Substantive Procedures - Class of Transactions

SALES AND SALES RETURN

Occurrence (for Overstatement) Analytical Procedures Completeness (for Understatement) Occurrence Compare Sales of this year with Sales of last year as well as with budgeted and Industry average. Investigate unusual difference. Compare G.P. Ratio of this year with last year as well as budgeted and Industry average. Investigate unusual difference. Review a reconciliation of Inventory (opening + Produced disposed = closing) and compare units sold with production record Develop an expectation about Sales to test the reasonableness of Sales (by multiplying number of units sold with price per unit). Select a sample of recorded transactions from Sales Journal, and vouch for complete audit trail i.e. from recording Journal to initiative document e.g. G.L. Sales Invoice, Delivery Note, Customer Order. Select a sample of Shipping Documents, and vouch for complete audit trail i.e. from Shipping documents to Sales Invoice, recording in GL to obtain evidence that all goods dispatched have been accounted for. Review reconciliation between Individual Sales Invoices and Total posted in Debtors' Control Account. Recalculate amount of bill for a sample of sales invoices by using quantity from Dispatch Note, Rate from authorized rate list, and also check mathematical accuracy of invoices. Review ledger for any unusual debits/credits to identify any misclassification. Examine a sample of sales invoices for proper classification into revenue accounts. Perform Cut off Test i.e. Select a sample of sales invoice just before and after year end and compare dates of shipment with the dates they were recorded in the sales journal.

Completeness Tests Of Details

Accuracy Classification Cut off

PURCHASES AND PURCHASE RETURN

Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Comparison of GP ratio with last year, budgeted and industry average Comparisons of purchases are made by months, regions and product basis, also compare with last year's figures. Prepare a reconciliation of Inventory (opening + Produced disposed - closing) and compare units purchased with production record Select a sample of recorded transact ions from Purchase Journal, and vouch for complete audit trail i.e. from recording in Journal to initiative documents e.g. Purchase Invoice, GRN, PO, Requisition. Select a sample of GRNs, and vouch for complete audit trail i.e. from GRN to Vendor's Invoice and recording in G.L to obtain evidence that all goods received have been accounted for. Review reconciliation between Individual Purchases Invoices and Total posted in Creditors' Control Account Recalculate amount of bill for a sample of sales invoices by using quantity from GRN, Rate from authorized rate list, and also check mathematical accuracy of invoices. Review ledger for any unusual debits/credits to identify any misclassification. Examine a sample of sales invoices for proper classification into purchase accounts. Vouch purchases account and fixed assets account for any unusual entries to identify any misclassification (e.g. inventory recorded as fixed assets and vice versa) Perform Cut off Test i.e. Select a sample of vendors' invoices just before and after year end and compare dates of GRN with the dates of recording in Purchase journal.

Completeness Tests of Details

Accuracy Classification

Cut off

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Substantive Procedures - Class of Transactions

COST OF SALES
Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Completeness Accuracy Compare Cost of Sales of this year with Cost of Sales of last year as well as with budgeted and Industry average. Investigate unusual difference. Perform Vertical Analysis i.e. compare Cost of Sales as a percentage of Total Sales with last year as well as with budgeted and industry average. Investigate unusual difference. Select a sample of recorded cost of sales entries and vouch to supporting documentation. Select a sample of basic transaction documents (such as production reports) and determine whether the related cost of goods sold was recorded. Determine whether the accounting costing method used by the client (such as FIFO, AVCO, Standard cost) was applied properly. Compute the ratio of cost elements (such as labor, material) to total cost of goods sold and compare this ratio to that for prior years. Review ledger for any unusual debits/credits to identify any misclassification Ensure cost of sales is recorded considering cut off based on purchases and sales.

Tests of Details

Classification Cut off

DEPRECIATION
Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Completeness Accuracy Classification Cut off Compare Depreciation of this year with Depreciation of last year as well as with budgeted and Industry average. Investigate unusual difference. Compare depreciation rate with prior years and industry practice. Develop an expectation about Depreciation, to test the reasonableness of Depreciation (by multiplying rate of depreciation to depreciable amount). Test whether allocation of depreciation expense between factory, selling and admin expenses is on reasonable basis. Review Fixed Assets Register to check whether depreciation has been charged on all fixed assets. For revalued assets, ensure depreciation is charged on revalued amounts. Review ledger for any unusual debits/credits to identify any misclassification Test that depreciation on additions and disposals during the year is appropriately calculated.

