracy of invoices.
• For a sample of invoices, recalculate invoice totals including any discounts and sales tax.
• Select a sample of credit notes raised, trace through to the original invoice and ensure the
invoice has been correctly removed from sales.
• Select a sample of despatch notes and agree these to sales invoices through to inclusion in the
detailed sales listing and revenue accounts in the general ledger to confirm completeness of
revenue.
• Select a sample of despatch notes both pre and post year end and follow these through to
sales invoices in the correct accounting period to ensure that cut-off has been correctly
applied.
• Select a sample of website sales made in the final week prior to the year end and where goods
were despatched post year end, confirm that the sale proceeds received are recorded as
deferred income (contract liability) rather than as revenue.

Pacific Co
Analytical Procedures
• Compare the overall level of revenue against prior years and discuss the reasons for the 9·4%
increase with management and agree to supporting documentation.
• Compare the overall level of revenue against the budget for the year and investigate any
significant fluctuations.
• Obtain a schedule of sales for the year disaggregated into the eight main product lines and
compare this to the prior year breakdown and budget to understand what impact the new
products have had on revenue. For any unusual movements, discuss with management.
• Obtain a schedule of sales for the year analysed for the existing 13 stores. Compare this to the
prior year and discuss any unusual movements/significant fluctuations with management.

AA – SUBSTANTIVE PROCEDURES 36
• Perform a proof in total calculation for revenue. The prior year revenue for the eight main
product lines should be taken and an adjustment should be made for sales from the new
product lines and for the new store for approximately nine months. This expectation should
be compared to actual revenue and whether this equates to 9·4% growth over the prior year.
Any significant fluctuations should be investigated.
• Calculate the gross profit margin for Pacific Co and compare this to the prior year and
investigate any significant fluctuations.

Pineapple Beach Hotel

Analytical Procedures
• Compare revenue for the current year against revenue for the prior year and budget and
investigate any unusual fluctuations through discussion with management.
• Compare revenue by category (accommodation, leisure facilities and restaurants) and
compare against the prior year and investigate any unusual fluctuations through discussion
with management.
• Analyse revenue by category on a month by month basis to assess whether revenue appears
reasonable taking into consideration seasonal fluctuations and any potential bad publicity
caused by the food poisoning lawsuit.
• Calculate the gross profit margin by category and compare with prior year. Discuss any
unusual fluctuations with management.
• Perform a proof in total for revenue from accommodation by multiplying the average
occupancy rate by the average room rate and compare with actual revenue for
accommodation. Discuss any unusual fluctuations with management.
• Perform a proof in total for leisure facility membership revenue by multiplying the average
number of members by the annual membership fee and compare with actual revenue for
leisure memberships. Discuss any unusual fluctuations with management.
• Calculate the average revenue per membership and compare with the annual membership fee
to assess reasonableness. Discuss any unusual fluctuations with management.

Hawthorn Co
Assertions (Occurrence, Completeness, Cut off, Classification and Presentation, Accuracy)

Occurrence
The transactions and events that have been recorded have actually occurred and pertain to the entity.

• Select a sample of sales transactions recorded in the detailed sales listing; agree the details
back to a goods despatched note (GDN) and customer order.
• Review the monthly breakdown of sales per key product, compare to the prior year and
budget and investigate any significant differences.

Completeness
All transactions and events that should have been recorded have been recorded.

• Select a sample of GDNs raised during the year; agree to the sales invoice and that they are
recorded in the detailed sales listing.
• Review the total amount of sales, compare to the prior year and budget and investigate any
significant differences.

AA – SUBSTANTIVE PROCEDURES 37
Accuracy

The amounts and other data relating to recorded transactions and events have been recorded
appropriately.

• Select a sample of sales invoices and recalculate that the totals and calculation of sales tax are
correct.
• For a sample of sales invoices, confirm the sales price stated agrees to the authorised price
list.

Cut-off

Transactions and events have been recorded in the correct accounting period.

• Select a sample of pre and post-year-end GDNs and agree that the sale is recorded in the
correct period’s detailed sales listing.
• Review the post-year-end sales returns and agree if they relate to pre-year-end sales that the
revenue has been correctly removed from the detailed sales listing.

Classification

Transactions and events have been recorded in the proper accounts.

• Agree for a sample of sales invoices that they have been correctly recorded within the
revenue general ledger account codes and included within revenue in the financial
statements.

