Inventory Held by Third Parties

Where the entity has inventory that is held by third

parties, and which is material to the financial
statements, the auditor shall obtain sufficient
appropriate audit evidence by performing one or both
of the following:
• Direct confirmation from the third-party regarding
quantities and condition (in accordance with ISA 505
External confirmations)
• Inspection or other appropriate audit procedures (if
third party's integrity and objectivity are doubtful.

The other appropriate audit procedures referred to

above could include the following:
Procedures to confirm inventory held at third party
locations
1. Send a letter requesting direct confirmation of
inventory balances held at year end from the third-
party regarding quantities and condition.
2. Attend the inventory count (if one is to be
performed) at the third-party warehouses to review
the controls in operation to ensure the completeness
and existence of inventory.
3. Inspecting documentation in respect of third-party
inventory (eg warehouse receipts or
acknowledgement)
4. Requesting confirmation from other parties when
inventory has been pledged as collateral

Audit procedures for continuous (perpetual) inventory

counts
(In a continuous count the inventory is counted
continuously but only a section at a time, but all
inventory is counted at least once every year.)
(Perpetual inventory system is a system when the
goods are recorded in the accounting system as they
are received or despatched and a perpetual count is
carried out and reconciled to the accounting records to
confirm accuracy of the accounting records)
In order that the company’s auditors to rely on the
company’s revised continuous inventory checking
system, the auditor should ensure that:
I. Inventory records are kept up to date.
II. All inventory lines are counted at least once a year
with higher value and desirable lines being counted
more frequently.
(After ever count a reconciliation is performed to
reconcile the inventory count balance and the
accounting record balance. If there are no difference
then the accounting balance is reliable, As such the
accounting record balance can be used for closing
inventory balance).
(But if there has been material difference each time the
count is performed, the records are not reliable and a
year end count should be carried out)
III. The counting of inventory is carried out by suitably
experienced independent individuals in a systematic
and orderly manner.
IV. All corrections to inventory records are authorised
by a responsible official of the company.
V. Any material discrepancies noted between inventory
records and physical quantities are investigated
immediately and reported to management for
immediate further follow up as appropriate.
VI. There are satisfactory procedures with regard to
cut-off and receipt/issue documentation at the time of
inventory counts.
Procedures
1. The audit team should attend at least one of the
continuous (perpetual) inventory counts to
review whether the controls over the inventory count
are adequate.
2. The audit team should confirm that all of the
inventory lines have been counted or are due to be
counted at least once a year by reviewing the
schedules of counts undertaken/due to be undertaken.
3. Review the adjustments made to the inventory
records on a monthly basis to gain an understanding of
the level of differences arising on a month by month
basis.
4. If significant differences consistently arise, this could
indicate that the inventory records are not adequately
maintained. Discuss with management how they will
ensure that year-end inventory will not be under or
overstated.
5. Consider attending the inventory count at the year-
end to undertake test counts of inventory from records
to floor and from floor to records in order to confirm
the existence and completeness and accuracy of
inventory.
SUBSTANTIVE TESTING: PROPERTY, PLANT &
EQUIPMENT

Completeness
1. Take a sample of physical assets and ensure they are
completely recorded in the NCA Register
2. Re-perform the NCA Register reconciliation to the
General Ledger
3. Obtain a breakdown of additions, cast the list and
agree that they have been included in the noncurrent
assets register to confirm completeness of PPE.
4. Review the repairs and maintenance ledger to
ensure capital expenditure has not been accidently
expensed of.

Existence
1. Select a sample of assets from the NCA Register and
inspect them to verify their physical existence
2. Ensure disposed-off assets have been removed from
the NCA Register as they no longer exist.
3. Verify the insurance coverage to confirm that all
assets have been insured .
Rights & Obligation
1. Inspect the ownership documents (title deeds
(Property), registration documents(M.V) to ensure
they are in client’s names.
2. Review insurance policies to confirm the asset is in
client’s name.
3. For small asset where registration is not required
possession will amount to ownership (Which is rights
and obligations)
4. Even for large assets where registration is not
required any entity that pays for repairs and
maintenance should have rights.

