Substantive Procedures - Class of Transactions

SALES AND SALES RETURN

Occurrence  Compare Sales of this year with Sales of last year as well as with budgeted and Industry
(for Overstatement) average. Investigate unusual difference.

Procedures

Compare G.P. Ratio of this year with last year as well as budgeted and Industry average.
Analytical

Completeness Investigate unusual difference.

(for Understatement)  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).
Occurrence  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.
Completeness  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
Tests Of Details

been accounted for.

 Review reconciliation between Individual Sales Invoices and Total posted in Debtors' Control
Account.
Accuracy  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.
Classification  Review ledger for any unusual debits/credits to identify any misclassification.
 Examine a sample of sales invoices for proper classification into revenue accounts.
Cut off  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.

PURCHASES AND PURCHASE RETURN

Occurrence  Comparison of GP ratio with last year, budgeted and industry average
Analytical

(for Overstatement)  Comparisons of purchases are made by months, regions and product basis, also compare with
last year's figures.
Completeness  Prepare a reconciliation of Inventory (opening + Produced disposed - closing) and compare
(for Understatement) units purchased with production record
Occurrence  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.
Completeness  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.
Tests of Details

 Review reconciliation between Individual Purchases Invoices and Total posted in Creditors'
Control Account
Accuracy  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.
Classification  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)
Cut off  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.

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 Substantive Procedures - Class of Transactions

COST OF SALES

Occurrence  Compare Cost of Sales of this year with Cost of Sales of last year as well as with budgeted and
Analytical

(for Overstatement) Industry average. Investigate unusual difference.

 Perform Vertical Analysis i.e. compare Cost of Sales as a percentage
Completeness of Total Sales with last year as well as with budgeted and industry
(for Understatement) average. Investigate unusual difference.
Occurrence  Select a sample of recorded cost of sales entries and vouch to supporting documentation.
Completeness  Select a sample of basic transaction documents (such as production reports) and determine
Tests of Details

whether the related cost of goods sold was recorded.

Accuracy  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.
Classification  Review ledger for any unusual debits/credits to identify any misclassification
Cut off  Ensure cost of sales is recorded considering cut off based on purchases and sales.

DEPRECIATION

Occurrence  Compare Depreciation of this year with Depreciation of last year as well as with budgeted
Analytical

(for Overstatement) and Industry average. Investigate unusual difference.

 Compare depreciation rate with prior years and industry practice.
Completeness  Develop an expectation about Depreciation, to test the reasonableness of Depreciation (by
(for Understatement) multiplying rate of depreciation to depreciable amount).
Occurrence  Test whether allocation of depreciation expense between factory, selling and admin expenses
Tests of Details

is on reasonable basis.
Completeness  Review Fixed Assets Register to check whether depreciation has been charged on all fixed
assets.
Accuracy  For revalued assets, ensure depreciation is charged on revalued amounts.
Classification  Review ledger for any unusual debits/credits to identify any misclassification
Cut off  Test that depreciation on additions and disposals during the year is appropriately calculated.

BAD DEBTS

Occurrence  Compare Bad debts of this year with Bad debts of last year as well as with budgeted and
Analytical

(for Overstatement) Industry average. Investigate unusual difference.

 Perform Vertical Analysis i.e. compare Bad debts as a percentage of Total Sales with last year
Completeness as well as with budgeted and industry average. Investigate unusual difference.
(for Understatement)
Occurrence  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.
Test of Details

Completeness  Review aging of receivables to identify overdue balances and inquire about their status.
Accuracy  Scan account of bad debts for unusual credits in the account.
Classification  Review ledger for any unusual debits/credits to identify any misclassification
Cut off  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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 Substantive Procedures - Class of Transactions

PAYROLL

Occurrence  Compare Payroll expense of this year with Payroll expense of last year as well as with
(for Overstatement) budgeted and Industry average. Investigate unusual difference.
Procedures
Analytical

 Perform Vertical Analysis i.e. compare Payroll expense as a percentage of Total Sales with last
Completeness year as well as with budgeted and industry average. Investigate unusual difference.
(for Understatement)  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).
Occurrence 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
Tests of Details

