◄UNIT 11: TEST OF CONTROLUNIT 13: AUDIT JUDGEMENT►

UNIT 12: PROCEDURES IN AUDIT OF FINANCIAL STATEMENTS

  • UNIT 12: PROCEDURES IN AUDIT OF FINANCIAL STATEMENTS

    Key unit competence: To be able to demonstrate working knowledge in 
    respect of performance of audit procedures
    Introductory activity
    UMURAVA Ltd Company is a textile industry with the purpose of selling 
    its products in Rwanda and outside. As part of corporate governance, 
    shareholders are supposed to make follow up of the performance of their 
    company. They often appoint the management and auditor. The auditor is 
    appointed by the shareholders during the annual meeting. 

    The main responsibility of the auditor is to audit the financial statements of 
    the company and ascertain whether the financial statements are prepared 
    in all material respects and free from material misstatement due to errors 
    and fraud. The auditor should also review/ carry out an assessment on the 
    internal control. Thereafter, the auditor should issue the audit report on 
    financial statements and on internal controls (Management letter).

    1. What do you think could be the purpose of the audit?

    2. What are the auditable elements of the financial statements?

    12.1. Substantive procedures

    Learning activity 12.1


    1. What do you think the person in picture above could be doing?
    2. What do you think would be roles/tasks of the auditor during the 

    audit of a financial statement?

    12.1.1 The nature of substantive procedures

    Substantive procedures are audit procedures designed to detect material 
    misstatements at the assertion level. They consist of tests of details (i.e. 
    testing classes of transactions, accounts balances and disclosures) and as 
    well substantive analytical procedures (i.e. where the auditor develops his/her 

    expectations and reconcile it with balances shown in the financial statements.

    a) Substantive procedures 

    Substantive audit procedures (tests of details), the auditor inspects transactions 
    and balances taken on sample basis. The auditor is required to establish the 
    audit procedures and carryout audit. Detailed audit tests are performed to 

    detect any material misstatement due to errors or fraud. 

    b) Analytical procedures 

    Analytical procedures are also another form of substantive procedures. 
    • The analytical procedures involve comparison with:
    – Similar information for prior periods; 
    – Anticipated results of the entity, from budgets or forecasts;

    – Predictions prepared by the auditor’s Industry information.

    • The consideration of the relationship between financial information and 
    relevant non-financial information.
    • The consideration also of the relationship between elements of financial 
    information that are expected to conform to a predicted pattern based 
    on the entity’s experience, such as the relationship of gross profit to 
    sales.
    • Ratio analysis can be a useful technique when carrying out analytical 

    procedures.

    12.1.2. Financial statement assertions

    Financial statement assertions are the representations by management, explicit 
    or otherwise, that are embodied in the financial statements, as used by the 
    auditor to consider the different types of potential misstatements that may occur. 
    Audit tests are therefore designed and performed to obtain the appropriate and 
    sufficient audit evidences about the financial statements assertions. Assertions 
    relate to:

    • Classes of transactions,
    • Accounts balances
    • Disclosures

    a) Assertions about classes of transactions and events and disclosures 

    (related to Income statement)

    • Occurrence: transactions and events that have been recorded or 
    disclosed have occurred, and such transactions and events pertain to 

    the entity.

    • Completeness: all transactions and events that should have been 
    recorded have been recorded, and all related disclosures that should 

    have been included in the financial statements have been included.

    • Accuracy: amounts and other data relating to recorded transactions 
    and events have been recorded appropriately, and related disclosures 

    have been appropriately measured and described.

    • Cut-off: transactions and events have been recorded in the correct 

    reporting period. 

    • Classification: transactions and events have been recorded in the 

    proper accounts.

    • Presentation: transactions and events are appropriately aggregated or 
    disaggregated and are clearly described, and related disclosures are 
    relevant and understandable in the context of the requirements of the 

    applicable financial reporting framework.

    b) Assertions about account balances and related disclosures (related 

    financial position)

    • Existence: assets, liabilities and equity interests exist.

    • Rights and obligations: the entity holds or controls the rights to assets, 

    and liabilities are the obligations of the entity. 

    • Completeness: all assets,aliabilities and equity interests that should 
    have been recorded have been recorded, and all related disclosures 
    that should have been included in the financial statements have been 

    included. 