Presentation

Transactions and events are appropriately aggregated or disaggregated and clearly described, and
related disclosures are relevant and understandable in the context of the applicable financial reporting
framework.

• Obtain a breakdown of revenue by account code and cast to ensure accuracy. Agree the
breakdown of revenue disclosed in the financial statements to the revenue account codes
within the general ledger.

Sagittarii Co
Income (Charity Organization)
• Obtain a schedule of all Vega Vista C o’s income and cast to confirm completeness and
accuracy of the balance and agree to the trial balance.
• Compare the individual categories of income of festival ticket sales, sundry sales and
donations against prior years and investigate any significant differences.
• For the annual festival, construct a proof-in-total calculation of the number of tickets sold,
approximately 15,000, multiplied by the ticket price of $35. Compare this to the income
recorded and discuss any significant differences with management.
• For tickets sold on the day of the festival reconcile from ticket stubs the number of tickets sold
multiplied by $35 and agree these sales to cash banked in the bank statement.
• Discuss with management their procedures for ensuring advance ticket sales for the

AA – SUBSTANTIVE PROCEDURES 38
 September 20X5 festival are excluded from income and instead recognised as deferred
income in the statement of financial position.
• Select a sample of advance ticket sales made online, agree that the transaction has been
excluded from current year income and follow through to inclusion in deferred income.
• Agree journal entry to transfer prior year deferred income relating to the 20X4 festival to
current year income to the ledger and agree figures to prior year financial statements.
• For sundry sales, obtain a breakdown of the income received per stall and agree to supporting
documentation provided by each stall holder. Recalculate the fixed percentage received is as
per the agreement/contract made with Vega Vista Co.
• Compare sundry sales per stall holder to prior year sales data and investigate any significant
differences.
• For monthly donations, trace a sample of donations from sign up documentation to the bank
statements, bank ledger account and income listing to ensure that they are recorded
completely and accurately.
• For a sample of new donors in the year, agree the monthly sum and start date from their
completed forms and trace to the monthly donations received account and agree to the bank
ledger account and bank statements.

Insect4U Co
Completeness of Income (Charity Organization)
• Obtain a schedule of all Insects4U Co’s income and cast to confirm completeness and
accuracy of the balance.
• Compare the individual categories of income against prior year and investigate any significant
differences.
• For monthly donations, trace a sample of donations received in the bank statements to the
bank ledger account to ensure that they are recorded completely and accurately.
• For a sample of new subscribers in the year, agree from their completed subscription form
the monthly sum and start date, trace to the monthly donations received account and agree
to the bank ledger account and bank statements.
• For donations received in the post, review correspondence from donors, agree to the
donations account and trace sums received to the bank ledger account and bank statements
to ensure all completely recorded.
• For the charity events, undertake a proof in total calculation of the number of tickets sold
multiplied by the ticket price, compare this to the income recorded and discuss any significant
differences with management.

AA – SUBSTANTIVE PROCEDURES 39
 DIRECTOR BONUS AND REMUNERATION

Hart Co
• Obtain a schedule of the directors’ bonus and cast the schedule to ensure its accuracy. Agree
the amount to that disclosed in the financial statements.
• Review the schedule of current liabilities and confirm the bonus accrual is included as a year-
end liability.
• Agree the individual bonus payments to the post-year-end payroll records.
• Recalculate the bonus payments and agree the criteria to supporting documentation and the
percentage rates to be paid to the directors’ service contracts.
• Confirm the amount of each bonus paid by agreeing to the post-year-end bank ledger
account and bank statements.
• Compare the profit before tax used in the bonus calculation to the final profit before tax
figure to confirm whether any adjustment is required to the bonus paid and discuss any
differences with management.
• Agree the amounts paid to each director to board minutes and contracts to ensure the
amounts included in the current year financial statements are fully accrued and disclosed.
• Review the board minutes to identify whether any additional payments relating to this year
have been agreed for any directors.
• Obtain a written representation from management confirming the completeness of
directors’ remuneration including the bonus.
• Review the disclosures made regarding the bonus paid to directors and assess whether these
are in compliance with local legislation.

