ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)
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Chapter 8: Audit evidence
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9.2 Revenue and receivables
Control objectives Key controls Tests of control Substantive tests
There must be
proper
authorisation
and recording
of customer
orders, goods
returned and
allowances
(discounts)
given.
Revenue must
be recorded for
all goods or
services
delivered.
All documents
and records
must be
recorded
accurately.
A policy
should be
established for
the collection
of receivables.
Segregation of
duties (order
acceptance/
despatch/
invoicing.)
Check that a
customer’s order
is within the
customer’s credit
limit.
Authorisation of
orders.
Use of pre-
numbered sales
order forms.
Despatch notes
should be pre-
numbered and
matched with
sales orders and
invoices.
Authorisation of
despatches after
checking.
Invoices should be
authorised for
sending to
customers, after
checking them for
accuracy and
against sales
orders and
despatch notes.
Invoices should be
recorded
promptly in the
sales ledger.
Batching of
invoices for input
and batch totals
may be used as a
control.
Sequence
checks on all
documents.
Check on
evidence of
authorisation
at each stage in
the cycle.
Check for
evidence that
the arithmetic/
calculations in
all documents
and records
have been
checked.
Check that
documents
have been
matched,
where
appropriate.
Check that
control account
reconciliations
have been
performed and
reviewed, with
appropriate
adjustments
being made to
the records.
Check the
accuracy of the
arithmetic in
books of prime
entry.
Check entries
in books of
prime entry
back to the
source
documents.
Check the
accuracy of
postings to
ledgers.
Check invoices
and credit
notes for
accuracy in the
arithmetic and
pricing.
Check that
inventory
records have
been correctly
updated for
despatches of
goods to
customers.
Review control
account
reconciliations.
Test the sales
cut-off.
Apply
analytical
procedures,
such as trend
analysis for
sales, and gross
profit margin.
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Control objectives Key controls Tests of control Substantive tests
Sales returns and
allowances
(discounts) should
be checked and
authorised.
Credit notes must
be recorded
accurately.
The control
account for
receivables in the
main ledger
should be
reconciled
regularly with
account balances
in the receivables
ledger.
Statements should
be sent regularly
(monthly) to
credit customers.
Debt collection
procedures
should be
followed
systematically, in
accordance with
debt collection
policy.
Writing off any
bad debts must be
authorised.
Chapter 8: Audit evidence
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9.3 Purchases and payables
Control objectives Key controls Tests of control Substantive tests
Goods and
services are
purchased:
with proper
authority
under proper
procedures
for the
business
from
authorised
suppliers
and are
inspected for
description,
quantity and
quality.
Segregation of
duties (ordering,
receipt of goods,
recording
invoices,
payment).
Use of official
pre-numbered
documentation
(purchase
orders).
Appropriate
authorisation
procedures
should be used
for orders and
payments.
Sequence checks
on all
documents
(purchase
orders, goods
received notes).
Check on
evidence of
authorisation at
each stage in the
purchasing
cycle.
Check for
evidence that the
arithmetic/
calculations in
all documents
and records
have been
checked.
Check the
accuracy of the
arithmetic in
books of prime
entry.
Check entries
in books of
prime entry
back to the
source
documents.
Check the
accuracy of
postings to
ledgers.
Before being
recorded purchase
invoices are:
authorised
checked for
arithmetic
accuracy and
pricing
checked
against
supporting
documentation
(for example,
purchase
orders).
Completeness and
accuracy of
recording.
There is a policy
for re-ordering
regular items of
inventory.
Goods received
notes (GRNs) are
used, and
signed, as
evidence that the
quantity, quality
and description
of all goods
received have
been checked.
Matching of
documents
(purchase
requisitions,
purchase orders,
GRNs and
purchase
invoices).
Check that
documents have
been matched
where
appropriate.
Check that
control account
reconciliations
have been
performed and
reviewed, with
appropriate
adjustments
being made to
the records.
Note that these tests
of control are
essentially the same as
for the revenue/sales
and receivables cycle.
Check invoices
and credit
notes for
accuracy in
arithmetic and
pricing.
