Inventory, Receivables and Payables

• Non Current Assets


  Key assertions: Existence, Valuation, Completeness, Rights and obligations
• Non Current Assets - Procedures

  1. Obtain the non-current asset register, cast and agree the totals to the financial statements: verifies completeness, classification, presentation

  2. Select a sample of assets from the non-current asset register and physically inspect them: verifies existence

  3. Select a sample of assets visible at the company's premises and inspect the asset register to ensure they are included: verifies completeness

  4. Inspect assets for condition and usage to identify signs of impairment: verifies valuation

  5. For revalued assets, inspect the independent valuation report and agree the amount stated to the amount included in the general ledger and the financial statements: verifies valuation

  6. Obtain a list of additions and for a sample, agree the cost to supplier invoice: verifies valuation

  7. For a sample of assets included in the non-current asset register, inspect supplier invoices (for equipment), title deeds (for property), and registration documents (for motor vehicles) to ensure they are in the name of the client: verifies rights and obligations
• Non Current Assets - Procedures

  1. Obtain a breakdown of disposals, cast the list and agree all assets have been removed from the non-current asset register: verifies existence

  2. Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry sales invoices: verifies accuracy of profit on disposal

  3. Recalculate the profit/loss on disposal and agree to the statement of profit or loss: verifies accuracy of profit on disposal

  4. Review profits and losses on disposal of assets disposed of in the year to assess the reasonableness of the depreciation policies: verifies valuation

  5. Recalculate the depreciation charge for a sample of assets to verify arithmetical accuracy: verifies accuracy, valuation

  6. Perform a proof in total calculation for the depreciation charged for each category of assets, discuss with management if significant fluctuations arise: verifies completeness, valuation
• The depreciation charge for fixtures and fittings for the year-ending 31 December 20X4 included in the draft financial statements is $338,000 (to the nearest $000).
• X Ltd Co's depreciation policy is to depreciate fixtures and fittings using the straight line method. The useful economic life for fixtures and fittings is ten years.
• Exercise: Create an expectation of the fixtures and fittings depreciation charge for the year-ending 31 December 20X4 if balance of P&M in the financial statements is $3.275m.


  We can set an expectation for total depreciation for fixtures and fittings for the year-ending 31 December 20X4 as $3,275,000/10 = $328,000 (to the nearest $000). The difference of $10,000 is 3% more than our expectation. If this is within an acceptable level of variation (as determined by the judgment of the auditor) the auditor will conclude that depreciation is not materially misstated
• Intangible Non Current Assets


  Key Assertions: Existence
• Intangible Non Current Assets - Procedures

  1. Development costs: Obtain a breakdown of costs capitalised and agree the amount to the financial statements = valuation

  2. For a sample of costs agree to invoice or timesheets = valuation

  3. Inspect board minutes for discussions relating to the intended use of intangible assets = valuation

  4. Discuss the details of the project with management to evaluate compliance with IAS 38 = existence

  5. Inspect budgets to confirm financial feasibility = Existence

  6. Inspect project plans and other documentation to assess compliance with IAS 38 = Existence
• Intangible Non Current Assets - Procedures


  1. Other Intangible assets eg patent royalties: Inspect purchase documents = Existence, rights and obligations

  2. Inspect specialist valuation reports and agree amounts to the general ledger and financial statements = Valuation
• Intangible Non Current Assets - Procedures

  1. Amortisation: Inspect to budgets/forecasts to ascertain the period over which economic benefits are to be obtained = valuation

  2. Recalculate the amortisation charge to verify accuracy = valuation

  3. For intangibles such as licences inspect the agreement to confirm the amortisation period is consistent = valuation

  4. Inspect the financial statement disclosures in the draft financial statements to ensure compliance with IAS 38
• The balance consists of motor vehicles, fixtures and fittings and land and buildings. Motor vehicles are replaced on a three-year cycle. Fixtures and fittings are replaced as and when required.
• The company uses the following depreciation rates: Land and buildings – no depreciation is charged due to values increasing, Fixtures and fittings – 10% straight line, Motor vehicles – 20% straight line.
• Inventory


  Key assertions: Existence, Valuation, Completeness, Rights and obligations
• Inventory - Tests of controls

  1. Observe the count to ensure that the inventory count instructions are being followed. For example: no movements of inventory occur during the count, teams of two people perform the count and sections of inventory are tagged as counted to prevent double counting.

