AUDIT and ASSURANCE

ASTANA, 2022
Audit Evidence
Testing
Audit Evidence

Evidence

Sufficient & appropriate

Quantity Quality

Reliability Relevant
Audit Evidence (continued)

Collection of Evidence

Test of Controls Substantive

(ToC) Procedures

ToD AnP
Substantive Tests VS Tests of Controls

ToD ToC
Test of Details Test of Controls

where the contents of where the systems that

the FS are checked by produce and protect the
looking for evidence contents of the FS are
that proves the figures checked. If the systems
and words are correct. work, then the resulting
FS should be accurate.
 SFP assertions

Existence The items on the SFP actually exist in real life.

Completeness All items pertaining to the company (its assets, liabilities etc) have been
recorded on the SFP and that all related disclosures have been made.

Rights & All of the assets on the SFP are owned by the company and all of the liabilities
Obligations are an obligation of the company.

Accuracy, Assets, liabilities and equity interests have been included in the FS at
valuation and appropriate amounts and any resulting valuation or allocation adjustments
allocation have been appropriately recorded and related disclosures have been
appropriately measured and described.
Presentation Transactions and events are appropriately aggregated or disaggregated and
clearly described, and related disclosures are relevant and understandable in
the context of the requirements of the applicable financial reporting
framework.
Classification The items on the SFP have been recorded in the proper accounts.
SPL assertions

Occurrence Transactions and events recorded have occurred and pertain to

the entity.
Completeness All transactions and events that should have been recorded
have been recorded.
Accuracy Amounts and other events relating to recorded transactions and
events have been recorded appropriately.
Cut-off Transactions and events recorded have been recorded in the
correct accounting period.
Classification Transactions and events have been recorded in the proper
accounts.
Presentation Transactions and events are appropriately aggregated or
disaggregated and clearly described, and related disclosures are
relevant and understandable in the context of the requirements
of the applicable financial reporting framework.
Types of tests

1. Analytical procedures (AnP)

2. Enquiry
3. Confirmation (Circularisation)
4. Inspection of documents & records
5. Inspection of tangible assets
6. Recalculation
7. Observation
8. Reperformance
Audit Tests – Tangible non-current assets (PPE)