Recorder Communication Co
• Obtain a schedule of the directors’ remuneration including the bonus paid and cast the
addition of the schedule to confirm arithmetical accuracy.
• Agree the individual bonus payments to the payroll records.
• Inspect the bank ledger account and bank statements to confirm the amount of each bonus
paid.
• Review the board minutes to confirm whether any additional bonus payments relating to this
year have been agreed.
• Obtain a written representation from management confirming the completeness of
directors’ remuneration including the bonus.
• Review any disclosures made of the bonus and assess whether these are in compliance with
local legislation.

AA – SUBSTANTIVE PROCEDURES 40
Gooseberry Co
• Obtain a schedule of the directors’ bonus paid in May 20X5 and cast the schedule to ensure
accuracy and agree amount disclosed in the financial statements.
• Review the schedule of current liabilities and confirm the bonus accrual is included as a year-
end liability.
• Agree the individual bonus payments to the payroll records.
• Recalculate the bonus payments and agree the criteria, including the exclusion of intangible
assets, to supporting documentation and the percentage rates to be paid to the directors’
service contracts.
• Confirm the amount of each bonus paid post year end by agreeing to the bank ledger account
and bank statements.
• Agree the amounts paid per director to board minutes to ensure the sums included in the
current year financial statements are fully accrued and disclosed.
• Review the board minutes to identify whether any additional payments relating to this year
have been agreed for any directors.
• Obtain a written representation from management confirming the completeness of
directors’ remuneration including the bonus.
• Review the disclosures made regarding the bonus paid to directors and assess whether these
are in compliance with local legislation.

Airsoft Co
• Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in April and
cast the schedule to ensure accuracy.
• Agree a sample of the individual monthly salary payments and the bonus payment in April to
the payroll records.
• Confirm the amount of each bonus paid by agreeing to the bank ledger account and bank
statements.
• Review the board minutes to identify whether any additional payments relating to this year
have been agreed for any directors.
• Agree the amounts paid per director to board minutes to ensure the sums included are
genuine.
• Obtain a written representation from management confirming the completeness of
directors’ remuneration including the bonus.
• Review the disclosures made regarding the directors’ remuneration and assess whether
these are in compliance with local legislation.

AA – SUBSTANTIVE PROCEDURES 41
 BANK AND CASH BALANCE
Daley Co
• Obtain a bank confirmation letter from Daley Co’s bank for all of its bank accounts.
• Agree all accounts listed on the bank confirmation letter to Daley Co’s bank reconciliations
and trial balance to ensure completeness of bank balances.
• Obtain the year-end bank reconciliations and cast to ensure mathematical accuracy.
• Agree the balance per cash book/bank ledge account on the year-end bank reconciliation
statements to the cash book/trial balance/financial statements.
• Agree the balance per the bank reconciliations to the year-end bank confirmation letter and
bank statements.
• Trace all outstanding lodgements/deposits to the pre-year-end cash book/bank ledger
account, post-year-end bank statement and also to the paying-in book pre year end.
• Trace all unpresented cheques through to the pre-year-end cash book/bank ledger account
and post-year-end bank statements.For any unusual amounts or delays, obtain explanations
from management.
• Examine any old unpresented cheques to assess if they need to be written back as they are
no longer valid.
• Examine the bank confirmation letter for details of any security provided by the company or
any legal right of set-off as this may require disclosure.
• Review the cash book/bank ledger account and bank statements for any unusual items or
large transfers around the year end as this may be evidence of window dressing.

Jasmine
• Obtain a bank confirmation letter from Jasmine Co’s bankers for all of its accounts.
• Agree all accounts listed on the bank confirmation letter to the company’s bank
reconciliations or the trial balance/general ledger to ensure completeness of bank balances.
• For the current account, obtain Jasmine Co’s bank reconciliation and cast to check the
additions to ensure arithmetical accuracy.
• Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.
• Agree the reconciliation’s balance per the bank ledger account to the year-end bank ledger
account.
• Trace all the outstanding lodgements to the pre-year-end bank ledger account, post-year-
end bank statement and also to the pre-year-end paying-in book.
• Trace all unpresented cheques through to a pre-year-end bank ledger account and post-year-
end bank statement. For any unusual amounts or significant delays, obtain explanations from
management.
• Examine any old unpresented cheques to assess whether they need to be written back as
they are no longer valid to be presented.
• Review the bank ledger account and bank statements for any unusual items or large transfers
around the year end, as this could be evidence of window dressing.