    • Accuracy, valuation and allocation: assets, liabilities and equity 
    interests have been included in the financial statements at appropriate 
    amounts and any resulting valuation or allocation adjustments have 
    been appropriately recorded, and related disclosures have been 

    appropriately measured and described.

    • Classification: assets, liabilities and equity interests have been 

    recorded in the proper accounts.

    • Presentation: assets, liabilities and equity interests are appropriately 
    aggregated or disaggregated and clearly described, and related 
    disclosures are relevant and understandable in the context of the 

    requirements of the applicable financial reporting framework.

    12.1. Methods of obtaining audit evidences

    During the audit, the auditor has to collect sufficient and appropriate evidences 
    to support his or her conclusion. The audit evidences are collected in the 

    following ways;

    • Inspection: inspection involves examining records or documents, 
    whether internal or external, in paper form, electronic form, or other 

    media, or a physical examination of an asset.

    • Observation: observation consists of looking at a process or procedure 
    being performed by others. For example: is where an auditor can attend 

    inventory counts.

    • External confirmation: an external confirmation represents audit 
    evidence obtained by the auditor as a direct written response to the 

    auditor from a third party.

    • Recalculation: recalculation consists of checking the mathematical 
    accuracy of documents or records. Recalculation may be performed 

    manually or electronically.

    • Reperformance: reperformance involves the auditor’s independent 
    execution of procedures or controls that were originally performed as 

    part of the entity’s internal control.

    • Analytical procedures: analytical procedures consist of evaluations of 
    financial information through analysis of plausible relationships among 
    both financial and non-financial data. Analytical procedures also look 
    at identified fluctuations or relationships that are inconsistent with from 

    the expected values.

    • Inquiry: inquiry consists of seeking information of knowledgeable 
    persons, both financial and non-financial, within the entity or outside 
    the entity. Inquiry is used extensively throughout the audit in addition to 
    other audit procedures. Inquiries may range from formal written inquiries 

    to informal oral inquiries.

    Exercise on analytical procedures

    The audit XY Company is a company that is involved in sale of its agricultural 
    produces. The company planned to obtain sales revenue amounting to FRW 
    300,000,000 for sales during the year. The table below indicates different 
    agricultural produces, quantities produced and their respective prices. You 
    are required to audit the above revenue amount disclosed in XY Company’s 

    financial statements for the period ended 31 Dec 2021. 

    As an auditor of XY Company, establish how can carry out your substantive 
    audit procedures and conclude on the revenue amount indicated above. 
    Following the considering the information shared to the auditor, it easy for the 
    audit to conclude on revenue amount by conducting substantive analytical 

    procedures. The auditor can perform the following:

    Step 1 

    Identify the quantities sold and their approved/ market prices

    Step 2 

    Develop the expectation(s)

    Step 3 
    Asses the relationship between computed amount and the amount reported in 

    the financial statements.

    Step 4 seek explanations from the management for the above difference of 

    185,000,000FRW obtained.

    Note

    In case it is justified/supported, conclude it by ignoring the difference

    If not justified, consider it as a reportable issue and include in the audit report.

    Application activity 12.1

    1. You have been tasked by your Auditor Manager to carry out the audit 
    of expense amounting FRW 100,000,000 included in the financial 
    statements of AB Ltd for the period ended 31 December 2020. 
    Demonstrate how you will collect the audit evidences during the audit 

    of this expenditure of AB Ltd.

    2. MK Ltd is a company that buys milk from the Milk collectors for the 
    consumption of its staff. Every month, the company collects 50,000 
    litres at a price of FRW 500 per Littre. MK reported the expense of FRW 
    45,000,000.     You are assigned by your audit partners to quickly audit 
    the expense related to milk consumed during the year. Establish the 
    three audit procedures you will perform to conclude on milk expense 

    included in MK Ltd for the period ended 31 December 2020.

    12.2. Analytical procedures

    Learning activity 12.2

    1. What are the materials/ items shown in the above picture? 
    2. What do you think could be their purposes? 
    3. What are the activities being done by the people shown in the above 

    picture? 

    12.2.1. Using analytical procedures

    One of the objectives of ISA 520 is that relevant and reliable audit evidence are 
    obtained when using substantive analytical procedures. The primary purpose of 
    substantive analytical procedures is to obtain assurance, in combination with 
    other audit testing (such as tests of controls and substantive tests of details), 

    with respect to financial statements assertions for one or more auditable areas. 