Tests of Details

BAD DEBTS
Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Completeness Accuracy Classification Cut off Compare Bad debts of this year with Bad debts of last year as well as with budgeted and Industry average. Investigate unusual difference. Perform Vertical Analysis i.e. compare Bad debts as a percentage of Total Sales with last year as well as with budgeted and industry average. Investigate unusual difference. Perform Vouching i.e. Select a sample of recorded transactions from Bad Debts, and vouch for complete audit trail i.e. Approval of write offs. Review aging of receivables to identify overdue balances and inquire about their status. Scan account of bad debts for unusual credits in the account. Review ledger for any unusual debits/credits to identify any misclassification Perform Cutoff Test i.e. check last document number of transactions in this year and first document number of transactions in next year.

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Test of Details

Substantive Procedures - Class of Transactions

PAYROLL
Occurrence (for Overstatement) Completeness (for Understatement) Compare Payroll expense of this year with Payroll expense of last year as well as with budgeted and Industry average. Investigate unusual difference. Perform Vertical Analysis i.e. compare Payroll expense as a percentage of Total Sales with last year as well as with budgeted and industry average. Investigate unusual difference. Develop an expectation about Salaries, to test the reasonableness of Salaries (by multiplying salary of base month to number of months and considering effect of joiners, leavers and increments). 1. Examine T accounts of payroll related expenses to obtain evidence whether all entries therein are supported by Salaries Register and related documents. 2.Select a sample of payments to employees from the payroll register and compare each selected transaction to the related documents and records, and examine Evidence in support of authorisation of pay rate (i.e. Personal Files) Evidence in support of authorization of time (i.e. approved time cards or attendance records) Evidence in support of authorization of payroll deduction, (i.e. Personal Files) Mathematical accuracy of the transaction. Review the period end accrual of payroll expenses. On Sample Basis, check calculation of salary is based on correct hours and rates and Check Mathematical Accuracy of salary sheet. Trace posting of Salary Register to relevant accounts in G.L. Review of Payroll Accounts for unusual items. Perform Cut off Test i.e. Trace a sample of time cards/sheets before and after period end to the appropriate "payroll register", and trace "payroll register" to the general ledger to verify payroll transactions are recorded in the proper period

Tests of Details Completeness Accuracy Classification Cut off

Analytical Procedures

Occurrence

TAX EXPENSE
Occurrence Completeness Accuracy Cut off Classification Check whether entity is involved in taxable activities according to Income Tax Ordinance. Ensure that tax credit/rebates have been taken into account. Check the calculation of taxable income in accordance with Income Tax Ordinance. Check assessment orders of prior years. Ensure proper cut off in Tax Year in recording tax expense. Check whether classification between items current Tax and deferred tax are appropriate. Check whether classification between items of Temporary differences and permanent differences are appropriate.

Tests of Details

INTEREST EXPENSE
Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Completeness Accuracy Cut off Classification Analytical Compare Interest Expense of this year with last year and investigate difference.

Relate all interest expenses to their relevant Loans and check their reasonableness. Check whether interest expense has been recorded on all debts. Recalculate interest expense using details from Loan Agreement. Check whether interest expense has been recorded in the correct period. Review Debt Repayment/Lease Amortization Schedule. Check the classification of interest expense e.g. whether to be expensed or capitalized Review criteria of leases for classification between Operating Lease and Finance Lease.

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Tests of Details

Substantive Procedures - Class of Transactions

OTHER OPERATING EXPENSES
Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Perform analytical procedures: e.g. Develop an expectation about expense, to test its reasonableness Compare actual expense with last year's expenses. Investigate unusual differences.

Completeness Accuracy Cut off Classification

Select a sample of transactions from expense account and perform following procedures: Check supporting documents Check mathematical accuracy Check acknowledgement of receipt of goods/services. Check approval and authorisation (e.g. Invoices) Check tax deduction Check evidence of payment (e.g. copy of cheque, receiving signature, and/or payment from bank statement) Check supporting duly stamped "Processed" or "Paid". Ensure that the expense relates to the year and business Review the period end accrual of expenses. Search for unrecorded liabilities. Recalculate invoices and ensure preparation of vouchers is accurate on the basis of invoices. Test that calculation of expenses is based on reasonable rates based on market rates. From selected sample of transactions, check date of acknowledgement of receipt of goods/services. Check allocation of payment between expense and prepayments Scan accounts in G.L. for unusual transactions e.g. credit items in expense accounts, Larger amounts in Repair and Maintenance Account etc.

