1.       Review the company’s capital expenditure budgets noting expenditure which has not yet being incurred

2.       Review the board minutes for expenditure authorized by the directors but not yet contracted for

3.       Check correspondence and order documents for expenditure contracted for but not yet provided in the financial statements 

·         A simple convenient way of recording a system

·         The quickest approach in a small unsophisticated system

·         Disadvantages are (a) cumbersome in a large system (b) difficult to interpret and review (c) difficult to alter if the system changes and (d) easy to miss “loose ends” or even to miss out whole sections of the system                                                                                        2.       Organization charts

• Convenient way of showing individuals in an organization and the lines for reporting and delegation of responsibilities between those individuals
• Useful to indicate who should report to whom
• Disadvantages: (a) do not deal with informal relationship (b) do not indicate the detailed reporting procedures involved
• Hence, cannot replace other recording methods but only supplement them

3.       Internal Control Questionnaires

·         A pre-printed document used widely in practice to ascertain the controls in a client’s system

·         Helps to ensure a formal approach to systems recording

·         Auditor’s attention should be drawn to the need for controls in the system

·         Easy to cross reference to other working paper

·         Disadvantages: (a) may be used improperly as the auditor may waste time asking unnecessary questions using a standard ICQ. (b)  may encourage auditors to perform work in a mechanical fashion without considering the circumstances of a particular client.                                 

  4.       Flowcharts

 Diagrammatic representation of the system

·         May be used to highlight the existence of controls and the division of responsibilities.

·         Should show the complete system without leaving an incomplete record of document movements

·         Disadvantages: danger is that they might not be fully understood by the auditor and so are misinterpreted. 

• To obtain confirmation of all bank balances of the company at year end
• To ascertain any interest or charges to be accrued at the year end
• To ascertain the existence of any assets held by the bank on the client’s behalf and whether any assets have been charged to the bank
• To assist in ascertaining the existence of any contingent liabilities
• To obtain details of all bank accounts which were in existence during the accounting period

  Contents In A Bank Confirmation Letter

The content of the confirmation letter should be in accordance with the format agreed with the clearing banks and should include the following:

·         Details regarding the client’s permission to approach the bank;

·         Requests for details of all bank balances, together with details of accounts closed during the year;

·         Request for details of any interest or charges accrued but not charged;

·         Request for details of any loans, overdraft and facilities, together with the limits and if applicable dates of repayments;

·         Request for details of any assets held by the bank on the customer’s behalf and of any assets charged to the bank

·         Request for details of any contingent liabilities of which the bank may be aware

·         Details of the existence of any other banking relationships with the company of which the recipient bank may be aware. 

·         The examining of records and documents or inspection of tangible assets

·         Reliability of these records and documents depend on the nature and effectiveness of internal control

·         Four major type of documentary evidence which provide different degree of reliability to the auditor are:

·         Documentary evidence origination from and held by third parties

·         Documentary evidence origination from third parties and held by the entity

·         Documentary evidence origination from the entity and held by third parties and

·         Documentary evidence origination from and held by the entity

·         Note that inspection of tangible assets only ensure the existence of such assets but not their ownership or value 

Observation:

• Looking at a process of procedure being performed by others
• Example like auditors’ presence at clients’ physical stockcount

Inquiry and Confirmation:

·         Seeking appropriate information from knowledgeable person inside or outside the entity.

·         Queries may range  from formal written enquiries to third parties, formal oral enquiries addressed to persons inside the entity. Response may provide the auditor with information which he did not previously possess or may provide him with corroborative evidence

·         Confirmation consists of the response to an inquiry to corroborate information in the accounting records. For example, auditor requesting for confirmation from receivables by direct communication with debtors 

Computation:

• The checking of arithmetical accuracy of source documents and accounting records or performing independent calculations

Analytical Review:

• The studying of significant ratios and trends and investigating unusual fluctuation and item

 Salient points:

The timing of all the above-mentioned procedure is dependent in part upon the period of time during which the evidence is sought. 

Substantive Procedures In An Audit

• Substantive Procedures are tests designed to obtain evidence to ensure the completeness, accuracy and validity of the data produced by the accounting system.

2. Classified into two (2) types:

• (a) Tests of details of transaction and balances and

·         (b)  Analysis of significant ratios and trends which also include the investigation of any unusual fluctuation and items whether in the Income Statement or Balance Sheet

     Purpose of Substantive Procedures:

Enable an auditor to be assured of the following:

(a) Existence

·         That an asset/liability exists at a given date

(b) Rights & Obligations:

 ·         That an asset is a right of the entity and a liability is an obligation of the entity at a given date

© Occurrence

·         That a transaction or event took place which pertains to the entity during the relevant period

(d) Completeness

·         That there are no unrecorded assets,  liabilities or transactions

(e) Valuation

·         That an asset/liability is recorded at an appropriate carrying value

(f) Measurement

·         That a transaction is recorded in the  proper amount and revenue or expense is allocated to the proper period

(g) Presentation

·         An item is disclosed,classified and described in accordance with recognized accounting, policies and practices and relevant statutory requirements if any.

Salient Points:

     1.       By using Substantive procedures, the auditor is trying to obtain evidence as to the existence, completeness, measurement, rights, obligations occurrence, valuation and presentation and disclosure of transactions and balances.    2.       Therefore, the extent and nature of substantive procedures to be performed will vary with respect to each of the above assertions. Obtaining evidence relevant to one of the above assertions will not compensate for failure to do so with respect to another matter concerning the same item e.g. existence of inventory and its valuation.