AA – SUBSTANTIVE PROCEDURES 42
• Examine the bank confirmation letter for details of any security provided by Jasmine Co, with
regards to the bank overdraft or any legal right of set-off as this may require disclosure.
• For the savings bank accounts, review any reconciling items on the year-end bank
reconciliations and agree to supporting documentation.
• Review the financial statements to ensure that the disclosure of bank balances is complete
and accurate and classified appropriately between current assets and current liabilities.

Airsoft Co
• Obtain a bank confirmation letter from Airsoft Co’s bankers for all of its bank accounts.
• Agree all accounts listed on the bank confirmation letter to Airsoft Co’s bank reconciliations
and the trial balance to ensure completeness of bank balances.
• For all bank accounts, obtain Airsoft Co’s bank account reconciliation and cast to ensure
arithmetical accuracy.
• Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.
• Agree the reconciliations balance per the bank ledger account to the year-end bank ledger
account.
• Trace all the outstanding lodgements to the pre-year-end bank ledger account, post-year-
end bank statement and also to the pre-year-end paying-in-book.
• Trace all unpresented cheques through to a pre-year-end bank ledger account and post-year-
end statement. For any unusual amounts or significant delays, obtain explanations from
management.
• Examine any old unpresented cheques to assess if they need to be written back as they are
no longer valid to be presented.
• Review the bank ledger account and bank statements for any unusual items or large transfers
around the year end, as this could be evidence of window dressing.
• Examine the bank confirmation letter for details of any security provided by Airsoft Co or any
legal right of set-off as this may require disclosure.
• Review the financial statements to ensure that the disclosure of bank balances is complete
and accurate.

Fox Industries
• Obtain Fox’s current bank account reconciliation and check the additions to ensure
arithmetical accuracy.
• Obtain a bank confirmation letter from Fox’s bankers for all of its accounts.
• For the current account, agree the balance per the bank statement to an original year-end
bank statement and also to the bank confirmation letter.
• Agree the reconciliation’s balance per the bank ledger account to the year-end bank ledger
account.
• Trace all of the outstanding lodgements to the pre-year-end bank ledger account, post-year-

AA – SUBSTANTIVE PROCEDURES 43
 end bank statement and also to pre-year-end paying-in book.
• Trace all unpresented cheques through to a pre-year-end bank ledger account and post-year-
end statement. For any unusual amounts or significant delays obtain explanations from
management.
• Examine any old unpresented cheques to assess if they need to be written back as they are
no longer valid to be presented.
• Agree all balances listed on the bank confirmation letter to Fox’s bank reconciliations or the
trial balance to ensure completeness of bank balances.
• Review the bank ledger account and bank statements for any unusual items or large transfers
around the year end, as this could be evidence of window dressing.
• Examine the bank confirmation letter for details of any security provided by Fox or any legal
right of set-off as this may require disclosure.
• For the saving (deposit) bank accounts, review any reconciling items on the year end bank
reconciliations and agree to supporting documentation.
• In respect of material cash balances, count cash balances at the year end and agree to petty
cash records.
• Review the financial statements to ensure that the disclosure of cash and bank balances are
complete and accurate.

AA – SUBSTANTIVE PROCEDURES 44
 BANK LOAN
Sagittarii Co
• Obtain a schedule of opening and closing loans detailing any changes during the year. Cast
the schedule to confirm its accuracy and agree the closing balances to the trial balance and
draft financial statements.
• For the new loan taken out in the year, review the loan agreement to confirm the amount
borrowed, the repayment terms and the interest rate applicable.
• For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan
agreement to the bank ledger account and bank statements.
• For loans repaid, agree the final settlement amount per bank correspondence to payments
out during the year in the bank ledger account and bank statements.
• Agree the quarterly repayment of the new loan of $150,000 paid on 31 March 20X5 to the
bank ledger account and bank statement.
• Recalculate the split of the loan repayment made on 31 March 20X5 between interest and
principal, recalculate interest and agree to inclusion in statement of profit or loss, and
outstanding loan balance reduced by principal amount repaid.
• Review the bank correspondence and loan agreements for confirmation of any early
settlement charges incurred on the loans repaid. Agree that these were charged to the
statement of profit or loss as a finance charge.
• Obtain direct confirmation at the year end from the loan provider of the outstanding
balances and any security provided. Agree confirmed amounts to the loans schedule.
• Review all loan agreements for details of covenants and recalculate all covenants to identify
any potential or actual breaches.
• Review the disclosure of non-current liabilities in the draft financial statements, including any
security provided and assess whether these are in accordance with accounting standards and
local legislation. Additionally, confirm that the split of current and non-current loans in the
financial statements is correct.