    Substantive analytical procedures are generally more applicable to large volumes 

    of transactions that tend to be more predictable over time.

    The application of substantive analytical procedures is based on the expectation 
    that relationships among data exist and continue in the absence of known 

    conditions to the contrary. 

    To derive the most benefit from substantive analytical procedures, the auditor 
    should perform substantive analytical procedures before other substantive tests 
    because results of substantive analytical procedures often impact the nature 
    and extent of detailed testing. Substantive analytical procedures might direct 
    attention to areas of increased risk, and the assurance obtained from effective 
    substantive analytical procedures will reduce the amount of assurance needed 

    from other tests.

    12.2.2.The nature of analytical procedures

    Analytical procedures involve the analysis of the relationships such as between 
    items of financial data to identify consistency and predicted patterns or 
    significant fluctuations, unexpected relationships and results of investigations 

    thereof. Analytical procedures are used throughout the audit process as follows:

    a) Preliminary analytical review-risk assessment (Compliance with 

    ISA 315)

    Preliminary analytical reviews are performed to obtain an understanding of 
    the business and its environment (e.g. financial performance relative to prior 
    years and relevant industry and comparison groups), to help assess the risk of 
    material misstatement in order to determine the nature, timing and extent of audit 

    procedures, i.e to help the auditor develop the audit strategy and programme.

    b) Substantive analytical procedures
    Analytical procedures are used as substantive procedures when the auditor 
    considers that the use of analytical procedures can be more effective or efficient 
    than tests of details in reducing the risk of material misstatements at the assertion 

    level to an acceptably low level.

    c) Final analytical review (Compliance with ISA 520)

    Analytical procedures are performed as an overall review of the financial 
    statements at the end of the audit to assess whether they are consistent with 
    the auditor’s understanding of the entity. Final analytical procedures are not 
    conducted to obtain additional substantive assurance. If irregularities are found, 
    risk assessment should be performed again to consider any additional audit 

    procedures deemed necessary.

    12.2.3. Analytical procedures in substantive testing

    Performing analytical procedures involve the following four steps:
    • Develop an expectation of account balance or ratio 
    • To determine the amount of difference from expectation that can be 
    accepted without investigation.
    • Comparison of company’s account balance or ratio with the expected. 
    • Investigate and evaluate significant ratio or difference from the 

    expectation

    Substantive analytical procedures are used for accounts balances or classes of 
    transactions where it is possible to develop an expected value for the recorded 
    amount or ratio. It should be however, noted that analytical procedures tend 
    to be appropriate for large volumes of predictable transactions (for example, 

    wages and salaries).

    Analytical procedures can be designed to test several assertions at the same 

    time. Some examples are shown in the table below:

    Gasaka secondary school has 331 students. As per the schools’ standards 
    procedures, each student is required to consume FRW 4750. The school 
    calendar of 2022 had 37 weeks/the year. The financial statement for the year 
    ended 31 December indicated expenditure of FRW 325,000,000 on students’ 
    consumptions. Use analytical procedures to audit the above expenditure 

    reported in Gasaka secondary school for the period ended 30 June 2022. 

    Answer:

    Step 1 
    • Obtain the school register and confirm whether the number of students 
    existed throughout the academic year
    • Obtain the approved school standards operating procedures/ guidelines 

    determining amount to be consumed by each student on daily basis. 

    Step 2

    • Develop the expectations

    Step 3
    • Obtain explanation(s) on the difference of FRW 82,212,750
    • Asses/analyze the reasons or justifications provided
    In response to the difference, the management reviewed their records and 
    noted that 67 were not available at some of days, hence form the basis for the 

    difference above (67*4750* 259).

    Step 4
    Conclusion, the auditor concludes that the amount repported is appropriate 

    (completeness and accurate and cut off)

    1. Investigation of fluctuations and relationships

    In planning the analytical procedures as a substantive test, the auditor should 
    consider the amount of difference from the expectation that can be accepted 
    without further investigation. This consideration is influenced primarily by 
    materiality and should be consistent with the level of assurance desired from the 
    procedures. Determination of this amount involves considering the possibility 
    that a combination of misstatements in the specific accounts balances, or class 
    of transactions, or other balances or classes could aggregate to an unacceptable 

    amount.

