Audit Evidence and Procedures for Each FSA Area

Assertions are representations by management, whether explicit or implicit, that are embodied in the financial statements. The auditor's objective is to obtain evidence about whether these assertions are true. ISA 315 categorises assertions into three groups:

A. Assertions about classes of transactions and events (SoPL items):

B. Assertions about account balances at the period end (SoFP items):

C. Assertions about presentation and disclosure:

Key exam point: When recommending an audit procedure, always identify which assertion it tests. This demonstrates that you understand the purpose of the procedure, not just the mechanics.

Key risks: Revenue is often considered a significant risk area (ISA 240 presumes a risk of fraud in revenue recognition). Key risks include: fictitious revenue (recording sales that did not occur), premature revenue recognition (recording revenue before performance obligations are satisfied), and overstatement of receivables (failing to write off irrecoverable debts or provide an adequate allowance).

Primary assertions at risk: Occurrence (did the sale actually happen?), Cut-off (is revenue in the correct period?), Valuation (is the receivable collectible?).

Substantive procedures — Revenue:

• Occurrence: Select a sample of recorded sales and trace to supporting documentation: sales order, dispatch note (GDN), and sales invoice. Confirm goods were actually dispatched/services delivered to a genuine customer. For a sample of large or unusual journal entries credited to revenue, investigate the nature and business rationale.
• Completeness: Select a sample of GDNs issued near the year end and trace to recorded sales invoices — ensures all dispatched goods have been invoiced. Perform a sequence check on invoice numbers to identify gaps (missing invoices = potentially unrecorded sales).
• Cut-off: Examine sales invoices and GDNs around the year end (last few days before and first few days after) to verify that revenue is recorded in the correct period. Goods dispatched before year end → revenue in current year. Goods dispatched after year end → revenue in next year.
• Accuracy: Recalculate a sample of sales invoices (quantities × prices, VAT, discounts). Agree prices to authorised price lists or contracts. Cast (add up) the sales day book and trace postings to the general ledger.
• Classification: Review credit notes issued after the year end — if they relate to current-year sales, the revenue may need to be adjusted. Examine whether revenue is appropriately disaggregated (e.g., by product line, geography) per IFRS 15/IFRS 8.
• Analytical procedures: Compare revenue month by month, to prior year, to budget. Calculate gross profit margin and compare to prior year — investigate significant changes. Compare revenue per employee or per unit to expectations.

Substantive procedures — Trade receivables:

• Existence: Perform a receivables circularisation (external confirmation — ISA 505): send letters to a sample of customers asking them to confirm the balance they owe directly to the auditor. Investigate all non-replies (use alternative procedures: check subsequent cash receipts, review invoices and GDNs) and discrepancies.
• Valuation: Review the aged receivables listing — identify old/overdue balances. Discuss with management the recoverability of large overdue amounts. Review post-year-end cash receipts — if a customer has paid since the year end, the debt existed and was recoverable. Assess the adequacy of the allowance for receivables by comparing it to historical loss rates, the ageing profile, and known specific bad debts.
• Rights: Review whether any receivables have been factored, assigned, or pledged as security — if so, the entity may not have full rights. Check for any legal restrictions on collection.
• Completeness: Reconcile the receivables ledger to the receivables control account. Agree the total to the financial statements.

Key risks: Unrecorded liabilities (payables that exist but have not been recorded — completeness is the primary risk for liabilities), fictitious purchases, and cut-off errors.

Primary assertions at risk: Completeness (are all liabilities recorded?), Cut-off (are purchases in the correct period?), Existence (do the liabilities actually exist?).

Substantive procedures — Purchases:

• Occurrence: Select a sample of recorded purchase invoices and trace to supporting documentation: purchase order, GRN, and the supplier invoice. Confirm the three-way match.
• Completeness: Select a sample of GRNs (goods received before year end) and trace to recorded purchase invoices — ensures all goods received are recorded as purchases/payables. Examine unmatched GRNs at the year end — these represent goods received but not yet invoiced (an accrual/payable should be recognised).
• Cut-off: Examine GRNs around the year end (last few days before and after). Goods received before year end → purchase and payable in current year. Goods received after → next year. Cross-reference to inventory count records to ensure consistency.
• Accuracy: Recalculate a sample of supplier invoices (quantities × unit prices, VAT). Agree prices to contracts or purchase orders. Check the casting of the purchase day book.

Substantive procedures — Trade payables:

• Completeness (the key assertion):
  • Perform a supplier statement reconciliation: obtain statements from major suppliers and reconcile to the payables ledger. Investigate differences — they may reveal unrecorded invoices.
  • Review payments after the year end: if the entity pays a supplier after year end for goods/services received before year end, there should be a corresponding payable at year end. If not recorded, it's an unrecorded liability.
  • Review unmatched GRNs at year end (goods received but no invoice recorded yet) — ensure an accrual is made.
  • Compare the payables listing to the prior year — investigate any significant suppliers with lower or nil balances (may indicate unrecorded invoices).
• Existence: Agree a sample of payable balances to supplier invoices and statements. Note: for payables, completeness is a greater risk than existence (entities are more likely to understate liabilities than overstate them).
• Valuation: Ensure payables are recorded at the correct amounts. For foreign currency payables, check the year-end exchange rate translation.
• Completeness (accruals): Review accruals for reasonableness by comparing to prior year and to actual invoices received after the year end. Ensure all significant known liabilities have been accrued (e.g., audit fees, utility bills, bonuses).