Elounda Co
• Agree the opening balance of the bank loan to the prior year audit file and financial
statements.
• For any loan payments made during the year, agree the cash outflow to the bank ledger
account and bank statements.
• Review bank correspondence to identify whether any late payment penalties have been
levied and agree these have been charged to profit or loss account as a finance charge.
• Obtain direct confirmation at the year end from the loan provider of the outstanding balance
and any security provided. Agree confirmed amounts to the loan schedule and financial
statements.
• Review the loan agreement for details of covenants and recalculate to identify any breaches
in these.
• Agree closing balance of the loan to the trial balance and draft financial statements and that
the disclosure is adequate, including any security provided, that the loan is disclosed as a
current liability and disclosure is in accordance with accounting standards and local
legislation.

AA – SUBSTANTIVE PROCEDURES 45
 ISSUE OF SHARES
Spinach Co
Issue of Normal Share

• Review board minutes to confirm the number of additional shares issued in May 20X5 and
the issue price.
• Agree the issue of shares is permitted from a review of any statutory constitution agreements
in place.
• Review legal documentation, correspondence or share issue prospectus to confirm the
details of the share issue.
• Agree the issue of new shares to the share register.
• Inspect the bank ledger account and bank statements for evidence of the amount of cash
received from the share issue.
• Where the sum received is less than $4.3m, confirm the difference is treated as share capital
called up but not paid in the financial statements.
• Recalculate the split of proceeds between the nominal value of shares and premium on issue
and agree correctly recorded within share capital and share premium account (other
components of equity).
• Review the disclosure of the share issue in the draft financial statements and ensure it is in
line with relevant accounting standards and local legislation.

Andromeda Co
Issue of Rights Shares

• Review board minutes to confirm the amount of finance to be raised via rights issue.
• Recalculate the amount raised by multiplying the number of shares issued with the share
price of $2.50 to confirm accuracy.
• Inspect bank statements to confirm the amount received from the rights issue.
• Recalculate split of share capital and share premium and agree to the financial statements.
• Review financial statement disclosure to confirm compliance with financial reporting
framework.

AA – SUBSTANTIVE PROCEDURES 46
 GOING CONCERN
Spadefish Co
• Obtain the company’s cash flow forecast and review the cash in and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash flows.
• Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.
• Evaluate management’s plans for future actions, including their contingency plans in relation
to ongoing financing and plans for generating revenue, and consider the feasibility of these
plans.
• Review the company’s post-year-end sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
• Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.
• Review any bank correspondence to assess the likelihood of the bank renewing the overdraft
facility.
• Review post-year-end correspondence with suppliers to identify if any have threatened legal
action or any others have refused to supply goods.
• Inspect any contracts or correspondence with suppliers to confirm supply of the company’s
specialist equipment. If no new supplier has been confirmed, discuss with management their
plans to ensure the company can continue to meet customer demand.
• Enquire of the lawyers of Marlin Co as to the existence of any litigation.
• Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate.
• Review the post-year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.
• Review post-year-end management accounts to assess if in line with cash flow forecast.
• Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
• Consider whether the going concern basis is appropriate for the preparation of the financial
statements.
• Obtain a written representation confirming the directors’ view that Marlin Co is a going
concern.

Jasmine Co
• Obtain the company’s cash flow forecast and review the cash inflows and outflows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash.
• Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash in/outflow.
• Evaluate management’s plans for future actions, including their contingency plans in relation
to ongoing financing and plans for generating revenue, and consider the feasibility of these
plans.