Accuracy , valuation, allocation

(Accuracy of recording would be relevant:
a. In the year of acquisition
b. In the year of disposal
c. Allocation of depreciation
d. Impairments and fair valuation)
Additions during the year
1. Select a sample of additions from the NCA register
and agree cost to supplier invoice to confirm valuation.
2. Ensure all additions were authorized by inspecting
the minutes of the board meetings, capital budgets and
purchase orders.
3. Review the list of additions and confirm that they
relate to capital expenditure items rather than repairs
and maintenance.
Disposals during the year
1. Disposal proceeds matched to supporting
documents such as invoices or sale & purchase
agreements to cash book and bank statement
2. Verify that the correct cost and depreciation has
been removed from the accounting records and
included in the disposal account.
3. Recalculate profit/loss on disposal agree to the
amount included in the statement of profit or loss
4. Check authorising documentation to ensure that the
disposal was appropriately authorised.
(Authorisation would be a lower level than acquisition)
5. Examine the sales documentation (Sales and
purchase agreement or sales invoice )relating to the
disposal and ensure that the sale details match those in
the authorising documentation.
Revaluation
1. Obtain a schedule of assets revalued this year and
cast to confirm completeness and accuracy of the
revaluation adjustment.
(Completeness is to confirm that all assets within a
class are revalued)
2. Ensure all similar assets have been revalued
3. Verify depreciation has been calculated on the
revalued amount.
4. Agree the valuation to the expert’s report.
Valuation should be performed by experts and at
regular intervals by independent experts.
5. Inspect the valuer’s report to ensure the valuer was
skilled and independent
6. Agree the revalued amounts for these assets are
included correctly in the noncurrent assets register.
7. Review the financial statements disclosures of the
revaluation to ensure they comply with IAS 16
Depreciation
1. Review the depreciation policy of the company to
ensure that it is consistent and appropriate(this can be
done by comparison with last year and with industry
practice)
2. recalculate and re-perform depreciation charge to
ensure its accuracy.
3. assess depreciation method is reasonable:
 compare with last year
 compare with industry practice
 review NCA Register with Net Book Value of zero
which are still in use.
( If assets with a zero carrying value are still in use
it is an indication that the assets have been over
depreciated)
 review NCA Register for excessive profit/loss on
disposal.
Excessive profits on disposal is an indication of over
depreciation.
Excessive losses on disposal is an indication of under
depreciation.
Enquire from the management the reason for the
excessive profits or losses.
4. enquire from the management whether they
consider the depreciation method to be reasonable
and obtain a ‘written representation’.
5. Review the disclosure of the depreciation charges
and policies in the draft financial statements.
General
Review the disclosure of the additions and disposals
in the draft financial

( Disclosures must be in compliance with IAS 16)

Repairs and Maintenance

This expenditure could have capital expenditure
included by error. An example is renovation or
upgrading.
1. Obtain a schedule of the expenditure and cast to
ensure accuracy of computation of the schedule.
2. For those items treated as capital and included with
property, plant and equipment, agree to purchase
invoices and ascertain whether they are in fact of a
capital nature.
3. For capital items, agree to the non-current assets
register to ensure that they are correctly included.
4. For capital items, recalculate the depreciation
charged to ensure it has been appropriately time
apportioned.
5. For items treated as repairs, agree to invoices to
ensure they are not of a capital nature and that
they have been correctly expensed to the statement of
profit or loss (income statement).