Tests of Details

OTHER INCOME
Analytical Occurrence (for Overstatement) Completeness (for Understatement) Occurrence Tests of Details Select a sample of transactions from income account and perform following procedures: Check approval and authorisation (e.g. Agreements for rent or sale) Check evidence of receipt (e.g. copy of cheque, payment into bank statements) Ensure that income is recognized for all relevant transactions (keeping in view nature of activities in which entity is involved e.g. Interest, Rent etc). Recalculate income to be recorded (e.g. Book Value of Asset, No. of months Property was used. Number of months balance was kept in bank account) Ensure that income relating to current year only is recognized. Ensure that classification between operating income and non operating income is appropriate. Perform analytical procedures e.g. Compare actual income with last year's income. Investigate unusual differences.

Completeness Accuracy Cut off Classification

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Substantive Procedures Account Balances

FIXED ASSETS
Analytical Completeness (for Understatement) Compare Fixed Assets of this year with Fixed Assets of last year as well as with budgeted and Industry average. Investigate unusual difference. Perform Vertical Analysis i.e. compare Fixed Assets as a percentage of Total Assets with last year as well as with budgeted and industry average. Investigate unusual difference. Obtain "Fixed Assets' Schedule", "schedule of additions and deletions" and "Fixed Assets' Register" and perform following procedures: Check mathematical accuracy. Agree schedules with each other and with balances in general ledger Physically examine the existence of major fixed assets by coding or other identification, (list to floor) Physically examine a sample of fixed assets and trace them into the fixed assets register (list to floor). Ensure that Fixed Assets' Register is reconciled to closing balances in General Ledger. Review the repairs and maintenance expense account for items of a capital nature. Evaluate fixed assets for significant write-offs or impairments by performing procedures like: Obtain evidence about condition of fixed assets during physical verification (i.e. whether fixed assets have been damaged or obsolete). Identify other event or change In circumstance indicating impairment Examine client documentation supporting impairment of write off. Verify impairment loss by determining recoverable amount and compare to carrying value. Test depreciation expense for a sample of capital assets: Determine whether appropriate depreciation rate is applied Determine reasonableness of useful lives and residual values. Recalculate depreciation expense. Confirm fully depreciated assets are separately identified and are not being depreciated. Ensure that depreciation policy is appropriate in accordance with AFRF and consistent with last year and industry. Check that depreciation on assets purchased starts from date of purchase and depreciation on assets sold stops on date of sale. Also check calculation of accumulated depreciation on disposals. Examine title documents (e.g. Title documents of Property. Vehicle Registration Documents. Lease agreements) of fixed assets for proof of ownership. Inquire of management about liens on capital assets, and review the terms of mortgages.

Existence

Completeness

Tests of Details

Valuation and Allocation

Rights and Obligation

INTANGIBLES
Goodwill Agree the consideration to sales agreement by inspection. Consider whether asset valuation on is reasonable. Agree that the calculation is correct by recalculation. Review the impairment review and discuss with management. Ensure valuation of goodwill is reasonable/there has been no impairment not adjusted through discussion with management. Confirm that capitalised development costs conform to IAS 38 criteria by inspecting details of projects and discussions with technical managers. Confirm feasibility and viability by inspection of budgets. Recalculate amortisation calculation, to ensure it commences with production/is reasonable. Inspect invoices to verify expenditure incurred on R&D projects. Agree purchased intangibles to purchase documentation agreement by Inspection. Inspect specialist valuation of intangibles and ensure it is reasonable. Review amortisation calculations and ensure they are correct by recalculation.

Research and development costs

Other Intangibles

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Substantive Procedures Account Balances

INVENTORY
Overstated/ understated inventory Analytical Compare Inventory of this year with Inventory of last year as well as with budgeted and Industry average. Investigate unusual difference. Compare GP. Ratio of this year with last year as well as budgeted and Industry average. Investigate unusual difference. Compare Inventory Turnover Ratio of this year with last year as well as budgeted and Industry average. Investigate unusual difference. Compare inventory balances by category (i.e. raw material, work in process, and finished goods) for the current year with the prior year. Obtain a listing of Inventory's balance and observe count of physical inventory (list to floor) Obtain a listing of Inventory's balance and observe count of physical inventory (floor to list) Ensure that goods sent on consignment basis and goods sent on 'sale on approval' basis are included in Inventory. Ensure that Physical Balance of Inventory is reconciled to balances in Perpetual Records. Review Reconciliation for unusual items. Cost: Inquire management about valuation method and determine whether it is appropriate in accordance with AFRF and consistent with last year. Check calculation of Costing method on sample items of Inventory. Investigate unusual differences in Actual Cost, Standard Cost and check disposition of Variances. Net Realisable Value: Inquire management about estimated selling price of inventory, cost of completion and cost to make sale. Check management's calculation considering understanding of entity and subsequent events. Obtain evidence about condition of inventory during physical verification (i.e. whether inventory has been damaged or obsolete) Review aged inventory reports and identify any slow moving goods, discuss with management why these items have not been written down. Inquire of management concerning obsolete, slow moving, or excess inventory. Ensure that goods held on consignment basis and goods held on 'sale on approval' basis are NOT included in Inventory.