Key risks: Inventory may not exist (existence), may not be owned by the entity (rights), or may be overvalued (valuation — cost exceeds NRV). Inventory is also susceptible to theft and damage.

Primary assertions at risk: Existence (does the inventory physically exist?), Valuation (is it measured at the lower of cost and NRV?), Rights (does the entity own it?).

Substantive procedures:

• Existence — Inventory count attendance (ISA 501):
  • Attend the entity's physical inventory count to observe management's count procedures and assess their adequacy
  • Perform independent test counts: select items from the physical inventory and check to the count records (tests existence), and select items from the count records and locate them physically (tests completeness)
  • Observe the condition of inventory — identify damaged, obsolete, or slow-moving items for NRV consideration
  • Check cut-off: note the last GRN number and last dispatch note number at the count date to ensure movements are recorded in the correct period
  • Ensure third-party goods (consignment stock) are excluded and the entity's goods held at third-party locations are separately confirmed
• Valuation:
  • For a sample of inventory items, agree the cost to purchase invoices (raw materials) or cost records (WIP, finished goods). Verify that the cost formula (FIFO or weighted average) is correctly applied.
  • Assess NRV: compare cost to post-year-end selling prices (less costs to complete and sell). For items identified as slow-moving or damaged, verify that NRV write-downs have been applied.
  • Review the standard cost system (if used) and check that variances are reasonable and allocated appropriately.
  • For WIP and finished goods, verify that production overheads are allocated based on normal capacity (IAS 2) — abnormal waste is excluded.
• Rights: Ensure inventory is owned by the entity (not held on consignment, retention of title, or pledged as security). Review purchase agreements and loan covenants. Confirm with third parties holding the entity's inventory.
• Completeness: Reconcile the final inventory sheets from the count to the financial statements. Investigate any adjustments between the count date and the year end. Perform analytical procedures (compare inventory turnover to prior year).

Key risks: Assets may not exist or may not be owned (existence, rights). Assets may be overvalued — depreciation may be inadequate or impairment may not have been recognised (valuation). Capital expenditure may have been incorrectly treated as revenue expenditure, or vice versa (classification).

Primary assertions at risk: Existence, Valuation (depreciation and impairment), Classification (capital vs revenue), Rights.

Substantive procedures:

• Existence:
  • Select a sample of assets from the non-current asset register and physically inspect them to confirm they exist and are in use
  • Conversely, select a sample of assets observed on the premises and trace back to the register (tests completeness)
• Valuation — Additions:
  • For a sample of additions during the year, agree the cost to purchase invoices, contracts, or other supporting documentation
  • Verify that only directly attributable costs have been capitalised (IAS 16) — check that training costs, admin overheads, and pre-operating costs have been excluded
  • For internally generated intangibles, verify that capitalisation criteria (PIRATE — IAS 38) are met and only development costs (not research) have been capitalised
• Valuation — Depreciation:
  • Recalculate the depreciation charge for a sample of assets using the entity's stated policy (method, rate, useful life, residual value)
  • Assess whether the useful lives and residual values are reasonable given the nature and use of the assets
  • Compare the depreciation charge to the prior year and investigate significant changes
• Valuation — Impairment:
  • Inquire of management whether any indicators of impairment exist (IAS 36)
  • If indicators exist, review management's impairment calculations (recoverable amount = higher of FVLCD and VIU)
  • For goodwill and indefinite-life intangibles, ensure annual impairment testing has been performed
• Valuation — Disposals:
  • For a sample of disposals, verify the disposal proceeds (to cash book entry, sales agreement)
  • Recalculate the profit or loss on disposal (proceeds minus carrying amount at disposal date)
  • Verify that the asset has been removed from the register
• Classification: Review items debited to repairs and maintenance expense to check that no capital items have been incorrectly expensed. Conversely, review additions for items that may be revenue expenditure incorrectly capitalised.
• Rights: Inspect title deeds for property (or confirm with solicitors/land registry). Inspect registration documents for vehicles. Review lease agreements to determine if assets under IFRS 16 leases are properly recognised.
• Completeness: Reconcile the non-current asset register opening balances, additions, disposals, depreciation, and impairment to the closing balances and to the financial statements.

Key risks: Cash is inherently susceptible to theft (existence). Bank balances may be misstated. Undisclosed bank accounts, overdrafts, or borrowings may exist (completeness).

Primary assertions at risk: Existence, Completeness, Valuation (especially foreign currency balances).