Research and development – IAS 38

Accounting treatment
 a. All research expenditure must be expensed of in
the year the expenditure is incurred.
b. Development expenditure must be capitalised if
the suitable criteria is fulfilled.
Audit procedures are:
1. Obtain and cast a schedule of intangible assets,
detailing opening balances, amount capitalised in the
year under review, amortisation and closing balances.
2. Agree the opening balances to the prior year
financial statements.
3. Agree the closing balances to the general ledger, trial
balance and draft financial statements.
4. Recalculate the amortisation charge for a sample of
intangible assets and confirm it is line with the
amortisation policy.
5. For those expenditure that expensed as research
cost, agree the costs incurred to invoices and
supporting documentation and to inclusion in profit or
loss.
6. For those capitalised as development, agree costs
incurred to invoices and confirm technically feasible by
discussion with development managers or review of
feasibility reports.
(It is not normal to obtain external experts opinion for
R&D due to confidentiality).
7. Review market research reports to confirm client has
the ability to sell the product once complete and
probable future economic benefits will arise.
(Probable economic benefits would require a review of
budgets and forecasts)
8. Review the disclosures for intangible assets in the
draft financial statements are in accordance with IAS 38
Intangible Assets.

An acquired brand
1. Review board minutes for evidence of discussion of
the purchase of the acquired brand, and for its
approval.
2. Obtain the sale & purchase agreement and confirm
the rights of client in respect of the brand as well as the
acquisition price.
3. Agree the cost of acquisition to the company’s cash
book and bank statement.
4. Discuss with management the estimated useful life
of the brand and obtain an understanding of how the
useful life has been determined.
5. Recalculate the amortisation expense for the year
and agree the charge to the financial statements
6. Confirm adequacy of disclosure in the notes to the
financial statements in accordance with IAS 38.

For intangible assets they can only be recognised in the

financial statements if they acquired.
Internally generated intangible assets cannot be
recognised except for Development expenditure if the
full fill the suitable requirement.
All intangibles assets recognised must only be
amortised if it has a limited useful economic life can be
determined.
If the limited useful economic life cannot be
determined, then an annual impairment review must
be carried out.

Bank and cash

General procedures
1. Agree the bank balance on the trial balance to
- the year end bank balance on the cash book in the
accounting system, and
- the balance on the financial statements.
2. Review the cash book and bank statements for any
unusual items or large transfers around the year end,
as this could be evidence of window dressing.
3. Review the financial statements to ensure that the
disclosure of cash and bank balances are complete and
accurate.

Bank confirmation letter

Procedure for obtaining a bank letter
1. The auditor will produce a confirmation letter in
accordance with local audit regulations and practices.
2. The letter will be sent to the client to sign and
authorise disclosure and then it will be forwarded on to
the client’s bank. (Alternatively, the client may already
have provided a standard authority for the bank to
respond to a bank letter each year. In this case separate
authority would not be required.)
Ideally the letter should be sent before the end of the
accounting period to enable the bank to complete it on
a timely basis e.g. at the year-end.
 2. The bank will complete the letter and send it back
directly to the auditor.

Contents of a bank letter

The following matters should be confirmed in the
confirmation from the company’s bank:
1. Titles and account numbers of all bank accounts held
in the name, joint name or trade name of client at the
year end in any of the branches with the particular
bank.
2. Confirmation of balances held in those accounts at
the year end.
3. Full details of interest charged or received on
accounts held during the year if not specified on bank
statements.
4. Details of overdrafts and loans repayable on demand
together with details of other loans and facilities.
5. Details of any assets of client which are held as
security by the bank.
6. Details of any other assets held by the bank, for
example share certificates, documents of title or deeds
in safety deposit boxes.
7. Accounts with nil balance
(This is unusual as such it must verified even though it
is not material)
8. Details of accounts closed in the last 12 months
These accounts may have had transactions which may
not have been recognised in the financial statements.
9. A list of branches of the bank, or other banks, or
associated companies where it is known that a
relationship has been established with the client.
Audit procedures on the bank confirmation letter
include:
1. Agree the balances for each bank account to the
relevant bank reconciliation and the yearend balance in
the financial statements.
2. Agree total interest charges on the letter to the
interest expense account in the general ledger.
3. For any details of loans, ensure repayment terms are
correctly disclosed in the financial statements between
current and non-current liabilities.

