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Substantive procedures notes

Bank reconciliation ✓

1. Obtain company’s bank reconciliation & cast to ensure arithmetical accuracy. Agree the cash
book figure to the financial statements. (accuracy, valuation)

2. Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are too old to be presented. (accuracy, valuation)

3. Examine the bank confirmation letter for details of any security provided by the company or any
legal right of setoff as this may require disclosure.

4. Agree unpresented cheques to the post year-end bank statements to confirm they have been
cleared in a reasonable time.

5. Review the cash book & bank statements for any unusual items or large transfers around the
year end, as this could be evidence of window dressing.

6. Agree the balance per the bank reconciliation to an original year end bank reconciliation & to
the bank confirmation letter.

7. Trace all outstanding lodgments to the pre-year end cash book & post year end bank statement.
For any unusual amounts or significant delays, obtain explanation from management. (Accuracy,
valuation, completeness.

Development expenditure ✓

1.​ Obtain the breakdown of development expenditure of the new product, cast for arithmetical accuracy
and agree to the amount included in the FS.
2.​ For a sample of costs included in the breakdown, agree the amount to timesheets or invoices.
3.​ Inspect the board minutes for any discussions relating to the intended sale or use of the asset.
4.​ Inspect the market research report to verify the new product is acceptable to the customers & it is
financially viable.
5.​ Review the post year-end sales of the new product developed to assess whether they are in line with
the initial forecast of the company.
6.​ Review the disclosure for intangible assets in draft FS to confirm if they are in accordance with IAS
38.
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Non-current assets – revaluation ✓

1.​ Discuss with the management of the company the reason for using the revaluation model & assess
the validity of the response.
2.​ Review the Non-current asset register of the company and verify the land and buildings of the same
classification have been revalued.
3.​ Review the revaluation report of the external independent valuer regarding the land and building &
assess the reasonableness of the assumption & methods used in valuation.
4.​ Recalculate the revaluation adjustment on land and buildings & verify the same has been recorded in
the revaluation.
5.​ Recalculate the depreciation on the assets revalued & verify if the same is recorded in the FS.
6.​ Consider the competence & capability of the valuer, by assessing by enquiring their qualification,
membership of professional body & experience in valuing these types of assets.

Non-current assets - disposals ✓

1.​ Obtain a breakdown of disposals cast & ensure arithmetical accuracy. Verify whether all assets have
been removed from the NCA register.
2.​ Recalculate the profit/loss on disposals & agree to the SOPL.
3.​ Agree the cash payment of $X to the cash book and bank statements.
4.​ Select a sample of disposals & agree sales proceeds to supporting documents such as invoices and
bank statements.

Non-current assets - additions

1.​ Obtain the non-current asset register & verify whether all additions have been added.
2.​ Physically inspect a sample of new vehicles, confirm the registration number agrees to that on the
NCA register.
3.​ Select a sample of new vehicles, agree to purchase invoice & confirm the invoice is made out to the
Co.

Revenue

1.​ Compare the overall level of revenue with the prior years & budget for the year and investigate any
significant differences.
2.​ Calculate the gross profit margin for the Co, compare this to the prior year and investigate the
significant difference.
3.​ Select a sample of invoices, recalculate invoice totals including sales tax.
4.​ Select a sample of credit notes raised trace through the original invoice & ensure the invoice has
been correctly removed from sales.
5.​ Select a sample of GDNs notes both pre year-end and post year end & follow through to sales
invoices in the correct accounting period.
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Receivables circularisation letter✓

1.​ Obtain consent from the client to perform the circularisation.

2.​ If no response. With the permission of the client write another letter as a follow up.
3.​ If still no response received, obtain consent from the client to approach their debtor via telephone &
request them to respond to the confirmation letter sent.
4.​ If still there is no response, perform alternative substantive tests such as confirmation of amounts
from the individual invoices, & GDNs, & review post year-end bank statements.
5.​ If reply is received, reconcile to the client’s receivables records, & any differences such as cash or
goods in transit should be investigated further.

Receivables - Valuation (increasing balance)

1.​ Review the aged receivables listing to identify slow moving or old balances. Discuss the stats of these
balances with the credit controller to assess whether the customers are likely to pay or if an allowance
for receivables is required.
2.​ Review whether there are any post year-end cash receipts for slow-moving/old receivable balances.
3.​ Review correspondence with customers to identify any balances which are in disputes are unlikely to
be paid & discuss with management whether any allowance is required.
4.​ Obtain a breakdown of the allowance for receivables. Recalculate & compare it to any potentially
irrecoverable balances to assess if the allowance is adequate.
5.​

Receivables - accounts not tallying

1.​ Investigate the difference & identify whether this relates to timing difference or whether there are
possible errors in the records.
2.​ If the difference is due to timing, such as cash in transit, details of the difference should be agreed to
the post-year cash receipts in the cash book.
3.​ If the difference is due to goods in transit, then details should be agreed to a pre year-end GDN.
4.​ The receivables ledger should be reviewed to identify any possible mis-postings as this could be a
reason for the difference..
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Inventory - WIP

1.​ Obtain the schedule of total WIP cast to ensure arithmetical accuracy. Agree to the amount in trial
balance and financial statements.
2.​ Select a sample of inventory items (finished goods and WIP), obtain the relevant cost sheet & agree
raw material costs to recent purchase invoices, labour cost to timesheets or payrol records & confirm
overhead allocation are of production nature.
3.​ Obtain the post year end credit notes to determine whether there have been returns which could
signify a write down is required.
4.​ Discuss with the management the basis of WIP valuation and assess the validity of their response.
5.​

Inventory - faulty goods.