Substantive procedures:

• Existence and accuracy — Bank confirmation (ISA 505):
  • Obtain a bank confirmation letter (sent directly from the bank to the auditor) confirming: account balances, overdraft facilities, loans, charges/guarantees, and any other information the bank holds
  • This is one of the most important audit procedures — it provides independent external evidence of bank balances and related matters
• Existence and accuracy — Bank reconciliation:
  • Obtain the entity's bank reconciliation at the year end
  • Agree the balance per the bank statement to the bank confirmation letter
  • Agree the balance per the cash book to the general ledger / trial balance
  • Investigate reconciling items: outstanding cheques (verify they are genuine — check to cheque book, review whether cleared post-year-end), deposits in transit (check they were banked shortly after year end), other items (should be small and explicable)
  • Check for stale cheques (cheques outstanding for an extended period — may indicate an issue)
• Completeness: The bank confirmation letter should list all accounts held at that bank. Review prior year working papers for accounts that were open previously. Inquire of management about accounts at other banks. Review correspondence with banks for evidence of undisclosed accounts or facilities.
• Cut-off: Ensure receipts and payments around the year end are recorded in the correct period. Compare cash book entries to bank statement dates. Check that the last cheque and receipt numbers at year end are consistent with the cut-off.
• Valuation: For foreign currency bank balances, verify conversion at the year-end exchange rate (IAS 21). Recalculate the translated amount.
• Cash in hand: Perform a physical cash count on the last day of the year (or as close as possible). Reconcile to the cash book. Count petty cash and reconcile to the imprest balance.

Key risks: Payments to fictitious employees ("ghost employees"), unauthorised pay increases, inaccurate calculation of wages/salaries/deductions, and misstatement of payroll liabilities (PAYE, NIC, pension contributions).

Primary assertions at risk: Occurrence (are payments to real employees?), Accuracy (are amounts correct?), Completeness (are all liabilities recorded?).

Substantive procedures:

• Occurrence: Select a sample of employees from the payroll and agree to HR records (contracts of employment, joining documentation) — confirms they are genuine employees. For new starters and leavers, check authorisation from HR.
• Accuracy:
  • For a sample of employees, recalculate gross pay (hourly rate × hours, or monthly salary ÷ 12), deductions (PAYE, NIC, pension, student loans), and net pay
  • Agree pay rates to contracts of employment or authorised pay scales
  • For overtime, verify approval by a supervisor and recalculate the amounts
• Analytical procedures: Perform a proof in total (reasonableness test): multiply the average number of employees by the average salary to estimate total payroll cost, and compare to the actual recorded amount. Investigate significant variances. Compare monthly payroll totals to prior year — investigate unusual fluctuations.
• Completeness of liabilities: At the year end, verify that amounts owed to HMRC (PAYE, NIC) are correctly accrued. Verify that pension contributions payable are correctly recorded. Check that any accrued holiday pay or bonuses are reasonable.
• Classification: Verify that payroll costs are correctly allocated between cost of sales (production workers), distribution costs, and administrative expenses.
• Payments: For a sample of net pay payments, trace to the bank statement to confirm the payment was made and to the correct bank account. Review any large or unusual payments.

Key risks: Provisions may be overstated or understated (valuation), unrecognised provisions may exist (completeness), or provisions may be created inappropriately (existence — e.g., to smooth earnings). Contingent liabilities may not be disclosed.

Primary assertions at risk: Completeness (are all obligations recorded/disclosed?), Valuation (is the estimate reasonable?), Existence (does the obligation genuinely exist?).

Substantive procedures:

• Completeness:
  • Inquire of management about the existence of any legal claims, disputes, or regulatory actions
  • Review board minutes for references to legal claims, restructuring plans, or other potential obligations
  • Review correspondence with solicitors and request a solicitor's letter (letter from the entity's legal counsel confirming the status of all pending or threatened litigation, and their assessment of the likely outcome)
  • Review post-year-end events for evidence of obligations that existed at the year end
  • Review contracts for potential onerous obligations (where unavoidable costs exceed expected benefits)
• Valuation:
  • Assess the reasonableness of management's estimates — review the assumptions, calculation methods, and data used
  • For warranty provisions: compare to historical claims data (actual claims as a percentage of sales). Evaluate whether the provision methodology is consistent and reasonable.
  • Where provisions are discounted to present value, verify the discount rate is appropriate and recalculate the present value
  • Compare provisions to the prior year — investigate significant changes and assess whether they are justified by changed circumstances
• Existence (IAS 37 criteria):
  • For each material provision, evaluate whether the three IAS 37 recognition criteria are met: present obligation, probable outflow, reliable estimate
  • Ensure that provisions are not recognised for future operating losses (prohibited by IAS 37)
  • For restructuring provisions, verify that a detailed formal plan exists AND the entity has raised a valid expectation in those affected — a board decision alone is insufficient
• Disclosure — Contingent liabilities and assets:
  • Review the solicitor's letter and management representations for any possible obligations that do not meet the recognition criteria — these should be disclosed as contingent liabilities (unless remote)
  • Review for contingent assets — possible assets from pending legal claims filed by the entity. Disclosed if the inflow is probable, never recognised.
  • Review the adequacy of disclosures in the notes: nature of the contingency, estimate of financial effect (or a statement that it cannot be estimated), uncertainties, possibility of reimbursement
• Written representations: Obtain written representations from management confirming the completeness of disclosures about contingent liabilities and that all known or probable litigation has been communicated to the auditor.