Assurance

Professional Stage: Knowledge Level

Substantive Procedures- Key Financial Statements Figures (Chater-!"#
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A* +hat are the ,ey areas for testing-
1. Tangible non-current assets;
2. Intangible non-current assets; and
3. Investments.
!* +hat are the ,ey areas when testing tangible non-current assets-

Confirmation of ownership to ensure rights and obligations;
Inspection of non-current assets to ensure existence and valuation;
aluation! preferable b" third parties for accurate valuation; and
#de$uac" of depreciation rates for actual valuation.
.* +hat are the ,ey areas when testing intangible non-current assets-

Confirmation that assets exist; and
Confirmation of appropriate valuation.
"* +hat are the ,ey areas when testing investments-
Confirmation of existence; and
Confirmation of ownership.
/* +hat are the reasons of tangible non-current assets balances to be misstated in the financial
statements-
The ma%or ris&s of the tangible non-current assets balances in the financial statements being
misstated are due to'
The compan" not actuall" owing the assets;
The assets not actuall" existing or having been sold;
(mission of assets owed b" the compan";
The assets being overvalued! either b" inflating cost or valuation or b" undercharging
depreciation;
The assets being undervalued b" not including an appropriate revaluation in a polic" of
revaluation or b" overcharging depreciation; and
The assets being incorrectl" presented in the )*s.
0* +hat are the resources of information about non-current assets-
The non-current assets register;
+urchase invoices for assets purchased within the "ear;
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*ales invoices for the assets sold within the "ear;
,egistration documents or other documents;
aluation carried out b" emplo"ees or third parties;
-ease or hire purchase documentation in respect of assets;
+h"sical inspection of the assets; and
.epreciation records and calculations.
1* +hat are the ma2or ris,s of misstatement of the intangible non-current asset balances in the
financial statements-
The ma%or ris&s of misstatement of the intangible non-current assets balances in the financial
statements are due to'
/xpenses being capitali0ed as non-current assets inappropriatel".
Intangible assets being carried at the wrong cost or valuation due to inflating the cost or
valuation;
Intangible assets being carried at the wrong cost or valuation due to charging in appropriate
amorti0ation! wrongl" amorti0ing or not amorti0ing;
Intangible assets being carried at the wrong cost or valuation due to impairment reviews not
being carried out appropriatel".
The ob%ective of tests in respect of intangible non-current assets is therefore to prove these
assertions about the assets are correct.
3* +hat are the sources of information about intangible $CA-
#ccounting standards and auditors &nowledge of accounting standards for what constitutes an
intangible assets;
+urchase invoice or documentation;
Calculations and schedules ;
*pecialists valuations; and
#uditors understanding of the entit".
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7* +hat are the ,ey areas when testing inventory-
1e" areas when testing inventor" are'
#ttending an inventor" count;
aluation at lower of cost and net reali0able value; and
In some cases confirmation of ownership.
8* +hat are the ma2or ris,s of misstatement of the inventory balance in the FSs-
The ma%or ris&s of misstatement of the inventor" balance in the financial statements are due to'
Inventor" that does not exist being included in the )*s;
2o all inventories that exists being included in the )*s;
Inventor" being included in the )*s at full value when it is absolute or damaged;
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Inventor" being included in the )*s at the wrong value whether due to miscalculation of cost
or valuation method; and
Inventor" that actuall" belongs to third parties being included in the financial statement.
9* +hat are the sources of information about inventory-
The companies control over inventor" counting;
The auditors attendance at the annual inventor" count;
Confirmation with third parties holding inventor" or having inventor" stored for them b" the
compan";
+urchase invoices for inventor";
3or& in progress records for inventor";
+ast "ear end price lists for inventor"; and
+ast "ear end sales orders.
Inventor" ma" lend itself to anal"tical review as there is a relationship between inventor"! revenue
and purchases.
!:* +hen net reali;able value is li,ely to be less than cost-
2et reali0able value is li&el" to be less than cost when there has been'
#n increase in costs or a fall in selling price'
+h"sical deterioration;
(bsolescence of products;
# mar&eting decision to manufacture and sell products at a loss;
/rrors in production or purchasing.
)or wor&ing progress the ultimate selling price should be compared with the carr"ing value at the
"ear-end plus costs be incurred after the "ear-end to bring wor&-in-progress to a finished stage.
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C* +hat are the ,ey areas when testing receivables-
1e" areas when testing receivables are'
Confirming debt owed b" customers; and
Confirming debt is still li&el" to be collected.
!!* +hat are the ma2or ris,s of misstatement of the receivables balance in the financial
statements-
The ma%or ris&s of misstatement of the receivables balance in the financial statements are due to'
.ebt being uncollectible; and
.ebts being contested b" customers;
The ob%ective of audit tests in respect of receivables is therefore to prove that these assertions
about the assets are correct.
!.* +hat are the sources of information about receivables-
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,eceivables ledger information;
Confirmation from customers; and
Cash pa"ments received after the "ear end.
!"* +hat are the methods of confirmation from customer and when to e<ercise-
3hen confirmation is underta&en the method of re$uesting information from the customer ma" be
with positive or negative.
Positive method
4nder the positive method the customer is re$uested to give the balance or to confirm the accurac"
of the balance shown or state in what respect he is in disagreement; and
$egative method
4nder this method the customer is onl" re$uested to repl" if the amount stated is disputed.
!/* +hat are the circumstances to aly negative method-
2egative method of confirmation should onl" be used when'
#ssumed ris&s of material misstatements is low;
# large number of small balance is involved ;
# substantial number of errors is not expected; and
The auditor has no reason to believe that customers will disregard the re$uest.
!0* =raft a ositive re>uest for confirmation with balance*
(ntity Letterhead
.ate
5essrs 6Customer7
In accordance with the re$uest of our #uditors! 5essrs 881, 9 Co. we as& that "ou &indl"
confirm to them directl" "our indebtedness to us as on date which according to our records!
amounted to :.T;.as shown b" the enclosed statement.
If the above amount is in agreement with "our records! please sign in the space provided below
and return this letter directl" to our auditors in the enclosed stamped addressed envelope.
If the amount is not in agreement with "our records! please notif" our auditors directl" of the
amount shown b" "our records and if possible detail on the reverse of this letter full particulars of
the differences.
<ours faithfull"!
)or 5anufacturing Co. -td.
,eference 2o.
6Tear off *lip7
The amount shown is=is not in agreement with our records as on date.
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#ccount no. *ignature;;;;;;;;;;;
.ate;;.. ;.. Title or position;;;;;;;;.
The position according to our record is shown overleaf.
!1* =efine and clarify the confirmation rocedure*
3hen constructing the sample the following classes of account should receive special attention'
(ld unpaid accounts
#ccounts written off during the period under review;
#ccounts with credit balances; and
#ccounts settled b" round some pa"ments.
*imilarl" the followings should not be overloo&ed'
#ccounts with net balances; and
#ccounts that have been paid b" the date of the examination.
#ssurance provides will have to carr" out further wor& in relation to those receivables who'
.isagree with the balanced stated; and
.o not respond.
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=* +hat are the ,ey areas when testing the balance sheet ban, figures-
Confirming ban& balances directl" with the ban&;
Confirming reconciliations differences calculated b" the client are reasonable; and
Confirming an" material cash balances held at the client are correctl" stated.
!3* +hat are the ma2or ris,s of misstatement of the ban, and cash balance in the financial
statements-
The ma%or ris&s of misstatement of the ban& and cash balances in the financial statements are due
to'
2ot all the ban& balances owed b" the client being disclosed;
,econciliation differences between ban& balance and cash boo& balance being misstated; and
5aterial cash floats being omitted or misstated.
!8* +hat are the sources of information for ban, and cash balances-
Cash boo&;
Confirmation from the ban&;
:an& statements; and
:an& reconciliations carried out b" the client.
PA6A7L(S
Assurance Professional Stage Knowledge Level Substantive Procedures: Key Financial Statements Figures Page
(* Key areas when testing ayables:

/nsuring that all liabilities are included; and
Confirming that all liabilities are bona fied owed b" the compan"
!9* )he ma2or ris,s of misstatements of ayable in the financial statements are due to:
The entit" understanding its liabilities in the )*s;
Cut-off between goods inward and liabilit" recorded being incorrect; and
2on-existent liabilities being declared.
.:* )he following sources of information can be used:
+a"able ledger records; and
Confirmations from suppliers.
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F* Key areas when testing long term liabilities:
,is&s included failure to ma&e correct disclosures and miscalculation of interest; and
There should be third part" evidence from lender.
.!* )he ma2or ris,s of misstatements:
That all long term liabilities have been disclosed;
That interest pa"able has not been calculated correctl" and included in the correct accounting
period; and
That disclosers are incorrect.
..* )he following sources of information e<ist:

*chedule of loans= prior "ear audit file information;
*tatutor" boo&s;
-oan agreement;
:an& letter and direct confirmations from other lenders;
Cash boo& ;
:oard minutes;
Clients schedules and calculations; and
#ccounting policies in the financial statements.
."* +hat is the ,ey area when testing income statement items-
The &e" area for testing income statement items is completeness.
Assurance Professional Stage Knowledge Level Substantive Procedures: Key Financial Statements Figures Page !
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Assurance Professional Stage Knowledge Level Substantive Procedures: Key Financial Statements Figures Page "