Check that
inventory
records have
been correctly
updated for
receipts of
goods from
suppliers.
Review control
account
reconciliations.
Test purchases
cut-off.
Apply
analytical
procedures.
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Control objectives
Key controls
Tests of control
Substantive tests
Procedures
should exist for
analysing
purchase
invoices and
recording them
in the correct
expense or asset
accounts.
Use of control
accounts and
batch totals to
ensure
completeness
and accuracy of
processing.
Accurate records
should be kept
of purchases
returns, and
these should be
matched with
credit notes from
the supplier.
Review other
audit areas and
prior year working
papers for
evidence of
possible
unrecorded
liabilities.
9.4 Payroll
Control objectives Key controls Tests of control Substantive tests
Gross pay is
calculated at
the correct
rates.
Employees are
paid only for
work done.
Segregation of
duties
(establishing pay
rates, calculating
pay, recording
pay).
Maintenance of
up-to-date
personnel records.
Authorisation of
joiners and
leavers, pay rates,
overtime,
voluntary
deductions from
pay.
Check:
that payroll
information is
reconciled
between
periods and
any changes
between
periods are
explained
entries in the
wages control
account, if
used
Check:
the accuracy of
the arithmetic
in payroll
calculations
and payroll
records
postings to
ledger
accounts
that correct
pay rates are
used
Chapter 8: Audit evidence
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Table continues
Control objectives Key controls Tests of control Substantive tests
Gross pay, net
pay and
deductions are
recorded
completely and
accurately in
the payroll,
cash records
and ledger
accounts.
The correct
employees are
paid the
correct
amounts.
The correct
amount of
deductions are
paid to the tax
authorities and
other
authorities.
Regular
management
review of overall
cost of payroll.
Establishment of
standard
procedures,
timetables and
systems for
processing
payroll.
Approval of
payroll, once
prepared.
Use of a control
account for
payroll expenses/
liabilities.
Safe custody of
cash, where
employees are
paid in cash.
Verification of the
identity of
employees, when
payment is in
cash.
Signature received
for pay, when
payment is in
cash.
Custody and
investigation of
unclaimed pay
packets, when
payment is in
cash.
Use of a separate
bank account for
payroll.
the accuracy
and
completeness
of ledger
account entries
the accuracy of
the arithmetic
in payroll
records
that the payroll
records agree
with
cash/bank
records
Agree payroll
amounts to
bank records.
Review payroll
for unusual
amounts.
When employees
are paid in cash:
check that
unclaimed
wages are kept
safe and
reasons for not
claiming wages
are explained.
attend and
observe a
distribution of
pay.
compare
names on
payroll to
names on pay
packets.
examine
signed receipts
for pay.
that correct,
authorised
rates are used
for statutory
deductions
(such as tax)
and voluntary
deductions
that overtime,
bonuses and
similar
payments have
been properly
authorised
that joiners are
properly
authorised
that employees
have not been
paid for
periods before
they join or
after they leave
the pay for
hours worked
or output
produced
should be
checked
against the
authorised
documentation
that payments
of deductions
have been
made to the
appropriate
authorities
the signed
receipts for
wages paid in
cash
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Control objectives Key controls Tests of control Substantive tests
Authorisation of
cheques/bank
transfers, when
employees are
paid by these
methods.
check that no
employee
receives more
than one pay
packet.
that the correct
entries have
been made in
the wages
control account
Also:
Verify the
existence of a
sample of
employees on
the payroll.
When wages
are paid in
cash, observe
the distribution
of pay packets.
Carry out
analytical
procedures, such
as trend analysis,
average pay per
employee.
9.5 Bank and cash
Control objectives Key controls Tests of control Substantive tests
Bank
All money
belonging to the
company is
received and is
promptly and
accurately
recorded.
All payments are
properly
authorised and
are promptly
and accurately
recorded.
Segregation of
duties.
Listing and
prompt
recording and
banking of all
receipts.
Authorisation
for all
payments.
Regular
reconciliations
are performed
and reviewed.
Review bank
reconciliations
for unusual
items and
evidence of
management
review of
statements.
Review cash
book for
unusual entries.