Existence Completeness

Valuation and Allocation Test s of Details Rights and Obligation

BANK BALANCE
Existence Obtain a list of all bank accounts along with closing balances and perform following procedures: Check mathematical accuracy. Agree closing balances to the General Ledger. Review the summary for any possible omission Obtain confirmation for all bank balances with financial institutions (standard bank confirmation). Completeness Include bank accounts with small balances or accounts closed during the year for confirmation letters. Review reconciliation between balance of General Ledger (Bank Account) and Bank Statement. and verify mathematical accuracy agree balances with bank statement and general ledger trace reconciling items into subsequent month's bank statement for untraced items examine supporting documentation Valuation & Allocation Review ledger for any unusual debits/credits lo identify any misclassification Rights and Obligations Review the bank confirmation for evidence of loans and collateral. Check any lien on balance

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Tests of Details

Substantive Procedures Account Balances

DEBTORS
Analyti cal Existence & Completeness Existence Comparison of G.P. ratio with last year and industry average Comparison of Receivable Turnover Ratio & Debtors' Age with Past and Industry averages Comparison of bad debts expense as a %age of sales with Past and Industry averages Send confirmation requests to a sample of debtors and perform follow up procedures. Vouch selected amounts from the list of balances with supporting documentation e.g. Dispatch note etc.

Completeness

Review reconciliation between balance of General Ledger (Debtors' Control Account) and Subsidiary Ledger (Sales Ledger). Select debtors with small or zero balances for confirmation. Investigate and obtain explanation for long standing balances. Obtain invoice wise breakup of individual suppliers and recalculate the total outstanding amount. Review accounts receivable ledger for any unusual debits/credits to identify any misclassification (e.g. receivables or long term receivables which should be disclosed separately or debtors with credit balances) Perform following procedures to determine adequacy of provision for bad debts: Obtain and review aging of receivables. Ensure that policy of provision for bad debts is consistent with past practice, industry practice and current economic conditions. Calculate estimate for provision using prior relations of bad debts and sales, taking account of current economic events. Examine Cash Receipts and Credit Notes subsequent to year end. Inquire management whether any receivables have been sold, discounted, or hypothecated. Review bank confirmations, loan agreements, and minutes of the BOD meetings for indications of whether debtors have been sold, factored, discounted, or pledged as collateral. Examine receipts subsequent to year end.

Valuation and Allocation Tests of Details Rights and Obligation

CASH BALANCE
Tests of Details Existence Completeness Perform cash count at year end. Review reconciliation between balance of General Ledger (Cash A/C) and Physical Balance. Review cut off of cash receipts and cash payments to ensure closing balance represents correct figure of year end. Review ledger for any unusual debits/credits to identify any misclassification Ensure cash is under proper lock and key and in custody of entity.

Valuation & Allocation Rights and Obligation

ACCRUED ASSETS
Analytical Existence & Completeness Compare current year balances in accruals with prior years' balances and inquire unusual differences. Test reasonableness of accrual balances. Vouch selected amounts from the list of accruals, with supporting documentation e.g. Rent agreements etc. Ensure that income is recognized for all relevant transactions (keeping in view nature of activities in which entity is involved e.g. Interest, Rent etc). Examine whether accrued assets have been received subsequently. Review documents to determine entity is legally obliged to receive the amount. For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued is correct

Existence Tests of Details Completeness Rights and Obligations Valuation and Allocation

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Substantive Procedures Account Balances

LONG TERM LOAN
Existence Rights and Obligations Completeness Confirm details and outstanding balance directly with lender/banker. Examine Loan/Lease Agreements. inquire of management for off balance sheet financing e.g. Repurchase Agreements or Resale Agreements. Examine Large payments for possible debt transactions. Review payments for interest expense for possible debt transactions. Recalculate amortization of discount or premium. Review Debt Re payment/ Lease Amortization Schedule.