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.
Completeness  Review the period end accrual of payroll expenses.
Accuracy  On Sample Basis, check calculation of salary is based on correct hours and rates and Check
Mathematical Accuracy of salary sheet.
Classification  Trace posting of Salary Register to relevant accounts in G.L.
 Review of Payroll Accounts for unusual items.
Cut off  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

TAX EXPENSE

Occurrence  Check whether entity is involved in taxable activities according to Income Tax Ordinance.
Completeness  Ensure that tax credit/rebates have been taken into account.
Tests of Details

Accuracy  Check the calculation of taxable income in accordance with Income Tax Ordinance.
 Check assessment orders of prior years.
Cut off  Ensure proper cut off in Tax Year in recording tax expense.
 Check whether classification between items current Tax and deferred tax are appropriate.
Classification  Check whether classification between items of Temporary differences and permanent
differences are appropriate.

INTEREST EXPENSE

Occurrence  Compare Interest Expense of this year with last year and investigate difference.
Analytical

(for Overstatement)
Completeness
(for Understatement)

Occurrence  Relate all interest expenses to their relevant Loans and check their reasonableness.
 Check whether interest expense has been recorded on all debts.
Tests of Details

Completeness
Accuracy  Recalculate interest expense using details from Loan Agreement.
Cut off  Check whether interest expense has been recorded in the correct period.
Review Debt Repayment/Lease Amortization Schedule.
Classification  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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 Substantive Procedures - Class of Transactions

OTHER OPERATING EXPENSES

Occurrence Perform analytical procedures: e.g.

Analytical

(for Overstatement)  Develop an expectation about expense, to test its reasonableness

 Compare actual expense with last year's expenses. Investigate unusual differences.
Completeness
(for Understatement)
Occurrence 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
Tests of Details

bank statement)
 Check supporting duly stamped "Processed" or "Paid".
 Ensure that the expense relates to the year and business
Completeness  Review the period end accrual of expenses.
 Search for unrecorded liabilities.
Accuracy  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.
Cut off  From selected sample of transactions, check date of acknowledgement of receipt of
goods/services.
Classification  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.

OTHER INCOME

Occurrence  Perform analytical procedures e.g. Compare actual income with last year's income. Investigate
Analytical

(for Overstatement) unusual differences.

Completeness
(for Understatement)
Occurrence  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)
Tests of Details

Completeness  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).
Accuracy  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)
Cut off  Ensure that income relating to current year only is recognized.
Classification  Ensure that classification between operating income and non operating income is
appropriate.

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 Substantive Procedures – Account Balances

FIXED ASSETS

Completeness  Compare Fixed Assets of this year with Fixed Assets of last year as well as with budgeted and
Analytical

(for Understatement) 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.

Existence  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)
Completeness  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.
Valuation and Evaluate fixed assets for significant write-offs or impairments by performing procedures like:
Tests of Details

Allocation  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.
Rights and Obligation  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.

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.
Research and • Confirm that capitalised development costs conform to IAS 38 criteria by inspecting details of projects
development and discussions with technical managers.
costs • 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.
Other • Agree purchased intangibles to purchase documentation agreement by Inspection.
Intangibles • Inspect specialist valuation of intangibles and ensure it is reasonable.
• Review amortisation calculations and ensure they are correct by recalculation.

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 Substantive Procedures – Account Balances

INVENTORY

Overstated/  Compare Inventory of this year with Inventory of last year as well as with budgeted and
understated inventory Industry average. Investigate unusual difference.
 Compare GP. Ratio of this year with last year as well as budgeted and Industry average.
Analytical

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.
Existence  Obtain a listing of Inventory's balance and observe count of physical inventory (list to floor)
Completeness  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.
Valuation and Cost:
Allocation  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.
Test s of Details

 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.
Rights and Obligation  Ensure that goods held on consignment basis and goods held on 'sale on approval' basis are
NOT included in Inventory.

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).
Tests of Details

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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 Substantive Procedures – Account Balances

DEBTORS

Existence &  Comparison of G.P. ratio with last year and industry average
Analyti

Completeness  Comparison of Receivable Turnover Ratio & Debtors' Age with Past and Industry averages
cal

 Comparison of bad debts expense as a %age of sales with Past and Industry averages
Existence  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.
Valuation and  Obtain invoice wise breakup of individual suppliers and recalculate the total outstanding
Allocation amount.
 Review accounts receivable ledger for any unusual debits/credits to identify any
Tests of Details

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.
Rights and Obligation  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.

