SPECIFIC FURTHER AUDIT PROCEDURES

Substantive Procedures Summary: Assets, Liabilities and Equity

The following tables summarize the substantive procedures auditor usually performs for each specified account in order to obtain
sufficient appropriate evidence about the relevant assertions (although assertions are summarized into one list based primarily upon
account balances):
Cash Receivables Inventories
Existence  Confirmation  Confirmation  Confirmation of consigned
 Count cash on hand  Inspect notes inventory and inventory in
 Prepare bank transfer  Vouch (examine shipping warehouses
schedule documents, invoices, credit  Observe inventory account
memos)
Rights and Obligations  Review bank statements  Inquire about factoring of  Inquire about inventory
receivables from vendors on
consignment
Completeness and Cut-off  Review cutoffs (receipts  Review cutoffs (sales, cash  Review cutoffs (sales,
and disbursements) receipts, sales returns) sales returns, purchases,
 Perform analytical  Perform analytical purchase returns)
procedures procedures  Perform test counts and
 Review bank compare with client’s
reconciliation counts/summary
 Obtain bank cutoff  Inquire about consigned
statement to verify inventory
reconciling items on bank  Perform analytical
reconciliation procedures
 Accounts for all inventory
tags and count sheets
Valuation, Allocation and  Foot summary schedules  Foot subsidiary ledger  Foot and extend summary
Accuracy  Reconcile summary  Reconcile subsidiary schedules
schedules to general ledger to general ledger  Reconcile summary
ledger  Examine subsequent cash schedules to general
 Test translation of any receipts ledger Test inventory
foreign currencies  Age receivables to test costing method
adequacy of allowance for  Determine that inventory
doubtful accounts is value at lower of cost or
 Discuss adequacy of market
allowance with  Examine inventory quality
management and compare (saleable condition)
to historical experience  Test inventory
obsolescence
Presentation and Disclosure  Review disclosures for  Review disclosures for  Review disclosures for
compliance with GAAP compliance with GAAP compliance with GAAP
 Inquire about  Inquire about pledging,  Inquire about pledging
compensating balance discounting  Review purchase
requirements and  Review loan agreements commitment
restrictions for pledging, factoring

Property, Plant and

Intangibles and Prepaids Marketable securities
Equipment
Existence  Inspect additions  Confirmation of deposits  Confirmation of securities
 Vouch additions and insurance held by third parties
 Review any leases for  Vouch (examine)  Inspect and count
proper accounting insurance policies  Vouch (to available
 Perform search for (miscellaneous support for documentation)
unrecorded retirements deposits)
Rights and Obligations  Review minutes for  (See Existence or  (See Existence or
approval of additions Occurrence) Occurrence)
Completeness and Cutoff  Perform analytical  Review cutoffs  Review cutoffs (examine
procedures  Perform analytical transactions near year-
 Vouch major entries to procedures end)
repairs and maintenance  Perform analytical
expense procedures
 Reconcile dividends
received to publish
records
Valuation, Allocation and  Foot summary schedules  Foot summary schedules  Foot summary schedules
Accuracy  Reconcile summary  Reconcile summary  Reconcile summary
schedules to general schedules to general ledger schedules to general
ledger  Recalculate prepaid ledger
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Presentation and Disclosure
 Recalculate depreciation portions  Test amortization of
premiums and discounts
 Determine the market
value for trading and
available-for-sale
securities
 Review audited financial
statements of major
investees
 Review disclosures for  Review disclosures for  Review disclosures for
compliance with GAAP compliance with GAAP compliance with GAAP
 Inquire about liens and  Review adequacy of  Inquire about pledging
restrictions insurance coverage  Review loan agreements
 Review loan agreements for pledging
for liens and restrictions  Review management’s
classification of securities