Tests of Details

Valuation and Allocation

SHARE CAPITAL & RESERVES (STATEMENT OF CHANGES IN EQUITY)

SHARE CAPITAL Agree the authorised share capital with the statutory documents governing the company's constitution. Agree changes to authorised share capital with properly authorised resolutions. ISSUE OF SHARES Verity any issue of share capital or other changes during the year with general and board minutes Ensure issue or change is within the terms of the constitution, and directors possess appropriate authority to issue shares. Confirm that cash or other consideration has been received or receivable(s) is included as called-up share capital not paid. TRANSFER OF SHARES and Movements Verity transfers of shares by reference to: - Correspondence - Completed and stamped transfer forms - Cancelled share certificates - Minutes of directors' meeting Review the balances on shareholders' accounts in the register of members and the total list with the amount of issued share capital in the general ledger. Agree dividends paid and proposed pre year-end to authority in minute books and reperform calculation with total share capital issued to ascertain whether there are any outstanding or unclaimed dividends. Agree dividend payments with documentary evidence (say, the returned dividend warrants). Test that dividends do not contravene distribution provisions by reviewing the legislation. Inspect tax returns to insure that imputed tax has been accounted for to the taxation authorities and correctly treated in the accounts. Agree movements on reserves to supporting authority. Ensure that movements on reserves do not contravene the legislation and the company's constitution by reviewing the legislation Confirm that the company can distinguish distributable reserves from those that are non-distributable Ensure appropriate disclosures of movements on reserves are made in the company's accounts by Inspection of the financial statements.

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Substantive Procedures Account Balances

CREDITORS
Existence (for Overstatement) Completeness (for Understatement) Existence Analytical Comparison of GP. ratio with last year and industry average Comparison of Payable Turnover Ratio & Creditors' Age with Past and Industry averages Compare current year balance with prior years' balances (total and party wise). Send confirmation requests to selected creditors and perform follow up procedures. Vouch selected amounts from the list of balances with supporting documentation e.g. suppliers' invoices. Review reconciliation between balance of General Ledger (Creditors' Control Account) and Subsidiary Ledger (Purchases Ledger). Select debtors with small or zero balances in the confirmation process. Investigate and obtain explanation for long standing balances. Perform "Omitted Liabilities Test" or "'Search for unrecorded liabilities" Obtain invoice wise breakup of individual suppliers and recalculate the total outstanding amount Review accounts payable ledger for any unusual debits/credits to identify any misclassification (e.g. payables or long term liabilities which should be disclosed separately or creditors with debit balances) Examine payments subsequent to year end.

Completeness Tests of Details

Valuation and Allocation

Rights and Obligation

ACCRUED LIABILITIES
Analytical Existence (for Overstatement) Completeness (for Understatement) Existence Analytical Procedures Completeness Compare current year balances in accruals with prior years' balances and inquire unusual differences. Test reasonableness of accrual balances. Vouch selected amounts from the list of accruals, with supporting documentation e.g. utilities bills, salary sheets etc, Review the period end accruals of expenses includes necessary items e.g. Salaries accrual. Accruals for Utility bills, Withholding tax payable, Provision for Warranty etc. Perform "Omitted Liabilities Test" (or "Search for unrecorded liabilities"). Examine whether accrued liabilities have been paid subsequently. Review documents to determine entity is legally obligated to pay the liability and obligation recorded is as per authorized plans (e.g. pension/gratuity plans). For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued is correct

Rights and Obligations

Valuation and Allocation

PROVISION FOR TAX EXPENSE

Existence Rights and Obligations Tests of Details Completeness Obtain legal and tax status of entity from tax consultant. Check whether temporary differences in tax and accounting base of assets &liabilities exist. Obtain information from tax consultant regarding application of relevant provisions of Income Tax Ordinance. Inquire if there were any disputes with tax authorities which may affect tax payable. Check whether advance taxes paid on utilities bills, banking transactions etc has been taken into account. Ensure That all temporary differences are accounted for to calculate deferred tax. Check that Tax liability has been calculated using applicable tax rates. Check that Deferred Tax has been calculated using applicable tax rates in relevant years. Check whether company is able to utilize deferred tax asset against future taxable profits.

Valuation and Allocation

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Test of Controls
SALES AND SALES RETURN
Control Objective Occurrence and Existence One person is not responsible for taking orders, recording sales and receiving payment. Recorded sales transactions represent goods shipped. Controls by Management Segregation of duties Test of Controls Observe and evaluate whether proper segregation of duties is operating

Sales recorded only with approved sales order form and shipping documentation. Accounting for numerical sequences of invoices. Monthly customer statements sent out and customer queries and complaints handled independently. Authorisation of credit terms to customers (senior staff authorisation, references/credit checks for new customers, regular review of credit limits) Authorisation by senior staff required for changes in other customer data such as address etc. Orders not accepted unless credit limits reviewed first Authorised price lists and specified terms of trade in place.