CASH BALANCE

Existence  Perform cash count at year end.

Tests of Details

Completeness  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.
Valuation & Allocation  Review ledger for any unusual debits/credits to identify any misclassification
Rights and Obligation  Ensure cash is under proper lock and key and in custody of entity.

ACCRUED ASSETS

Existence &  Compare current year balances in accruals with prior years' balances and inquire unusual
Analytical

Completeness differences.
 Test reasonableness of accrual balances.

Existence  Vouch selected amounts from the list of accruals, with supporting documentation e.g. Rent
agreements etc.
Tests of Details

Completeness  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).
Rights and Obligations  Examine whether accrued assets have been received subsequently. Review documents to
determine entity is legally obliged to receive the amount.
Valuation and  For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued
Allocation is correct

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 Substantive Procedures – Account Balances

LONG TERM LOAN

Existence  Confirm details and outstanding balance directly with lender/banker.

Rights and Obligations  Examine Loan/Lease Agreements.
Tests of Details

Completeness  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.
Valuation and  Recalculate amortization of discount or premium.
Allocation  Review Debt Re payment/ Lease Amortization Schedule.

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  Comparison of GP. ratio with last year and industry average
Analytical

(for Overstatement)  Comparison of Payable Turnover Ratio & Creditors' Age with Past and Industry averages
Completeness  Compare current year balance with prior years' balances (total and party wise).
(for Understatement)

Existence  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.
Completeness  Review reconciliation between balance of General Ledger (Creditors' Control Account) and
Subsidiary Ledger (Purchases Ledger).
Tests of Details

 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"
Valuation and  Obtain invoice wise breakup of individual suppliers and recalculate the total outstanding
Allocation 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)
Rights and Obligation  Examine payments subsequent to year end.

ACCRUED LIABILITIES

Existence  Compare current year balances in accruals with prior years' balances and inquire unusual
Analytical

(for Overstatement) differences.

Completeness  Test reasonableness of accrual balances.
(for Understatement)

Existence  Vouch selected amounts from the list of accruals, with supporting documentation e.g.
utilities bills, salary sheets etc,
Analytical Procedures

Completeness  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").
Rights and Obligations  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).
Valuation and  For a sample of accruals, recalculate the amount of the accrual to ensure the amount
Allocation accrued is correct

PROVISION FOR TAX EXPENSE

Existence  Obtain legal and tax status of entity from tax consultant.
 Check whether temporary differences in tax and accounting base of assets &liabilities exist.
Rights and Obligations  Obtain information from tax consultant regarding application of relevant provisions of
Tests of Details

Income Tax Ordinance.

Completeness  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.
Valuation and  Check that Tax liability has been calculated using applicable tax rates.
Allocation  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.

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 Test of Controls

SALES AND SALES RETURN

Control Objective Controls by Management Test of Controls

Occurrence and Existence

One person is not  Segregation of duties  Observe and evaluate whether proper
responsible for taking segregation of duties is operating
orders, recording sales and
receiving payment.
Recorded sales transactions  Sales recorded only with approved sales  Test a sample of sales invoices for authorised
represent goods shipped. order form and shipping documentation. sales order form and shipping documentation.
 Examine application controls for authorisation.
 Accounting for numerical sequences of  Review and test entity’s procedures for
invoices. accounting for numerical sequences of invoices.
 Monthly customer statements sent out  Review entity’s procedures for sending out
and customer queries and complaints monthly statements and dealing with customer
handled independently. queries and complaints.
Goods and services are only  Authorisation of credit terms to  Review entity’s procedures for granting credit
supplied to customers with customers (senior staff authorisation, to customers.
good credit ratings. references/credit checks for new
customers, regular review of credit limits)
 Authorisation by senior staff required for  Examine a sample of sales orders for evidence
changes in other customer data such as of proper credit approval by the appropriate
address etc. senior staff member.
 Orders not accepted unless credit limits  Examine application controls for credit limits.
reviewed first
 Goods and services are  Authorised price lists and specified terms  Compare prices and terms on a sample of sales
provided at authorised of trade in place. invoices to the authorised price list and terms
prices and on of trade.
authorised terms.  Examine application controls for authorised
 Customers are prices and terms.
encouraged to pay
promptly.
Completeness
All revenue relating to goods  Accounting for numerical sequences of  Review and test entity’s procedures for
dispatched is recorded. invoices. accounting for numerical sequences of invoices.
All goods and services sold  Shipping documentation is matched to  Trace a sample of shipping documents to the
are correctly invoiced. sales invoices. sales invoices and ledger.
 Sales invoices are reconciled to the daily  Review a sample of reconciliations performed
sales report.
 An open-order file is maintained and  Inspect the open order file for unfilled orders.
reviewed regularly.
Accuracy
All sales and adjustments  Sales invoices and matching documents  Vouch recorded sales to supporting 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  Compare dates on sales invoices with dates of
recorded in the correct to the invoicing section on a daily basis. corresponding shipping documentation.
period.  Daily invoicing of goods shipped  Compare dates on sales invoices with dates
recorded in the sales ledger
Classification
All transactions are properly  Chart of accounts in Place Codes in place  Review sales ledger for proper classification. �
classified in accounts 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 Controls by Management Test of Controls