Existence
• Select a sample of assets from the company’s asset register and
physically verify existence and in use by company
• For a sample of new assets purchased, consider likelihood that the
new asset replaces an existing asset – if so, check list of disposals to
ensure a similar old asset is present.
Accuracy, valuation and allocation
• Agree cost of new assets purchased to purchase documentation
(invoice, purchase agreement etc.)
• Compare depreciation policies with:
– Those used in previous years
– Those in use by similar companies
– Any company replacement policies.
Audit Tests – Tangible non-current assets (continued)
• Analyse history of gains and losses on asset disposals, and assess
depreciation policies in light of these results (repeated gains on disposal
would suggest company is depreciating too quickly)
• Inspect asset register for assets still in use but with zero Net Book Values
(this would suggest depreciation is too quick)
• For a sample of assets, recalculate depreciation charge for the year
• Compare depreciation charge with prior year, allowing for the effects of
additions, disposals etc.
• For revalued assets:
– Agree valuations to valuation report.
– Assess independence, experience etc. of the valuer.
– Verify that surplus taken to separate revaluation reserve.
– Verify all similar assets have been revalued together.
– Recalculate depreciation to ensure it is based on the new value.
Audit Tests – Tangible non-current assets (continued)
Rights and obligations (Ownership)
• Inspect ownership documents, ensuring company’s name is correct:
– Title deeds (or Land Registry confirmation)
– Vehicle registration documents
– Purchase agreements / invoices
• Inspect insurance policy documents to verify company’s assets included.
Completeness
• For a sample of assets seen in use by the company, inspect asset register to
confirm included.
• Inspect repairs and maintenance accounts for larger items that may be asset
by nature.
• Match disposals with additions – most disposals are in order to replace with
a newer asset, so if a disposal has no corresponding addition, it may
indicate an unrecorded asset.
Audit Tests – Tangible non-current assets (continued)
Cut-off
• For additions and disposals, inspect purchase / sales documents to
verify the date the asset was installed / ceased to be used by the
company.
Presentation and disclosure
• Agree totals in asset register with figures in financial statements.
• Agree brought forward balances with prior year financial statements.
• Select a sample of assets and ensure included in the appropriate asset
class.
• Verify that the depreciation policies in use are the same as those
disclosed in the accounting policies note in the financial statements.
• For revalued assets, inspect financial statements to ensure the
relevant disclosures have been made.
Audit Tests – Intangible non-current assets
Main assertions
Development costs should be capitalised where there is a reliable expectation of
future benefits being earned (e.g. a new product being sold):
• The development project is likely to be completed if:
– The company has the resources to finish it
– The company is planning to finish it
– There are no legal reasons it will not be finished
– The development is technically feasible.
• There are likely to be future benefits that exceed the development costs (i.e.
the product will sell enough to at least cover the costs of developing it.
As such, the assertions that are most important here are similar to tangible fixed
assets – will future benefits be earned (i.e. does an asset exist), and will
these benefits exceed the costs (i.e. what is the value of the development
costs).
 Audit Tests – Intangible non-current assets (continued)
Audit tests
• Inspect board minutes for evidence that the company intends to try to complete the development
project.
• Obtain written representation from management/client’s lawyers to confirm that there are no legal
issues that could block sales of the new product.
• If the new product is patented, inspect copy of patent.
• If necessary, obtain written representation from a specialist confirming the product is technically
feasible and is likely to be completed.
• Inspect copies of market research/reviews in trade magazines to confirm that the product is likely
to sell.
• Inspect forecasts of the development costs and sales to verify costs appear likely to be exceeded by
income from the product.
• Compare cash available with the expected costs of development to verify they have the finance to
complete the project.
• Inspect prototypes (if available) to confirm product exists and appears to work.
• If development was finished after the year end, inspect copies of any orders received (or of sales
that have already been made), to help assess likelihood of sales forecasts being achieved.
Audit Tests – Inventory
Main assertions
For inventory, the most important assertions are:
Stocktake attendance
• Existence – inventory may have been stolen, or disposed of without being
recorded as sold / scrapped, or may never have existed in the first place.
• Completeness – inventory belonging to the client may not have been recorded in
the inventory records.
• Valuation – inventory may be damaged, or too old to sell.
• Cut-off – if the stocktake is on the last day of the accounting year, it will be
possible to see the final goods leaving and arriving. The company may record
goods movements on the wrong date, which could lead to them being recorded
in the wrong accounting year.
• Rights and obligations - inventory belonging to the client may be stored at a
different location. Inventory belonging to other companies may be stored
alongside the client’s inventory in their main warehouse.
Audit Tests – Inventory (continued)
Final audit visit
• Cut-off – now that the year-end has passed, it will become clear if goods
movements, and the corresponding invoices, have been recorded the correct
side of the year end
• Valuation – inventory should be valued at the lower of cost or NRV. Now that
the year-end has passed, assessing realisable value should be easier and items
that were damaged or old at the year-end may have been repaired or
scrapped.
Audit Tests – Inventory (continued)
Audit tests – stocktake attendance
Before any substantive tests are carried out, the auditor needs to assess the amount of
substantive testing that needs to be done, by assessing the client’s internal controls.
The stocktake is an internal control – so the auditor will assess how well organised the
client’s stocktake procedures are. For example:
• Are there clear instructions for the client’s stock counting team?
• Is there a system to ensure that all areas are counted, and only once
• How are goods movements during the count going to be recorded
• Is a second team of checkers re-counting a sample of items after the first count?
If controls appear good, the amount of substantive tests can be reduced.
Existence
Select a sample of inventory items from the inventory records and physically inspect them.
Completeness
Select a sample of inventory items that can be seen in the warehouse, and trace to the
inventory records to verify included.
Audit Tests – Inventory (continued)
Rights and obligations (Ownership)
• Ask client’s staff if any of the items in the warehouse belong to other companies,
and if necessary obtain written management representation to confirm all
inventory on site belongs to the company.
• If company’s inventory is held at other locations, obtain written representations
from people at these locations to confirm the inventory is there.
Cut-off
Take copies of the final GDN and GRN of the accounting year, so that cut-off can
be tested in detail at the final audit visit.
Valuation
When at the stocktake, make a note of any items in the warehouse that appear to
be old, damaged, or are returns.
Audit Tests – Inventory (continued)
Audit tests – final audit visit
Completeness and existence
Agree figures from the inventory records tested at the stocktake, to the final
inventory figures in the financial statements.
Cut-off
• Select the last few GDNs before the year end, and locate the corresponding sales
invoice, making sure that the sale and receivable are recorded before the year-
end.
• Repeat the above test for GDNs immediately after the year-end, testing that the
sale and receivable are recorded after the year-end.
• Repeat both of the above tests for GRNs and purchase invoices.
Audit Tests – Inventory (continued)
Valuation
Cost
• For a sample of raw materials, agree the cost per unit back to purchase invoices.
• For WIP, agree the costs incurred to date to production records and associated invoices.
• For a sample of finished goods:
– Agree the raw material costs back to purchase invoices.
– Agree the raw material quantities by:
○ Inspecting requisitions from stores/warehouse
○ Enquiring of production staff
○ Observing the production process
– Agree labour cost (per hour)/tariff rate to personnel records (i.e. employment contracts, etc)
– Agree labour hours by:
○ Inspecting timesheets of production staff (hours spent by workers)
○ Enquiring of production staff
○ Observing the production process
Audit Tests – Inventory (continued)
– Recalculate the overhead absorption rate.
– Assess whether absorption method is reasonable:
○ Only production overheads being absorbed
○ Absorption basis is reasonable
– Inspect results of client’s variance analysis, as this should give an overall picture
of the accuracy of standard cost information.
NRV
• For a sample of inventory held at the year-end, inspect post year-end sales
invoices to confirm that the prices that were achieved were above cost
• For items held at the year-end that remain unsold:
– Obtain aged inventory analysis to highlight the oldest items.
– Obtain management representation confirming board’s belief that the items will
be sold, and for more than cost.
– Inspect current standard price lists to verify they are in excess of cost.
Audit Tests – Receivables
Main assertions
• Existence – balances may not represent genuine sales transactions.
• Accuracy, valuation and allocation – balances may be wrongly valued due to a
failure to accurately account for bad/doubtful debts, a failure to record
discounts or refunds, or errors in the original recording of sales invoices.
• Cut-off – if sales transactions near the year-end are recorded in the wrong
accounting year, then receivables could be over or under-stated.
Audit Tests – Receivables (continued)
Audit tests
Existence
• Select a sample of receivable balances at year-end and agree entries back to invoices.
• With client permission, circularize a selection of client’s customers, requesting a direct
confirmation that their balance is accurate.
– Positive method – involves either:
○ Sending balances to customers and asking them to agree/disagree with the figure
○ Sending a request for the customer to tell you the balance they think they owe
– Negative method – involves sending balances to customers and asking them to respond
only if they disagree with the balance.
Valuation
• For a sample of year-end balances, agree to post year-end cash received from customer
• Obtain aged receivables analysis and identify the oldest year-end balances that remain
uncollected.
Audit Tests – Receivables (continued)
• Inspect correspondence between client and customers who have old balances,
to identify any disputes
• If necessary, obtain management representations confirming that the oldest
balances are believed to be collectible
• If there is a doubtful debt provision, re-perform the calculation that created it
• Inspect credit notes issued to customers since the year-end, and trace back to
the original invoices. If these invoices are for pre year-end sales, ensure that
there is a provision at the year-end to recognize that these receivables are not
“receivable”!
• Analyse year-end receivables ledger for any negative balances (i.e. credit
balances) and obtain explanations for these (many of them may indicate that a
customer was owed money back, which makes them a liability, rather than a
negative receivable)
• Compare receivables days ratio with prior year and with similar companies, to
assess reasonableness.
Audit Tests – Receivables (continued)
Cut-off
This is the same test as seen in the Inventory section of the Chapter, matching up
GDNs and sales invoices either side of the year-end.
Presentation and disclosure
If any receivables are due to be collected more than 1 year after the year-end,
ensure that this fact is disclosed in the financial statements.
Audit Tests – Trade Payables
Main assertions
For trade payables (supplier balances), the main assertions are:
• Completeness – that all liabilities have been included at the year-end
• Accuracy, valuation and allocation – that liabilities are recorded accurately
• Cut-off – that transactions near the year-end are recorded in the correct
accounting year.