AA – SUBSTANTIVE PROCEDURES 47
• Review the company’s post-year-end sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
• Review any agreements with the bank to determine whether any covenants have been
breached, especially in relation to the overdraft.
• Review any bank correspondence to assess the likelihood of the bank renewing the overdraft
facility.
• Review post-year-end correspondence with suppliers to identify if any have threatened legal
action or any others have refused to supply goods.
• With the client’s permission, enquire of the lawyers of Jasmine Co as to the existence of any
litigation and if so, the likely outcome of any litigation.
• Perform audit tests in relation to subsequent events to identify any items which might indicate
or mitigate the risk of going concern not being appropriate.
• Review the post-year-end board minutes to identify any other issues which might indicate
further financial difficulties for the company.
• Review post-year-end management accounts to assess if in line with cash flow forecast.
• Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
• Consider whether the going concern basis is appropriate for the preparation of the financial
statements.
• Obtain a written representation confirming the directors’ view that Jasmine Co is a going
concern.

Elounda Co
• Obtain Elounda’s cash flow forecast and review the cash in and out flows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash flows to meet liabilities as they fall due.
• Discuss with management their ability to settle the next instalment due for repayment to the
bank and the lump sum payment of $800k in October 20X5 and ensure these have been
included in the cash flow forecast.
• Review current agreements with the bank to determine whether any key ratios or covenants
have been breached with regards to the bank loan or any overdraft.
• Review the company’s post-year-end sales and order book to assess the levels of trade and if
the revenue figures in the cash flow forecast are reasonable.
• Review post-year-end correspondence with suppliers to identify whether any restrictions in
credit have arisen, and if so, ensure that the cash flow forecast reflects the current credit
terms or where necessary an immediate payment for trade payables.
• Enquire of the lawyers of Elounda Co as to the existence of litigation and claims; if any exist,
then consider their materiality and impact on the going concern basis.
• Perform audit tests in relation to subsequent events to identify any items which might
indicate or mitigate the risk of going concern not being appropriate.
• Review the post-year-end board minutes to identify any other issues which might indicate
financial difficulties for the company.
• Review post-year-end management accounts to assess if in line with cash flow forecast and to

AA – SUBSTANTIVE PROCEDURES 48
 identify any issues which may be relevant to the going concern assessment.
• Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
• Obtain a written representation confirming the directors’ view that Elounda Co is a going
concern.

AA – SUBSTANTIVE PROCEDURES 49
 RECONCILIATIONS
Hawthorn Co
Supplier statement reconciliation

• Select a representative sample of year-end supplier statements and agree the balance to the
list of individual supplier balances of Hawthorn. If the balance agrees, then no further work is
required.
• Where differences occur due to invoices in transit, confirm from goods received notes (GRN)
whether the receipt of goods was pre year end, if so confirm that this receipt is included in
year-end accruals.
• Where differences occur due to cash in transit from Hawthorn to the supplier, confirm from
the bank ledger account and bank statements that the cash was sent pre year end.
• Discuss any further adjusting items with the payables ledger supervisor to understand the
nature of the reconciling item, and whether it has been correctly accounted for.

Bank reconciliation

• Obtain Hawthorn’s bank account reconciliation and cast to check the additions to ensure
arithmetical accuracy.
• Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.
• Agree the reconciliation’s balance per the bank ledger account to the year-end bank ledger
account.
• Trace all the outstanding lodgements to the pre-year-end bank ledger account, post-year-end
bank statement and also to paying-in-book pre year end.
• Trace all unpresented cheques through to a pre-year-end bank ledger account and post-year-
end statement. For any unusual amounts or significant delays, obtain explanations from
management.
• Examine any old unpresented cheques to assess if they need to be written back as they are no
longer valid to be presented.

AA – SUBSTANTIVE PROCEDURES 50
 SUBSEQUENT EVENT
Hyacinth Co
Procedures to form a conclusion on any amendment required in relation to flood damage to
inventory and PPE

• Obtain a schedule showing the damaged property, plant and equipment and agree the net
book value to the non-current assets register to confirm the total value of affected assets.
• Obtain a schedule of the water damaged inventory, visit the off-site warehouse and physically
inspect the impacted inventory. Confirm the quantity of goods present in the warehouse to
the schedule; agree the original cost to pre-year end production costs.
• Review the condition of other PPE and inventory to confirm all damaged assets identified.
• Review the damaged property, plant and equipment and inventory and discuss with
management the basis for the zero scrap value assessment.
• Discuss with management why they do not believe that they are able to claim on their
insurance; if a claim were to be made, then only uninsured losses would require disclosure,
and this may be an immaterial amount.
• Discuss with management whether they will disclose the effect of the flood, as a non-
adjusting event, in the year-end financial statements.

AA – SUBSTANTIVE PROCEDURES 51