Period-end Bank Reconciliation Statement (BRS)

Obtain a copy of client’s bank reconciliation (At the
year end) and perform the procedures below:
1. Cast the reconciliation to check arithmetical accuracy
of the BRS.
2. Agree the bank balance in the BRS to the trial
balance.
3. Agree the reconciliation’s balance per the cash book
to the year-end cash book.
4. Agree the balance per the bank statement to the
original year-end bank statement and also to the bank
confirmation letter.
5. Trace all of the outstanding lodgements to the pre-
year-end cash book, post year end bank statement and
also to paying-in-book per year end.
6. Trace all un-presented cheques through to a pre-
year-end cash book and post year end statement. For
any unusual amounts or significant delays obtain
explanations from management.
7. Examine any old un-presented cheques to assess if
they need to be written back into the purchase ledger
as they are no longer valid to be presented.

Completeness
Agree all balances listed on the bank confirmation
letter to client’s bank reconciliations or the trial
balance to ensure completeness of bank balances.
Examine the bank confirmation letter for details of any
security provided by client as this may require
disclosure in compliance with IAS 1.

Cash
Generally, cash balance is immaterial to the financial
statements. However, cash is an area which is prone to
fraud, especially if the internal controls are not
efficient. That is why cash verification is an important
audit procedure for internal auditors.
(Cash may be material in the retail industry)
Physical verification of cash
Cash balances include the hard cash, unbanked
cheques, credit card slips and IOUs.
(IOUs indicate an unhealthy practise of employees
taking money out of the cash balance and depositing
an IOU or customers being provided with goods and
services with a promise to pay.)
That is why all cash balances need to be counted at the
same time.
The audit working papers relating to the cash count will
include the date of the count, time of the count, name
and signature of staff conducting the count and the
name of the client’s staff available at the count.
Audit procedures for cash
The main audit work involved in verifying cash balances
is a physical count. Audit procedures include the
following:
• The auditor should count cash at all locations
simultaneously and in the presence of a company
official. (Simultaneous counting is necessary, to prevent
the client from moving cash that has been counted at
one location to another location ready for the next
count.)
• After the count the auditor should obtain a signed
receipt for the amount of cash returned to the official.
• The auditor should check the cash balance obtained
from the count against the client's cash records and
cash balance in the draft financial statements.
• Where appropriate, the auditor should also
investigate the treatment of any money advances to
employees (for example, against wages or salary).
Trade Payables
Key risk: understatement
Completeness
1. Reconcile payables ledger to the general ledger.
2. Check reconciliation of supplier account statements
to trade payable ledger balances( Account Payable),
prepared by client. Enquire into any abnormalities and
carry out further reconciliations as required.
3. Obtain year-end supplier statements:
 Agree the balance on the statement to the
individual account in client’s payables ledger.
 Where necessary,(If there are differences)
reconcile the balances taking into account cash
and invoices in transit.
3. Compare trade payables individually and in total to
prior year balances, investigate any significant
difference, in particular any decrease for this year.
(This is Analytical procedure)
4. Calculate the trade payable days and compared to
prior years, investigate any significant difference.
5. Current supplier list matched to last year’s supplier
list and explanations sought for suppliers missing this
year.
6. Select a sample of purchase invoices received after
the year-end. Trace to evidence of goods receipt and
where goods received prior year-end, ensure invoice
amount included in purchase accrual.
7. Post year end payments reviewed. If they relate to
purchases made before the year end, ensure they were
recorded as a liability at the year end.
8. Verify the Audit trail from source document to
records (Take a sample of GRNs prior to the end of the
year and trace to purchase invoice. Ensure a liability
has been recorded)

Accuracy, Valuation, Allocation

1. Supplier circularization (rare in practice)
Suppliers statement are available as a substitute for
circularisation.
2. Verify supporting documentation ( Purchase order
Goods Received Note, Invoice)
3. Supplier statements reconciled to individual supplier
accounts ( as above)
Cut-off (purchases)
Provides evidence of accuracy and completeness of the
balance.
1. Select a sample of GRNs before the year end and
after the year end and follow through to inclusion in
the correct period’s payables balance, to ensure correct
cut- off.
2. Review after date payments; if they relate to the
year under audit, then follow through to the purchase
ledger listing to ensure they are recorded in the correct
period.

