Substantive Procedures

AA – L2 – SA – Q4.7 – Financial Statement Assertions

Assertions for non-current asset procedures.

Question

Identify which financial statement assertion is addressed for each of the below substantive procedures performed on a non-current asset schedule (which agrees to the financial statements).

Confirming whether the costs on the schedule are correct
Tracing items from the non-current asset register to the schedule
A Existence
B Accuracy and valuation
C Completeness
D Accuracy
E Existence
F Completeness

Answer

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Tags: Assertions, ICAG, Non-current Assets, Substantive Procedures
Level: Level 2

Topic: Audit and Assurance Evidence

AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

Question

TechTrend Solutions sells personal computers (PCs) to independent shops. You are the external auditor of TechTrend Solutions. Your interim audit revealed the following issues:

(1) The half-year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required:

Draft the section of your report to management dealing with the above deficiencies. Set out the deficiencies, their implications, and your recommendations for improvement.

Answer

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Topic: AUDIT REPORT

AA – L2 – Q54 – Audit Evidence

Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

Question

Nexis Beverages manufactures and distributes soft drinks. Its inventories are controlled using a real-time system which provides accurate records of quantities and costs of inventories held at any point in time. This system is known within the company as the ‘PureTrack’ system and it is integrated with the purchases and revenue system. Nexis Beverages has an internal audit function whose activities encompass inventories.
No year-end inventory count takes place. Inventories are held in several large warehouses where non-stop production takes place.
Your firm is the external auditor to Nexis Beverages and you have been asked to perform the audit of inventories. Inventories include finished goods and raw materials (water, sugar, sweeteners, carbonating materials, flavourings, cans, bottles, bottle tops, fastenings and packaging materials).
Your firm, which has several offices, wishes to rely on the ‘PureTrack’ system to provide the basis of the figure to be included in the financial statements for inventories. Your firm does not wish to ask the company to conduct a year-end inventory count.

Required:
(a) Describe the audit tests that you would perform on the ‘PureTrack’ system during the year in order to determine whether to rely on it as a basis for the raw materials and finished goods figures to be included in the financial statements. (11 marks)
(b) Describe the audit tests you would perform on the records held by Nexis Beverages at the year end to ensure that raw materials and finished goods are fairly stated in the financial statements. (9 marks)

Answer

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Tags: Computerized Auditing, Internal Audit, Inventory Audit, Real-Time Systems, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q51 – Audit Evidence

Describe audit work to check supplier statements against purchase ledger balances for Kumasi Manufacturing Ltd. Describe audit work to verify purchases cut-off at year-end for Kumasi Manufacturing Ltd. Describe audit work to ensure sundry payables and accruals are correctly stated for Kumasi Manufacturing Ltd.

Question

our firm is the auditor of Kumasi Manufacturing Ltd, and you have been asked to suggest the audit work you will carry out in verifying accounts payable and purchase accruals at the company’s year-end of 30 September 2025. You attended the inventory count at the year end.

The company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multipart goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g. incorrect quantities or faulty materials).

The purchase accounting department receive the purchase invoices, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a PC.

The main sundry payables and accruals at the year-end include:
(i) wages accruals and associated taxes payable;
(ii) sales taxes payable;
(iii) time dependent accruals, such as interest on loans and overdrafts, telephone, heat and light, and other expenses paid in arrears.

Most employees’ wages are paid weekly in arrears.

Required:
(a) Describe in detail the audit work you will carry out to check suppliers’ statements to the balances on the purchase ledger.

(b) Verify that purchases cut-off has been correctly carried out at the year-end.

(c) Ensure that sundry payables and accruals are correctly stated.

Answer

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Tags: Accruals, Audit Evidence, Payroll, Substantive Procedures, Sundry Payables, Taxes
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

Question

Elisa Medical Co

Elisa Medical Co has a significant number of cash transactions and recent non-current asset purchases have been financed by a bank loan. This loan is repayable in equal annual instalments for the next five years.

Required:
(a) Explain the procedures to obtain a bank report for audit purposes from Elisa Medical Co’s bank and the substantive procedures that should be carried out on that report.
(5 marks)

(b) List the further substantive procedures that should be carried out on the bank balances in Elisa Medical Co’s financial statements.