Goods and services are only supplied to customers with good credit ratings.

Test a sample of sales invoices for authorised sales order form and shipping documentation. Examine application controls for authorisation. Review and test entitys procedures for accounting for numerical sequences of invoices. Review entitys procedures for sending out monthly statements and dealing with customer queries and complaints. Review entitys procedures for granting credit to customers.

Examine a sample of sales orders for evidence of proper credit approval by the appropriate senior staff member. Examine application controls for credit limits. Compare prices and terms on a sample of sales invoices to the authorised price list and terms of trade. Examine application controls for authorised prices and terms.

Goods and services are provided at authorised prices and on authorised terms. Customers are encouraged to pay promptly. Completeness All revenue relating to goods Accounting for numerical sequences of dispatched is recorded. invoices. All goods and services sold Shipping documentation is matched to are correctly invoiced. sales invoices. Sales invoices are reconciled to the daily sales report. An open-order file is maintained and reviewed regularly. Accuracy All sales and adjustments Sales invoices and matching documents are correctly journalised, required for all entries summarised and posted to the correct accounts. Cut off Transactions have been All shipping documentation is forwarded recorded in the correct to the invoicing section on a daily basis. period. Daily invoicing of goods shipped Classification All transactions are properly classified in accounts

Review and test entitys procedures for accounting for numerical sequences of invoices. Trace a sample of shipping documents to the sales invoices and ledger. Review a sample of reconciliations performed Inspect the open order file for unfilled orders.

Vouch recorded sales to supporting documents.

Compare dates on sales invoices with dates of corresponding shipping documentation. Compare dates on sales invoices with dates recorded in the sales ledger

Chart of accounts in Place Codes in place Review sales ledger for proper classification. for different types of products or Examine a sample of sales invoices for proper services classification

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Test of Controls
PURCHASES AND PURCHASE RETURN
Control Objective Occurrence and existance Recorded purchases represent goods and services received. Controls by Management Test of Controls

Authorisation procedures and policies in place for ordering goods and services. Segregation of duties. Purchase orders raised for each purchase and authorised by appropriate senior personnel. Approved purchase order for each receipt of goods Staff receiving goods check them to the purchase order Stores clerks sign for goods received. Purchase orders and GRNs are matched with the suppliers invoices

Inspect policies and procedures and inquire about them. Observe and evaluate segregation of duties Examine a sample of purchase orders to ensure they have been appropriately authorised. Review the delegated list of authority for purchases. For a sample of orders, examine the goods received note (GRN) and match it to the order. Observe receipt of goods by staff to confirm whether the check is done Inspect a sample to confirm whether stores staff undertake this check. Examine supporting documentation for a sample of invoices Examine supporting documentation for a sample of invoices Review entitys procedures for accounting for prenumbered documents. Examine application controls. Examine documentation for evidence of this check. Examine supporting documentation for a sample of invoices Recalculate the mathematical accuracy of a sample of suppliers invoices. Review reconciliations for evidence of this check. Review purchases journal and general ledger for reasonableness. Examine supporting documentation for a sample of invoices.

Completeness All purchase transactions that occurred have been recorded.

Purchase orders and GRNs are matched with the suppliers invoices. Periodic accounting for prenumbered GRNs and purchase orders. Independent check of amount recorded in the purchase journal

Accuracy, classification and valuation Purchase transactions are Purchase orders and GRNs are matched correctly recorded in the with the suppliers invoices accounting system. Mathematical accuracy of the suppliers invoice is verified. Amount posted to general ledger is reconciled to the purchases ledger. Chart of accounts in place. Rights & Obligations Recorded purchases represent the liabilities of the entity. Cut off Purchase transactions are recorded in the correct accounting period.

Purchase orders and GRNs are matched with the suppliers invoices.

All goods received reports forwarded to accounts payable department daily. Procedures in place that require recording of purchases as soon as possible after goods/services received.

Compare dates on reports to dates on relevant vouchers. Compare dates on vouchers with dates they were recorded in the purchases journal

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Test of Controls
INVENTORIES
Control Objective Existence and Occurrence All inventory movements are authorised and recorded. Controls by Management Test of Controls

Prenumbered documentation such as GDNs and GRNs in use. Reconciliations of inventory records with general ledger Segregation of duties Physical safeguards in place to ensure inventory is not stolen. Separate responsibilities for maintenance of records and custodianship. Inventory counted regularly.