Occurrence and existance

Recorded purchases  Authorisation procedures and policies in  Inspect policies and procedures and inquire
represent goods and place for ordering goods and services. about them.
services received.  Segregation of duties.  Observe and evaluate segregation of duties
 Purchase orders raised for each purchase  Examine a sample of purchase orders to ensure
and authorised by appropriate senior they have been appropriately authorised.
personnel.  Review the delegated list of authority for
purchases.
 Approved purchase order for each  For a sample of orders, examine the goods
receipt of goods received note (GRN) and match it to the order.
 Staff receiving goods check them to the  Observe receipt of goods by staff to confirm
purchase order whether the check is done
 Stores clerks sign for goods received.  Inspect a sample to confirm whether stores staff
undertake this check.
 Purchase orders and GRNs are matched  Examine supporting documentation for a sample
with the suppliers’ invoices of invoices
Completeness
All purchase transactions  Purchase orders and GRNs are matched  Examine supporting documentation for a sample
that occurred have been with the suppliers’ invoices. of invoices
recorded.  Periodic accounting for prenumbered  Review entity’s procedures for accounting for
GRNs and purchase orders. prenumbered documents.
 Independent check of amount recorded  Examine application controls.
in the purchase journal  Examine documentation for evidence of this
check.
Accuracy, classification and valuation
Purchase transactions are  Purchase orders and GRNs are matched  Examine supporting documentation for a sample
correctly recorded in the with the suppliers’ invoices of invoices
accounting system.  Mathematical accuracy of the supplier’s  Recalculate the mathematical accuracy of a
invoice is verified. sample of suppliers’ invoices.
 Amount posted to general ledger is  Review reconciliations for evidence of this check.
reconciled to the purchases ledger.
 Chart of accounts in place.  Review purchases journal and general ledger for
reasonableness.
Rights & Obligations
Recorded purchases  Purchase orders and GRNs are matched  Examine supporting documentation for a sample
represent the liabilities of with the suppliers’ invoices. of invoices.
the entity.
Cut off
Purchase transactions are  All goods received reports forwarded to  Compare dates on reports to dates on relevant
recorded in the correct accounts payable department daily. vouchers.
accounting period.
 Procedures in place that require  Compare dates on vouchers with dates they
recording of purchases as soon as were recorded in the purchases journal
possible after goods/services received.