Answer

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Tags: ank Balances, Audit Evidence, Cash Transactions, Financial Statements, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

Question

You are the audit manager in the firm of Amoah & Partners, an audit firm with ten national offices. One of your clients, Pearl & Stone, purchases diamond jewellery from national manufacturers. The jewellery is then sold from Pearl & Stone’s four shops. This is the only client your firm has in the diamond industry.

You are planning to attend the physical inventory count for Pearl & Stone. Inventory is the largest account on the statement of financial position with each of the four shops holding material amounts. Due to the high value of the inventory, all shops will be visited and test counts performed.

With the permission of the directors of Pearl & Stone, you have employed Crystal Experts, a firm of specialist diamond valuers who will also be in attendance. Crystal Experts will verify that the jewellery is, in fact, made from diamonds and that the jewellery is saleable with respect to current trends in fashion. Crystal Experts will also suggest, on a sample basis, the value of specific items of jewellery. Counting will be carried out by shop staff in teams of two using pre-numbered count sheets.

Required:
(a) List and explain the reason for the audit procedures used in obtaining evidence in relation to the inventory count of inventory held in the shops.

(b) Explain the factors you should consider when using the work of Crystal Experts.

(c) Describe the audit procedures you should perform to ensure that jewellery inventory is valued correctly.

Answer

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Tags: Audit Procedures, Diamond Industry, Inventory Valuation, Net Realisable Value, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

Question

You are the external auditor of Tandem Logistics, a public limited company (TL). The company’s year-end is 31 March. You have been the auditor since the company was formed 19 years ago to take advantage of the increase in goods being transported by road. Many companies needed to transport their products but did not always have sufficient vehicles to move them. TL therefore purchased ten vehicles and hired these to haulage companies for amounts of time ranging from three days to six months.

The business has grown in size and profitability and now has over 550 vehicles on hire to many different companies. At any one time, between five and 20 vehicles are located at the company premises where they are being repaired; the rest could be anywhere on the extensive road network of the country it operates in. Full details of all vehicles are maintained in a non-current asset register.

Bookings for hire of vehicles are received either over the telephone or via e-mail in TL’s offices. A booking clerk checks the customer’s credit status on the receivables ledger and then the availability of vehicles using the Transport Management System (TMS) software on TL’s computer network. E-mails are filed electronically by customer name in the e-mail program used by TL. If the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the TMS and confirmed to the customer using the telephone or e-mail. Booking information is then transferred within the network from the TMS to the receivables ledger programme, where a sales invoice is raised. Standard rental amounts are allocated to each booking depending on the amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for telephone orders or via e-mail for e-mail orders.

The main class of asset on TL’s statement of financial position is the vehicles. The net book value of the vehicles is $6 million out of total shareholders’ funds of $15 million as at 30 June 20X8.

Required:
(a) List and explain the reason for the audit tests you should perform to check the completeness and accuracy of the revenue figure in Tandem Logistics’ financial statements.

(b) List and describe the audit work you should perform on the statement of financial position figure for vehicles in Tandem Logistics’ financial statements for the year ended 30 June 20X8.

Answer

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Tags: Audit Procedures, Completeness, Depreciation, Existence, Financial Statements, Non-current Assets, Substantive Procedures, Transport Industry, Valuation, Vehicles
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q40 – Audit Evidence

Discuss the pros and cons of stating or not stating the balance in a confirmation letter to suppliers List substantive procedures to verify the amount of trade payables in the payables ledger. List substantive procedures to identify unrecorded liabilities in the payables ledger.

Question

n your audit procedures to date you have found a large number of misstatements in your client’s payables ledger. You have decided to write to a number of trade payables to obtain direct confirmation of the balances due.

Required
(a) The confirmation letter to the suppliers could either state the balance or ask the supplier to give the balance himself. Set out the arguments for each of these two approaches.

(b) List other substantive procedures which you could use to verify the amount of trade payables.

(c) List the substantive procedures you would carry out to discover the existence of unrecorded liabilities.

Answer

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Tags: Audit Evidence, Payables Ledger, Substantive Procedures, Unrecorded Liabilities
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

Question

Kumasi Playthings is a prestigious toy retailer trading from a single urban retail district. The accounts and administration offices are above the shop. The company is the wholly-owned subsidiary of a prominent retail group. Kumasi Playthings is headed by its dynamic managing director, Kofi Mensah, aged 70.