Review documentation in use. Review a sample of reconciliations to confirm they are performed and then reviewed by an independent person Observe and evaluate proper segregation Review security systems in place (eg locked warehouses, CCTV etc). Review policies and procedures in place; discuss procedures with relevant staff. Review procedures for counting inventory. Attend inventory count. Review entitys procedures relating to consignment inventory

Inventory included on the statement of financial position physically exists.

Rights and Obligations Inventory records only include items that belong to the entity. Completeness All purchases and sales of inventory have been recorded in the accounting system.

Procedures in place to include inventory held at third parties and exclude inventory held on consignment for third parties.

Procedures in place to include inventory held at third parties and exclude inventory held on consignment for third parties. Reconciliations of accounting records with physical inventory Accuracy, classification and valuation Inventory quantities have Periodic or annual comparison of been accurately determined. inventory with amounts shown in perpetual inventory records. Standard costs reviewed by management. Review of cost accumulation and variance reports. Inventory is properly stated Inventory managers review inventory at the lower of cost and net regularly to identify slow-moving, realisable value. obsolete and excess inventory. Cut-off All purchases and sales of All dispatch documents processed daily inventory are recorded in to record the dispatch of finished goods the correct accounting All goods inwards reports processed period. daily to record the receipt of inventory. Reconciliations of inventory records with general ledger. Presentation and disclosure assertions Inventory transactions and Orders for materials and production data balances are properly forms used to process goods through identified and classified in manufacturing. the financial statements. Disclosures relating to Approval by Finance Director classification and valuation are sufficient.

Review entitys procedures relating to consignment inventory

Review reconciliations performed and whether reviewed by independent person Review and test entitys procedures for taking physical inventory. Review and test entitys procedures for developing standard costs. Inspect variance reports produced Discuss with inventory managers how this is done. Observe the procedure being performed Inspect documentation to confirm daily processing. Inspect documentation to confirm daily processing. Review reconciliations performed.

Review entitys procedures and documentation used to classify inventory.

Review entitys working papers for evidence of review.

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Test of Controls
PAYROLL
Control Objective Occurrence & Existence Payment is made only to bona fide employees of the entity. Controls by Management Test of Controls

Segregation of duties between HR and Observe and evaluate proper segregation of payroll functions duties. Personnel files held for all employees. Review a sample of starters and leavers in the Authorisation procedures for hiring, year to ensure correct documentation is in terminating, time worked, wage rates, place. overtime, benefits etc. Review and test authorisation procedures in Any changes in employment status of place. employees (eg maternity, special leave Review policies and procedures in place for etc) informed to Human Resources changing status and consider whether department. adequate. Use of time clocks to record time Review personnel files for a sample of worked. employees whose status changed in the year. Clock cards approved by supervisor. Observe employees use of time clocks. Only employees with valid employee Inspect a sample of clock cards for evidence of numbers are paid. approval by appropriate level of management. Payroll budgets in place and reviewed Review and test procedures for entering and by management. removing employee numbers from the payroll Prenumbered clock cards in use. master file. Segregation of duties Review budgeting procedures. Review Authorisation of wage cheque cashed numerical sequence of clock cards. Custody of cash Encashment of Observe and evaluate proper segregation of cheque Security of pay packets duties. Security of transit Security and prompt If wages are paid in cash banking of unclaimed wages Attend the pay-out of wages to confirm that Verification of identity the official procedures are being followed. Recording of distributions Before the wages are paid compare payroll Preparation and authorisation of with wage packets to ensure all employees cheques and bank transfer lists have a wage packet. Comparison of cheques and bank Examine receipts given by employees; check transfer list with payroll unclaimed wages are recorded in unclaimed Maintenance and reconciliation of wages book. wages and salaries bank account Observe whether any employee receives more Preparation and authorisation of than one wage packet. cheques and bank transfer lists Inspect the unclaimed wages book entries with Comparison of cheques and bank the entries on the payroll to ensure they agree. transfer list with payroll Check that unclaimed wages are banked Maintenance and reconciliation of regularly by inspection of bank statements and wages and salaries bank account supporting documentation. Inspect that unclaimed wages books to check it shows reasons why wages are unclaimed. Review pattern of unclaimed wages in unclaimed wages book; variations may indicate failure to record. Holiday pay Verify a sample of payments with the underlying records and check the calculation of the amounts paid by recalculation. For salaries, review whether comparisons are being made between payment records. Examine paid cheques or a certified copy of the bank list for employees paid by cheque or bank transfer.