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 Test of Controls

INVENTORIES

Control Objective Controls by Management Test of Controls

Existence and Occurrence

All inventory movements  Prenumbered documentation such as  Review documentation in use.
are authorised and GDNs and GRNs in use.
recorded.  Reconciliations of inventory records with  Review a sample of reconciliations to confirm
general ledger they are performed and then reviewed by an
independent person
 Segregation of duties  Observe and evaluate proper segregation
Inventory included on the  Physical safeguards in place to ensure  Review security systems in place (eg locked
statement of financial inventory is not stolen. warehouses, CCTV etc).
position physically exists.  Separate responsibilities for  Review policies and procedures in place; discuss
maintenance of records and procedures with relevant staff.
custodianship.
 Inventory counted regularly.  Review procedures for counting inventory.
 Attend inventory count.
Rights and Obligations
Inventory records only  Procedures in place to include inventory  Review entity’s procedures relating to
include items that belong to held at third parties and exclude consignment inventory
the entity. inventory held on consignment for third
parties.
Completeness
All purchases and sales of  Procedures in place to include inventory  Review entity’s procedures relating to
inventory have been held at third parties and exclude consignment inventory
recorded in the accounting inventory held on consignment for third
system. parties.
 Reconciliations of accounting records  Review reconciliations performed and whether
with physical inventory reviewed by independent person
Accuracy, classification and valuation
Inventory quantities have  Periodic or annual comparison of  Review and test entity’s procedures for taking
been accurately determined. inventory with amounts shown in physical inventory.
perpetual inventory records.
 Standard costs reviewed by  Review and test entity’s procedures for
management. developing standard costs.
 Review of cost accumulation and  Inspect variance reports produced
variance reports.
Inventory is properly stated  Inventory managers review inventory  Discuss with inventory managers how this is
at the lower of cost and net regularly to identify slow-moving, done.
realisable value. obsolete and excess inventory.  Observe the procedure being performed
Cut-off
All purchases and sales of  All dispatch documents processed daily  Inspect documentation to confirm daily
inventory are recorded in to record the dispatch of finished goods processing.
the correct accounting  All goods inwards reports processed  Inspect documentation to confirm daily
period. daily to record the receipt of inventory. processing.
 Reconciliations of inventory records with  Review reconciliations performed.
general ledger.
Presentation and disclosure assertions
Inventory transactions and  Orders for materials and production data  Review entity’s procedures and documentation
balances are properly forms used to process goods through used to classify inventory.
identified and classified in manufacturing.
the financial statements.
Disclosures relating to  Approval by Finance Director  Review entity’s working papers for evidence of
classification and valuation review.
are sufficient.
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 Test of Controls

PAYROLL

Control Objective Controls by Management Test of Controls

Occurrence & Existence
Payment is made only to  Segregation of duties between HR and  Observe and evaluate proper segregation of
bona fide employees of the payroll functions duties.
entity.  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
banking of unclaimed wages If wages are paid in cash
 Verification of identity  Attend the pay-out of wages to confirm that
 Recording of distributions the official procedures are being followed.
 Preparation and authorisation of  Before the wages are paid compare payroll
cheques and bank transfer lists with wage packets to ensure all employees
 Comparison of cheques and bank have a wage packet.
transfer list with payroll  Examine receipts given by employees; check
 Maintenance and reconciliation of unclaimed wages are recorded in unclaimed
wages and salaries bank account wages book.
 Preparation and authorisation of  Observe whether any employee receives more
cheques and bank transfer lists than one wage packet.
 Comparison of cheques and bank  Inspect the unclaimed wages book entries with
transfer list with payroll the entries on the payroll to ensure they agree.
 Maintenance and reconciliation of  Check that unclaimed wages are banked
wages and salaries bank account regularly by inspection of bank statements and
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  Recalculate benefits and deductions for a
(tax, pension etc) are benefit calculations. sample of employees.
computed correctly  Payroll budgets in place and reviewed  Review budgeting procedures
by management.  Inspect documentation for evidence of
 Agreement of gross earnings and total management's review.
tax deducted with taxation returns.
Payroll transactions  Changes to master payroll file verified  Review reconciliation o ‘before and after’
correctly recorded in the through ‘before and after’ reports. reports to payroll master file.
accounting system.  Payroll master file reconciled to general  Review reconciliation o payroll master file to
ledger. general ledger. Confirm whether discrepancies
are followed-up promptly and resolved.
Cut-off
Payroll transactions are  All starters, leavers, changes to salaries  Review entity’s procedures for reporting
recorded in the correct and deductions are reported promptly to changes to the payroll department.
accounting period. payroll department and changes are  Check sample of starters and leavers.
updated to the payroll master file
promptly.
Presentation and disclosure assertions
Payroll transactions are  Chart of accounts  Review chart of accounts.
properly classified in the  Independent approval and review of  Review procedures for classifying payroll costs.
financial statements. accounts charged to payroll.  Review budgeting procedures.
 Payroll budgets in place and reviewed
by management.

Revenue and capital expenditure

Control Objective Controls by Management Test of Controls

Authorisation  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.
Completeness  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 Controls by Management Test of Controls

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

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 Test of Controls

Sales Cycle

Purchases Cycle

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