Payables (Current) Long-term Debt Owner’s Equity

Existence  Confirmation  Confirmation  Confirmation with
 Inspect copies of notes  Inspect copies of notes and registrar and transfer agent
and note agreements note agreements (if applicable)
 Vouch payables (examine  Trace receipt of funds (and  Inspect stock certificate
purchase order, receiving payment) to bank account book (when no registrar or
reports, invoices) and cash receipts journal transfer agent)
 Vouch capital stock
entries
Rights and Obligations  (See Existence or  Review minutes for proper  Review minutes for proper
Occurrence) authorization authorization
 Inquire of legal counsel on
legal issues
 Review Articles of
Incorporation and by laws
for propriety of equity
securities
Completeness  Review cutoffs  Review cutoffs (examine  Perform analytical
(purchases, purchase transactions near year-end) procedures
returns, disbursements)  Perform analytical  Inspect treasury stock
 Perform analytical procedures certificates
procedures  Inquire of management as
 Perform search for to completeness
unrecorded payables  Review bank
(examine unrecorded confirmations for
invoices, receiving unrecorded debt
reports, purchases orders)
 Inquire of management as
to completeness
Valuation, Allocation and  Foot subsidiary ledger  Foot summary schedules  Agree amounts to general
Accuracy  Reconcile subsidiary  Reconcile summary ledger
ledger to general ledger schedules to general ledger  Vouch dividend payments
 Recalculate interest  Vouch entries to account  Vouch all entries to
expense (if any)  Recalculate interest retained earnings
 For payroll, review year- expense and accrued  Recalculate treasury stock
end accrual interest payable transactions
 Recalculate other accrued
liabilities
Presentation and Disclosure  Review disclosures for  Review disclosures for  Review disclosures for
compliance with GAAP compliance with GAAP compliance with GAAP
 Review purchase  Inquire about pledging of  Review information on
commitments assets stock options, dividend
 Review debt agreements restrictions
for pledging and events
causing default

Substantive Procedures Summary: Income and Expenses Notes receivable Interest

Most revenue accounts are verified in conjunction with audit of Investments Interest, dividends, gains on
a related asset or liability account. For example: sales
Balance Sheet Account Income Account Property, plant and equipment Rent, gains on sale
Accounts receivable Sales