1.​ Obtain the breakdown of the damaged goods held in inventory & returned from customers & ensure
arithmetical accuracy.
2.​ Agree the cost of damaged goods & verify raw material cost from invoices, labour cost from
timesheets or payroll records and confirm if overheads are of production nature.
3.​ Inspect the board meeting minutes to obtain further information regarding the faulty products & its
possible resale value.
4.​ Discuss with the management if the goods have been written down. If so, follow through the write
down to the inventory valuation to confirm.
5.​

Accrual for employee tax payable

1.​ Compare accrual for employment tax payable to the prior year, investigate any significant difference.
2.​ Review the correspondence between the Co & the tax authority & verify whether there are no other
tax obligations other than the ones listed in accruals.
3.​ Agree the year end employment tax payable accrual to the payroll records to confirm accuracy.
4.​ Reperform the calculation of the accruals for a sample of employees to confirm accuracy.
5.​ Review the disclosures made for the employment tax payable accrual & assess whether they are in
compliance with accounting standards and local legislations.

Sales tax liability

1.​ Compare the year end sales tax liability to the prior year balance, and investigate any significant
difference.
2.​ Recalculate the amount payable to tax authority as being sales tax charged less sales tax incurred.
3.​ Agree the subsequent payment to the post year end cash book and bank statements and that it has
been paid in line with the term of the tax authorities.
4.​ Review the disclosures in the draft FS to ensure it is in compliance with the accounting standards and
local legislations.
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Revenue
1.​ Compare overall level of revenue with prior year & budget for the year & investigate any significant
difference.
2.​ Calculate the gross profit margin and compare this with prior year and investigate any significant
differences.
3.​ Select a sample of invoices, recalculate invoice totals, including discounts & sales tax.
4.​ Select a sample of dispatch notes just before and after the year end & follow these through sales
invoices in the correct accounting period to ensure that cut-off has been correctly applied.
5.​ Select a sample of credit notes raised, trace to the original invoice an ensure the invoice has been
correctly removed from sales.

Purchases & other expenses.\

1.​ Calculate the operating profit & gross prof margin & compare them to last year and budget and
investigate any significant differences.
2.​ Select a sample of purchase invoices, recalculate invoice total & the related taxes
3.​ Select a sample of GRNs just before and after the year end. Agree to the PDB to ensure the expense
is recorded in the correct accounting period.
4.​ Recalculate the prepayments and accruals charged at the year end to ensure the accuracy of the
expenses has been included in the SOPL.
5.​ Discuss with the management whether there have been any changes in the key suppliers sed &
compare this to the PDB.

Bank loan

1. Obtain a breakdown of all loans outstanding at the year-end, cast to verify arithmetical
accuracy and agree the total to the FS.

2. For the new loan taken out in the year, review the loan agreement to confirm the amount
borrowed, the repayment terms & the interest rate applicable.
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3. For the new loan taken out in the year, agree the loan proceeds of $4.8 million per the loan
agreement to the cash book & the bank statement.

4. Agree the repayment of the new loan paid to the cash book and bank statement.

5. Recalculate the split of the loan repayment made on 31 March 20X5 between interest &
principal. (if loan repayment is made)

6. Inspect the bank confirmation letters for any loans listed that have not been included in the FS

7. Recalculate the split between the current and non-current liabilities.

Going concern

1.​ Obtain a written representation confirming that directors view that the Co is a going concern.
2.​ Obtain the Co’s cash flows forecast & review the cash inflows & outflows. Assess the reasonableness
of assumptions & discuss the findings with management to understand if the Co has sufficient funds.
3.​ With the permission of the client, enquire the lawyers of the client as to the existence of any litigation
& if so, the likely outcome of any litigation.
4.​ Review the post year-end board minutes to identify any other issues which might indicate further
financial difficulties for the Co.
5.​ Rew the post year-end management accounts to assess if it is in line with the cash flow forecasts.

Directors’ remuneration

1.​ Obtain a schedule of the directors’ remuneration, split by salary and bonus paid. Cast to ensure
arithmetic accuracy.
2.​ Inspect the bank statements to verify the amounts actually paid to the directors.
3.​ Review the disclosures made for directors remunerations in the draft FS and confirm that it is made
according to local legislation.
4.​ Obtain a written representation from directors that they have disclosed all directors remuneration to
the auditor.
5.​ Inspect the board minutes for discussion & approval of directors’ bonus or other additional
remuneration.