  2. Damaged/obsolete items have been separately identified so they can be valued appropriately.

  3. Inspect the count sheets

  4. Enquire of the counting staff which department they work in to ensure they are not warehouse staff.
• Inventory - Substantive procedures

  1. Select a sample of items from the inventory count sheets and physically inspect the items in the warehouse: verifies existence.

  2. Select a sample of physical items from the warehouse and trace to the inventory count sheets to ensure that they are recorded accurately: verifies completeness

  3. Inspect the inventory being counted for evidence of damage or obsolescence that may affect the net realisable value: verifies valuation.
• Inventory - Substantive procedures

  1. Obtain copies of the inventory count sheets at the end of the inventory count and check against the final inventory listing at the final audit: verifies completeness and existence

  2. Inspect purchase invoices for a sample of inventory items to agree their cost: verifies valuation.

  3. Inspect post year-end sales invoices for a sample of inventory items to determine if the net realisable value is reasonable: verifies valuation.

  4. Inspect the ageing of inventory items to identify old/slow moving amounts that may require an allowance, and discuss these with management: verifies valuation
• Inventory - Substantive procedures


  1. Trace the goods received immediately prior to the year-end to year-end payables and inventory balances: verifies completeness & existence.

  2. Trace goods despatched immediately prior to year-end to the nominal ledgers to ensure the items are not included in inventory and revenue (and receivables where relevant) has been recorded: verifies completeness & existence
• Inventory


  Obtain copies of the inventory count sheets at the end of the inventory count and check against the final inventory listing at the final audit: verifies completeness and existence
• Inventory


  Inspect purchase invoices for a sample of inventory items to agree their cost: verifies valuation
• Inventory


  Inspect post year-end sales invoices for a sample of inventory items to determine if the net realisable value is reasonable: verifies valuation
• Inventory


  Inspect the ageing of inventory items to identify old/slow moving amounts that may require an allowance, and discuss these with management: verifies valuation
• Inventory


  Trace the goods received immediately prior to the year-end to year-end payables and inventory balances: verifies completeness & existence
• Inventory


  Trace goods despatched immediately prior to year-end to the nominal ledgers to ensure the items are not included in inventory and revenue (and receivables where relevant) has been recorded: verifies completeness & existence
• Inventory


  Calculate the inventory holding period and compare this to prior year to identify slow-moving inventory which requires an allowance to bring the value down to the lower of cost and NRV: verifies valuation
• Inventory


  Calculate gross profit margin and compare this to prior year, investigate any significant differences that may highlight an error in cost of sales and closing inventory: verifies valuation
• Receivables


  The focus of testing for receivables is valuation and existence
• Sources of evidence for receivables

  • Aged receivables listing
  • Sales invoices
  • Goods despatch notes
  • Receivables circularisation letters
  • Post year end bank statements
  • Policy for allowance for doubtful receivables
• Receivables


  Obtain the aged receivables listing, cast it and agree the total to the financial statements: verifies accuracy and presentation
• Receivables


  Agree the receivables ledger control account with the receivables ledger list of balances: verifies completeness and existence
• Receivables


  Select a sample of year-end receivable balances and agree back to valid supporting documentation, invoice, GDN and sales order: verifies existence
• Receivables


  Inspect after date cash receipts and follow through to pre year-end receivable balances: verifies valuation, rights and obligations and existence
• Receivables


  Select a sample of goods despatched notes (GDN) before and just after the year-end and follow through to the sales invoice to ensure they are recorded in the correct accounting period: verifies completeness and existence (cut-off of revenue)
• Receivables


  Inspect the aged receivables report to identify any slow moving balances and discuss these with the credit control manager to assess whether an allowance or write-down is necessary: verifies valuation and allocation
• Receivables


  Inspect board minutes to assess whether there are any material disputed receivables that may require write off: verifies valuation
• Receivables


  Inspect a sample of post year-end credit notes to identify any that relate to pre year-end transactions to ensure that they have not been included in receivables: verifies existence (occurrence of revenue)
• Receivables


  Calculate the average receivables collection period and compare this to prior year, investigate any significant differences: verifies completeness and valuation
• Payables and accruals


  The focus of testing for liabilities is completeness
• Sources of evidence for payables

  • Aged payables listing
  • Purchase invoices
  • Goods received notes
  • Post year end bank statements
  • Supplier statements
• Payables Procedures


  Obtain a list of trade payables, cast to verify arithmetical accuracy and agree to the general ledger and the financial statements: verifies completeness, classification, presentation
• Payables Procedures


  Reconcile the total of the individual payables accounts with the control account: verifies completeness