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Test of Controls
Accuracy, classification and valuation All benefits and deductions Verification of payroll amounts and (tax, pension etc) are benefit calculations. computed correctly Payroll budgets in place and reviewed by management. Agreement of gross earnings and total tax deducted with taxation returns. Payroll transactions Changes to master payroll file verified correctly recorded in the through before and after reports. accounting system. Payroll master file reconciled to general ledger. Cut-off Payroll transactions are recorded in the correct accounting period. Recalculate benefits and deductions for a sample of employees. Review budgeting procedures Inspect documentation for evidence of management's review. Review reconciliation o before and after reports to payroll master file. Review reconciliation o payroll master file to general ledger. Confirm whether discrepancies are followed-up promptly and resolved. Review entitys procedures for reporting changes to the payroll department. Check sample of starters and leavers.

All starters, leavers, changes to salaries and deductions are reported promptly to payroll department and changes are updated to the payroll master file promptly. Presentation and disclosure assertions Payroll transactions are Chart of accounts properly classified in the Independent approval and review of financial statements. accounts charged to payroll. Payroll budgets in place and reviewed by management.

Review chart of accounts. Review procedures for classifying payroll costs. Review budgeting procedures.

Revenue and capital expenditure

Control Objective Controls by Management Test of Controls

Authorisation

Completeness

All expenditure is authorised. Review policies and procedures in place. Orders for capital items should be Examine a sample of orders for appropriate authorised by appropriate levels of authorisation. management Order should be requisitioned on appropriate (different to revenue) documentation Invoices should be approved by the person who authorised the order Invoices should be marked with the appropriate general ledger code. All non-current assets are correctly Review reconciliation to ensure it is regularly recorded in the accounting system. carried out, reviewed by a more senior person, Capital items should be written up in the and that all discrepancies are followed up and non-current asset register. resolved on a timely basis. The non-current asset register should be reconciled regularly to the general ledger and any differences investigated and resolved promptly.

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Test of Controls
Cash and Bank (Payments)
Control Objective Occurrence Only valid cash payments are made. Controls by Management Test of Controls

Segregation of duties

Supplier statements independently reviewed and reconciled to trade payable records. Monthly bank reconciliations prepared Review reconciliations to confirm whether and reviewed. undertaken and reviewed. Only authorised staff can make Review delegated list of authority for cash electronic cash payments and issue payments cheques. Electronic cash payments and cheques Inspect relevant documentation for evidence of prepared only after all source documents approval by senior personnel. have been independently approved. Completeness All cash payments that occurred are recorded. Segregation of duties Supplier statements independently reviewed and reconciled to trade payable records. Monthly bank reconciliations prepared and reviewed. Review of cash payments by manager before release. Daily cash payments reconciled to posting to payable accounts. Use of prenumbered cheques. Accuracy, classification and valuation Cash payments recorded Reconciliation of daily payments report correctly in the ledger. to electronic cash payment transfers and cheques issued. Supplier statements reconciled to payable accounts regularly. Monthly bank reconciliations of bank statements to ledger account. Cash payments posted to Supplier statements reconciled to correct payable accounts payable accounts regularly. and to the general ledger. Agreement of monthly cash payments journal to general ledger posting. Payable accounts reconciled to general ledger control account Cut-off Cash payments are recorded Reconciliation of electronic funds in the correct accounting transfers and cheques issued with period. postings to cash payments journal and payable accounts Presentation and disclosure assertions Cash payments are charged Chart of accounts to the correct accounts. Independent approval and review of general ledger account assignment. Observe and evaluate proper segregation Review procedures for reconciling supplier statements. Review reconciliations to confirm whether undertaken and independently reviewed. Inspect sample of listings for evidence of senior review Review a sample of reconciliations for evidence that they have been done. Examine evidence of use of prenumbering Review reconciliation, to ensure performed, reviewed and any discrepancies followed up on a timely basis. Review reconciliations for a sample of accounts. Review bank reconciliation for evidence it was done and independently reviewed. Review reconciliations for a sample of accounts Review postings from journal to general ledger Review reconciliation, to ensure performed, reviewed and any discrepancies followed up on a timely basis. Review reconciliation and check it is carried out regularly.

Observe and evaluate proper segregation of duties. Review procedures for reconciling supplier statements

Review cash payments journal to assess reasonableness of charging of accounts. Review assignment of general ledger account.

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Test of Controls
Sales Cycle

Purchases Cycle

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