Ch 13. substantive procedures

1. SUBSTANTIVE
PROCEDURES

2. Amin Siddiki FCA
BSA 505: External Confirmations
BSA 500: Audit Evidence
BSA 520: Analytical Procedures
2
Related BSA (Bangladesh Standard on Auditing)

3. Amin Siddiki FCA
3
To reduce the risk of issuing an inappropriate audit report
to an acceptable level.
The auditor has 2 possible sources of assurance that the
financial statements are not materially misstated.
1. Test of Control
2. Substantive Procedures.

4. Amin Siddiki FCA
4
Test of Audit
Evidence
Test of Control
Substantive
Procedures
Test of Details
Analytical
Procedures

5. Amin Siddiki FCA
5
Substantive Procedures
Audit procedures performed to detect material misstatements at
the assertion level. It includes:
i. Test of detail of classes of transactions, accounts balances and
disclosures.
ii. Substantive analytical procedures.

6. Amin Siddiki FCA
6
Examples of substantive procedures are:
 Bank confirmation
 records to inventory on hand or sold
 Observe fixed assets
 Match purchase orders and supplier invoices to fixed asset records
 Confirm accounts payable
 Examine accounts payable; Accounts receivable confirmation
 Match customer orders to invoices billed
 Match collected funds to invoices billed
 Observe a physical inventory count
 Confirm inventories not on-site
 Confirm debt
 Analytical analysis of assets, liabilities, revenue, and expenses

7. Amin Siddiki FCA
Substantive Procedures
of
Tangible Non Current Assets
7

8. Amin Siddiki FCA
Tangible Non Current Assets
Sl Major Risk Assertion What to do
01. Not owned by the company Rights & Obligation
02. Physically not Exist/Sold Out Existence
03. Omission to record Completeness
04. Over/undervalued Valuation
05. Wrongly Presented Presentation &
Disclosure
8

9. Amin Siddiki FCA
Sl Assertion What to do
01. Rights &
Obligation
a. Vouching the document to ensure ownership
i. Vehicle-Registration doc, Valid Fitness Certificate
ii. Land & Building –Saf Kobla Dalil, Title Deed,
iii. Plant- Purchase invoice to ensure not to lease
b. Review sales invoice for sold assets to ensure that
ownership has been transferred
02. Existence a. Select the asset in the asset register
b. Physical Verification.
9
Tangible Non Current Assets

10. Amin Siddiki FCA
Sl Assertion What to do
03. Completeness a. Obtain a non current asset schedule
b. Compare all asset owned by the company has been
reflected in financial statements
c. Confirm all assets at site are in register
d. Confirm the addition are correct
04. Valuation a. Confirm the valuation as suggested by IAS
i. Cost of purchase through purchase invoice
ii. Directly attributable cost to capitalize
iii. Valuation certificate
b. Depreciation has been correctly calculated
05 Presentation
& Disclosure
a. Ensure disclosure criteria has been meet
10
Tangible Non Current Assets

11. Amin Siddiki FCA
Inventory
Sl Major Risk Assertion What to do
01. Not owned by the company Rights & Obligation
02. Physically not Exist/Sold Out Existence
03. Omission to record Completeness
04. Over/undervalued Valuation
05. Sold inventory may included
in FS
Cut Off
11

12. Amin Siddiki FCA
Sl Assertion What to do
01. Rights &
Obligation
a. Vouching the document to ensure ownership
i. Purchase invoice
ii. Confirmation with third party holding inventory
02. Existence a. Attendance at an Inventory Count
b. Purchase invoice
c. Post year end sales invoice
d. WIP records for inventory
03. Completeness a. Ensure that all inventory are included in FS
b. Consider the inventory in transit
12
Inventory

13. Amin Siddiki FCA
Sl Assertion What to do
04. Valuation a. Check the purchase cost of inventory
b. Check the accounting policy of inventory cost:
i. FIFO
ii. Weighted Average
c. Confirm the cost of WIP has been correctly recorded
d. Labor and related overhead has been correctly
allocated to the WIP and Finished goods
e. Consider the inventory valuation has been may in
accordance with IAS 2, Cost Vs NRV
f. Ensure the impairment loss has been appropriately
adjusted
05 Cut Off a. Carry out cut off test ensuring that year end deliveries
and sales have not been double counted or not
counted
b. Inventory reconciliation may be used
13