At Kofi Mensah’s insistence, your firm, as local to Kumasi Playthings, has recently been appointed as the auditor. Kumasi Playthings is now the only group company not to be audited by the group auditors.

The following matters have come to light during the preliminary discussions with Kofi Mensah and those members of his staff to whom he has allowed you access:

(1) The parent company wishes Kumasi Playthings to develop operations in a number of out-of-town shopping centres. Kofi Mensah regards this as unacceptable because it would destroy the goodwill and prestige built up over 150 years of quality retailing.

(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting instructions, no physical count is planned for the year end. The company intends to rely on the continuous inventory system which commenced operation in March 20X8. Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all the inventory lines before the system went live. Secondly, due to a dispute with the IT provider, there has been no maintenance service for five months.

(3) Kofi Mensah has just returned from a toy fair at which he placed an order for 50,000 dolls produced by a little-known youth cooperative led by his only niece. The chief buyer is said to be fuming over the incident.

(4) In the year to 31 January 20X8, Kofi Mensah received a bonus of C2m, but you were unable to obtain any information in respect of the calculation and authorization of the bonus. No other director of Kumasi Playthings received a bonus in that year and the next highest paid director received a total emoluments package of C300,000.

(5) There is a dispute with a major supplier over the credit facilities offered to Kumasi Playthings. The supplier manufactures and supplies 30% of Kumasi Playthings’ purchases and claims that Kumasi Playthings has continually exceeded its credit period and that its accounting staff are impatient and incompetent.

(6) The company’s overdraft limit of C2.5m is due for renegotiation in April 20X5.

Required
Identify the potentially high risk areas of the audit.

Answer

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Tags: Audit Risk, Control Risk, Financial Statement Assertions, Going Concern, Inventory, Management Override, New Client, Related Party Transactions, Retail Audit, Substantive Procedures
Level: Level 3

Topic: Audit Evidence, Planning

Tag (SQ): Substantive Procedures

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AA – L2 – SA – Q4.7 – Financial Statement Assertions

Assertions for non-current asset procedures.

AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

AA – L2 – Q54 – Audit Evidence

Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

AA – L2 – Q51 – Audit Evidence

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

AA – L2 – Q40 – Audit Evidence

Discuss the pros and cons of stating or not stating the balance in a confirmation letter to suppliers List substantive procedures to verify the amount of trade payables in the payables ledger. List substantive procedures to identify unrecorded liabilities in the payables ledger.

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

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AA – L2 – SA – Q4.7 – Financial Statement Assertions

Assertions for non-current asset procedures.

You're reporting an error for "AA – L2 – SA – Q4.7 – Financial Statement Assertions"

AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

You're reporting an error for "AA – L2 – Q69 – Audit Reports"

AA – L2 – Q54 – Audit Evidence

Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

You're reporting an error for "AA – L2 – Q54 – Audit Evidence"

AA – L2 – Q51 – Audit Evidence

You're reporting an error for "AA – L2 – Q51 – Audit Evidence"

AA – L2 – Q50 – Audit Evidence

Explain procedures for obtaining a bank report and substantive procedures for Zenith Healthcare Ltd's bank report. List substantive procedures for auditing bank balances in Zenith Healthcare Ltd's financial statements.

You're reporting an error for "AA – L2 – Q50 – Audit Evidence"

AA – L2 – Q45 – Audit Evidence

List and explain audit procedures for inventory count evidence at Pearl & Stone's diamond jewellery shops. Explain factors to consider when using Crystal Experts' work for Pearl & Stone's inventory audit. Describe audit procedures to ensure correct valuation of Pearl & Stone's jewellery inventory.

You're reporting an error for "AA – L2 – Q45 – Audit Evidence"

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

You're reporting an error for "AA – L2 – Q44 – Audit Evidence"

AA – L2 – Q40 – Audit Evidence

Discuss the pros and cons of stating or not stating the balance in a confirmation letter to suppliers List substantive procedures to verify the amount of trade payables in the payables ledger. List substantive procedures to identify unrecorded liabilities in the payables ledger.

You're reporting an error for "AA – L2 – Q40 – Audit Evidence"

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

You're reporting an error for "AAA – L3 – Q26 – Audit Planning and Risk Analysis"

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