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Substantive procedure approach for revenues
not verified in the audit of balance sheet accounts:
a. Perform analytical procedures related to revenue
accounts.
b. Obtain or prepare analyses of selected revenue
accounts.
c. Vouch selected transactions and determine that they
represent proper revenue for the prior period.
Most expense accounts are verified in conjunction with the audit
of a related asset or liability account. For example:
Balance Sheet Account Expense Account
Accounts receivable Uncollectible accounts
Inventories Purchase, cost of goods sold,
payroll
Property, plant and Depreciation, repairs and
equipment maintenance
Accrued liabilities Commissions, fees, product
warranty expenses
Substantive procedure approach for expenses not verified in the
audit of balance sheet accounts:
a. Perform analytical procedures related to the expense
accounts.
b. Obtain or prepare analyses of selected expense
accounts.
c. Vouch selected transactions.
PSA 510 – Initial Audit Engagements – Openings Balances
Initial audit engagements – An engagement in which either:
a. The financial statements for the prior period were not
audited; or
b. The financial statements for the prior period were
audited by a predecessor auditor.
Predecessor auditor – The auditor from a different audit firm,
who audited the FSs of an entity in the prior period and who has
been replaced by the current auditor.
Openings balances refer to those account balances that exist at
the beginning of the period. Opening balances are based upon
the closing balances of the prior period and reflect the effects of
transactions and events of prior periods and accounting policies
applied in the prior period. Opening balances also include
matters requiring disclosure that existed at the beginning of the
period, such as contingencies and commitments.
In conducting an initial audit engagements, the objectives of the
auditor with respect to opening balances is to obtain sufficient
appropriate audit evidence about whether:
a. Opening balances contain misstatements that materially
affect the current period’s FSs; and
b. Appropriate accounting policies reflected in the
opening balances have been consistently applied in the
current period’s FSs, or changes thereto are properly
accounted for and adequately presented and disclosed
in accordance with the applicable FRF.
Audit Procedures:
Opening Balances
The auditor shall read the most recet financial statements, if any,
and the predecessor auditor’s report thereon, if any, for
information relevant to opening balances, including disclosures.
The auditor shall obtain sufficient appropriate audit evidence
about whether the opening balances contain misstatements that
materially affect the current period’s financial statements by :
a. Determining whether the prior period’s closing
balances have been correctly brought forward to the
current period or, when appropriate, have been restated;
b. Determining whether the opening balances reflect the
application of appropriate accounting policies; and
c. Performing one or more of the following:
 Where the prior year financial statements were audited,
reviewing the predecessor auditor’s working papers to
obtain evidence regarding the opening balances;
 Evaluating whether audit procedures performed in the
current period provide evidence relevant to the opening
balances; or
 Performing specific audit procedures to obtain evidence
regarding the opening balances.
If the auditor obtains audit evidence that the opening balances
contain misstatements that could materially affect the current
period’s financial statements, the auditor shall perform such
additional audit procedures as are appropriate in the
circumstances to determine the effect on the current period’s
financial statements. If the auditor concludes the such
misstatements exist in the current period’s financial statements,
the auditor shall communicate the misstatements with the
appropriate level of management and those charged with
governance.
PSA 540 – Auditing Accounting Estimates, Fair Value
Accounting Estimates and Related Disclosures
Management is responsible for making accounting estimates that
are reasonable when preparing and presenting financial
statements.
The objective of the auditor is to obtain sufficient appropriate
audit evidence about whether:
a. accounting estimates, including fair value accounting
estimates, in the financial statements, whether
recognized or disclosed, are reasonable; and
b. related disclosures in the financial statements are
adequate, in the context of the applicable financial
reporting framework.
Obtaining sufficient appropriate evidence is particularly difficult
when auditing client accounting estimates (e.g., allowance for
doubtful accounts, loss reserves, pension expenses). When
evaluating reasonableness, the auditor concentrates on
assumptions or factors
 Significant to the estimates
 Sensitive to variation
 Apparent deviations from historical patterns
 Subjective and susceptible to bias or misstatement
The three basic approaches for evaluating the reasonableness of
these estimates are:
1. to review and test management’s process of
deriving the estimate (consider the
reasonableness and accuracy of management’s
approach);
2. develop one’s own expectation of the
accounting estimate and compare it to
management’s; and
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 3. review subsequent events or transactions  Borrowing or lending at no interest or at rates
occurring prior to the completion of fieldwork significantly different from market rates
which bear on the estimate  Sales of real estate at prices significantly different from
appraised values
PSA 550 – Related Parties  Exchanges of similar property in nonmonetary
transactions
Management is responsible identifying and ensuring sufficiency  Loans with no scheduled terms
of related party disclosures on the FSs.  Business with major customers, suppliers, etc.
The auditor shall obtain evidence about the sufficiency and  Services being provided (received) at unreasonable
appropriateness of related party disclosures. prices
The auditor shall inquire of managements regarding:
 Accounting records for large, unusual transactions
a. The identity of the entity’s related parties, including
 Confirmations
changes from the prior period;
 Invoices from lawyers
b. The nature of the relationships between the entity and
these related parties; and
In particular, the auditor shall inspect the following for
c. Whether the entity entered into any transactions with
indications of the existence of related party relationships or
these related parties during the period and, if so, the
transactions that management has not previously identified or
type and purpose of the transactions.
disclosed to the auditor:
a. Bank and legal confirmations obtained as part of the
During the audit, the auditor shall remain alert, when inspecting
auditor’s procedures;
records or documents, for arrangements or other information that
b. Minutes of meetings of shareholders and of those
may indicate the existence of related party relationships or
charged with governance; and
transactions that management has not previously identified or
c. Such other records or documents as the auditor
disclosed to the auditor.
considers necessary in the circumstances of the entity,
such as SEC filings, conflict of interest statements,
Indications of the existence of related parties may include:
pensions, other trusts, and identify officers thereof, etc.