Audit tests
Completeness
• Compare the list of supplier balances with previous year, seeking explanations
for any “missing” suppliers
• Review post year-end payments made by the company and trace to
documentation – these payments may be paying off year-end liabilities.
Audit Tests – Trade Payables (continued)
Select a sample of purchase orders and trace through goods received notes,
purchase invoices and supplier account to ensure recorded.
Accuracy, valuation and allocation
• With client permission, circularise a selection of client’s suppliers, requesting a
direct confirmation that their balance is accurate.
– Positive method – involves either:
○ Sending balance to supplier and asking them to agree/disagree with the
figure
○ Sending a request for the supplier to tell you the balance they think they are
owed
– Negative method – involves sending balance to supplier and asking them to
respond only if they disagree with the balance
• For a sample of suppliers, reconcile year-end ledger balance with the balance on
the year-end supplier statement, obtaining explanations for any differences
• Cast the list of supplier balances to ensure it adds up.
Audit Tests – Trade Payables (continued)
• For a sample of year-end balances, agree to post year-end cash paid to supplier.
• Obtain aged payables analysis and identify the oldest year-end balances that
remain unpaid.
• Inspect correspondence between client and suppliers who have old balances, to
identify any disputes.
• Analyse year-end payables ledger for any negative balances (i.e. debit balances)
and obtain explanations for these (many of them may indicate that a supplier
owes money back, which makes them a receivable, rather than a negative
payable).
• Compare payables days ratio with prior year and with similar companies, to
assess reasonableness.
Cut-off
This is the same test as seen in the inventory section of the chapter, matching up
GRNs and purchase invoices either side of the year-end.
Audit Tests – Bank and Cash
Main assertions
For bank and cash, the most important assertions are:
• Existence – the cash may have been stolen or lost
• Accuracy, valuation and Allocation – balances may be misstated.
Audit Tests – Bank and Cash (continued)
Audit tests
Existence
• Agree bank balances to year-end bank statements.
• Send a bank letter to the bank, requesting confirmation in writing of all bank
balances, loan balances (and anything else!) relating to the client.
• For cash balances, select a sample of tills / petty cash boxes and perform a test
count.
Valuation
• Obtain the year-end bank reconciliation and confirm it has been done properly.
• Check any outstanding items on the reconciliation to post year-end bank
statements to ensure they cleared without delay.