Check additions
in cash book
and entries in
ledgers.
Send bank
confirmation
letter(s).
Check or
prepare bank
reconciliation
statement.
Assess audit
significance of
other
information in
the reply from
the bank.
Chapter 8: Audit evidence
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Control objectives Key controls Tests of control Substantive tests
Bank
There are
sufficient
physical
custody
controls over
cheques and
cash.
Review
payments for
evidence of
authorisation.
Review large or
round-sum
amounts just
before and just
after the
reporting
period.
Carry out
analytical
procedures.
Cash
As for bank above. As for bank above.
Observe that
procedures for
opening mail
and handling
cash are being
followed.
Check amounts
recorded as
receipts against
remittance
advices from
customers.
Check the
amounts in
receipt books or
on till rolls
against paying-
in slips (paying
in cash to the
bank), the cash
book and bank
statements.
Check whether
cash is banked
daily.
Check
payments out of
cash takings, if
any.
Check petty
cash payments
for
authorisation.
Attend/carry
out cash counts.
Check that
postings are
made correctly
to ledger
accounts.
Analytical
procedures.
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Control objectives Key controls Tests of control Substantive tests
Cash
Check the
documents that
support any
cash payments
(for example,
receipts).
9.6 Inventories
Many of the points listed above in relation to the purchases cycle (for example, in
relation to the receipt of goods) and the sales cycle (for example, in relation to the
despatch of goods) should also apply to the inventory system. For example, the
requirement for authorisation procedures and segregation of duties are the same.
The table below focuses on additional points.
Control objectives Key controls Tests of control Substantive tests
Inventory in the
inventory
records should
represent
inventory that
physically exists.
Inventory is
valued at the
lower of cost
and net
realisable value
(NRV).
Inventory
quantities are
maintained at a
level suitable to
the business.
There should
be regular
inventory
counts, with
reconciliations
of physical
counts to
inventory
records.
Differences
should be
explained.
Reviews of
inventory for
items where
NRV may be
below cost.
Accurate, up-
to-date
inventory
records are
maintained.
Inventory cut-
off procedures
are in place.
Review and
observe
inventory
counting
procedures.
Check that any
necessary
changes to
inventory
records are
made.
Check that NRV
reviews are
performed.
Confirm that
cut-off
procedures are
operating.
Review
inventory levels
for adequacy.
Attend
inventory
count:
- observe
procedures
- record test
counts
- record cut-off
information.
Check
inventory
valuation, at
lower of cost
and NRV.
Check
inventory cut-
off.
Perform
appropriate
analytical
review
procedures.
Confirm the
existence of
inventory held
at outside
locations.
Chapter 8: Audit evidence
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Table continues
Control objectives Key controls Tests of control Substantive tests
Appropriate
physical
custody
procedures
should be in
place.
Check that
physical
custody
procedures are
operational (=
applied in
practice).
Check the
treatment of
inventory held
on the client’s
premises but
owned by a
third party.
9.7 Non-current assets
Again, some of the controls and tests that are listed above (for example, the
requirement that purchases/expenditure should be properly authorised) are also
relevant here. The table below lists additional points.
Control objectives Key controls Tests of control Substantive tests
Records of non-
current assets
should be
complete and
correct.
There should be
adequate
controls for the
safe custody of
non-current
assets.
Depreciation,
revaluations and
disposals must
be dealt with
correctly.
Use of
authorised
capital
expenditure
budgets and
project
evaluation
techniques, if
appropriate.
Use of a non-
current asset
register, that is
regularly
checked and
reconciled to
the non-current
asset accounts
in the main
ledger.
Impairment
reviews are
performed as
necessary.
Check for the
proper
authorisation of
additions and
disposals.
Check
reconciliations
of ledger
balances with
the non-current
asset register.
Review the
movement in
non-current
assets for the
period.
Check
additions, and
the calculations
of depreciation
and gain or loss
on disposals.
Physically
verify a sample
of additions.
Trace proceeds
for disposals to
cash records.
Review for
unrecorded
disposals.
Review
evidence
relating to any
asset
revaluations
during the
period.
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