14. Amin Siddiki FCA
14
Inventory Count
Attendance at an inventory count can be very important.
i. To confirm the amount of inventory in existence
ii. To rely on the controls that a company has in operation over
its inventory or its annual inventory count rather than
undertake a count itself
iii. To ensure that inventory control are capable to reflect the
correct amount of inventory in the financial statements

15. Amin Siddiki FCA
15
Inventory Count Instruction
1. Supervised by senior staff, (not involve with inventory is
preferable)
2. Marking inventory to help counting
3. Identification of damaged, slow moving, obsolete inventory.
4. Systematic counting to ensure all inventory counting.
5. Teams of two counters (counting and checking) or two
independent team.
6. Serial numbering
7. Recording of quantity, stage of production of WIP

16. Amin Siddiki FCA
16
Management should compare cost and Net realisable Value for each item of
inventory.
1. Net realisable value is likely to be less than cost when there has been:
2. An increase in costs or a fall in selling price
3. Physical deterioration
4. Obsolescence of products
5. A marketing decision to manufacture and sell products at a loss
6. Errors in production or purchasing
Cost Vs NRV

17. Amin Siddiki FCA
Accounts Receivable
Sl Major Risk Assertion What to do
01. Not owned by the company Rights & Obligation
02. Customer not Exist/Ghost Existence
03. Omission to record Completeness
04. Being uncollectable Valuation
17

18. Amin Siddiki FCA
Sl Assertion What to do
01. Rights &
Obligation
a. Confirmation from customer- BSA 505
i. To satisfy the amount
02. Existence a. Confirmation from customer- BSA 505
i. To satisfy whether customer exists
03. Completeness a. Obtain receivable list to compare with individual
receivable ledger
b. Confirm all customers (as relevant) are included in FS
04. Valuation a. Obtain aging analysis and review credit policy
b. Consider the amount written off
c. Post balance sheet info regarding written off
18
Accounts Receivable

19. Amin Siddiki FCA
19
Receivable Confirmation
Method of
Confirmation
Confirmation should
take place
immediately after
the year end.
ACR Balance
Confirmation
Positive Negative

20. Amin Siddiki FCA
20
Positive method of confirmation: The customer is requested to give the
balance or to confirm the accuracy of the balance shown or state in what
respect he is in disagreement.
Negative method of confirmation: The customer is requested to reply only
if the account stated is disputed.

21. Amin Siddiki FCA
21
The negative method should only be used when :
a. Assessed risk of material misstatement is low
b. A large number of small balances is involved
c. A substantial number of errors is not expected
d. The auditor has no reason to believe that customer will disregard
the request.
The statements will normally be prepared by the client’s staff, but
result to the assurance provider’s own office.

22. Amin Siddiki FCA
Special Consideration:
a. Old unpaid amount
b. Accounts written off during the period under review
c. Accounts with credit balance
d. Accounts settled with round sum payments
e. Accounts with Nil balance
f. Accounts that have been paid by the date of the examination
g. Disagree with balance stated with positive/negative confirmation
h. Do not respond with positive confirmation

23. Amin Siddiki FCA
23
Possible reasons for disagreements
a. Dispute between client and customer
b. Cut off problem exists
c. Customer may have sent money before year end but not
recorded before the year end
d. Posting in wrong account
e. Net off balance (Customer as well as supplier)
f. Teeming Lading

24. Amin Siddiki FCA
24
Accounts Payable
The major risks associated with
 The entity understanding its liabilities in the FS
 Cut off between goods inward and liability recording being
incorrect.
 Non existent liabilities being declared. (more rarely)
Sources of information can be used
 Payable ledger
 Confirmation from Supplier

25. Amin Siddiki FCA
25
Long Term Liabilities
Long term liabilities comprising debenture, loan stock and other loans
repayable at a date more than one year after the year end.
The major risks associated with
1. All long term liabilities have been disclosed.
2. Interest payable has not been calculated correctly.
3. Disclosure is incorrect.
Sources of information can be used
1. Schedule of loan.
2. Loan agreements
3. Bank letter and direct confirmations from other lenders
4. Board Minutes
5. Client schedules and calculations

26. Amin Siddiki FCA
26