Existence
1. Supplier circularization (rare in practice)
2. Verify the Audit trail from records to source
documents (individual ledger to
purchase invoice and Goods Received Note)
Substantive procedures for supplier statement
reconciliations
1. Select a representative sample of year-end supplier
statements and agree the balance to the purchase
ledger. If the balance agrees, then no further work is
required.
2. Where differences occur due to invoices in transit,
confirm from goods received notes (GRN) whether the
receipt of goods was pre year end, if so confirm that
this receipt is included in year-end accruals.
3. Where differences occur due to cash in transit from
client to the supplier, confirm from the cashbook and
bank statements that the cash was sent pre year end.
4. Discuss any further adjusting items with the
purchase ledger supervisor to understand the nature of
the reconciling item, and whether it has been correctly
accounted for.
Why supplier circularization is rare in practice
Third party evidence is a good source of audit evidence
and a large proportion of the documentation available
when auditing trade payables is produced by third
parties, for example, suppliers’ invoices, statements
and correspondence.
A trade payables circularisation may however be
deemed appropriate where:
 supplier statements are, for whatever reason,
unavailable.
 only faxed or photocopied supplier statements are
available and there is some doubt as to their
authenticity.
 the auditor or the company, suspect that
fraudulent manipulation with regard to supplier
payments is taking place within the company.

ACCRUALS
1. Obtain or prepare a listing of accruals as at the end
of the reporting period.
2. If the list is prepared by the client company, check
the calculations and additions far arithmetical accuracy.
Check the amounts in the listing against the balances
in the relevant main ledger expense accounts and
ensure that the amounts are the same.
3. Sample check computations of accruals by
comparing to earlier relevant invoices and payment
records.
4. Review the bank statement for post year end
payments that may relate to services used before the
year end. Trace these items to the accruals listing.
5. Compare the list of accruals to those for the previous
period to obtain assurance as to the completeness of
the accruals.
6. Review the list of accruals for completeness, based
on the auditor's knowledge of the business. The
auditor will review expense categories included in the
SPOL to identify areas of possible accruals and check to
list of accruals for inclusion.
7. Relate items on the list of accruals to other audit
areas, such as the bank confirmation letter (which
might provide details of unpaid/accrued bank charges).
8. Test transactions around the accounting period end
to determine whether amounts have been recognised
in the correct period.
: PAYROLL
Substantive Analytical procedures
1. Compare the total payroll expense to the prior year
and investigate any significant differences.
2. Review monthly payroll charges, compare this to the
prior year and budgets and discuss with management
for any significant variances.
3. Perform a proof in total of total wages and salaries,
incorporating joiners and leavers and the annual pay
increase. Compare this to the actual wages and salaries
in the financial statements and investigate any
significant differences.

Other procedures
1. Cast a sample of payroll records (Payroll summaries)
to confirm completeness and accuracy of the payroll
expense.
2. For a sample of employees, recalculate the gross and
net pay and agree to the payroll records to confirm
accuracy.
3. Re-perform the calculation of statutory deductions
to confirm whether correct deductions for this year
have been made in the payroll.
4. Select a sample of joiners and leavers, agree their
start/leaving date to supporting documentation,
recalculate that their first/last pay packet was
accurately calculated and recorded.
5. Agree the total net pay per the payroll records to the
bank transfer listing of payments and to the cashbook.
6. Agree the individual wages and salaries per the
payroll to the personnel records for a sample to
confirm bona fide employees. (There are no ghost or
fictitious employees in the payroll)
7. Select a sample of weekly overtime sheets and trace
to overtime payment in payroll records to confirm
completeness of overtime paid.

Accrual for income tax payable on employment income

Is the a liability as this amount has been deducted from
the employees income but is not an expenditure to the
client.
1. Agree the year-end income tax payable accrual to
the payroll records to confirm accuracy.
2. Re-perform the calculation of the accrual to confirm
accuracy.
3. Agree the subsequent payment to the post year-end
cash book and bank statements to confirm
completeness.