    The auditor should evaluate significant unexpected differences. Reconsidering 
    the methods and factors used in developing the expectation, the inquiry of 
    management may assist the auditor in this regard.

    Management responses should ordinarily be agreed with other evidential matter. 

    In those cases, when an explanation for the difference cannot be obtained, the 
    auditor should obtain sufficient evidence about the assertion by performing 
    other audit procedures to satisfy himself/herself as to whether the difference is 
    a likely misstatement. In designing such other procedures, the auditor should 
    consider that unexplained differences may indicate an increased risk of material 

    misstatement.

    Application activity 12.2

    BC ltd company employs staff of different levels. The table below shows 
    their levels and salaries per month. You have been appointed by audit 
    supervisor to audit the expense related to salary disclosed in the financial 
    statements for BC Ltd company. Note that the financial statements for BC 
    Ltd company for the year ended 31 Dec 2019 under audit show the expense 

    of FRW 115,000,000.

    Demonstrate the audit procedure you should perform during the audit of 
    the salary expense included in BC Ltd company financial statements for the 

    period ended 30 December 2019.

    12.3. Audit procedures for some elements of financial 

    statements

    Learning activity 12.3


    1. What do you think the person in the picture doing?

    2. What is the purpose of the tool he has?

    12.3.1. Inventory

    The valuation and disclosure rules for inventory are laid down in IAS 2. Inventory 
    should be valued at the lower of cost and net realisable value.
    Cost is defined by IAS 2 as comprising all costs of purchase and other costs 
    incurred in bringing inventory to its present location and condition. Net realisable 
    value is the estimated selling price in the ordinary course of business, less the 
    estimated cost of completion and the estimated costs necessary to make the 

    sale.

    a) Audit procedures of inventory

    The following procedures should be performed during the audit of inventory 

    balance disclosed in the financial statements.

    • The physical inventory count

    Physical inventory count procedures are vital, as they provide evidence which 
    cannot be obtained elsewhere or at any other time about the quantities and 

    conditions of inventories and work-in-progress. 

    ISA 501 Audit evidence – specific considerations for selected items provides 
    guidance for auditors on attending the physical inventory count to obtain 
    evidence regarding the existence and condition of inventory. It states that where 
    inventory is material, auditors shall obtain sufficient appropriate audit evidence 
    regarding its existence and condition by attending the physical inventory count 

    (unless this is impracticable) to do the following: 

    • Evaluate management’s instructions and procedures for recording and 
    controlling the result of the physical inventory count 
    • Observe the performance of the count procedures 
    • Inspect the inventory

    • Perform test counts

    When observing inventory count, the auditor should also consider the following:

    • Observe whether the client’s staff are following instructions, as this will 
    help to ensure the count is complete and accurate. 
    • Perform test counts to ensure procedures and internal controls are 
    working properly, and to gain evidence over existence and completeness 
    of inventory.
    • Ensure that the procedures for identifying damaged, obsolete and 
    slow-moving inventory operate properly; the auditors should obtain 
    information about the inventory’s condition, age, and usage and, in the 
    case of work-in-progress, its stage of completion to ensure that it is 
    later valued appropriately. 
    • Confirm that inventory held on behalf of third parties is separately 
    identified and accounted for so that inventory is not overstated. 
    • Conclude whether the count has been properly carried out and is 
    sufficiently reliable as a basis for determining the existence of inventories. 
    • Consider whether any amendment is necessary to subsequent audit 
    procedures.
    • Gain an overall impression of the levels and values of inventories held 
    so that the auditors may, in due course, judge whether the figure for 

    inventory appearing in the financial statements is reasonable.

    12.3.2.Non- current assets

    a) The audit procedures of Property Plant and Equipment (PPE)

    The following are some of the substantive audit procedures for non-current 

    assets.

    Substantive audit procedures for Intangible non-current assets

    Key assertions for intangible non-current assets are existence and valuation.

    Auditor has to apply different audit procedures during the audit of Intangible 
    non-current assets. The following are the substantive procedures that should 

    be performed by the auditors.

    1. Audit procedures for good will

    • Agree the consideration to sales agreement by inspection.

    • Consider whether asset valuation is reasonable.

    • Agree that the calculation is correct by recalculation. 

    • Review the impairment review and discuss with management. 

    • Ensure valuation of goodwill is reasonable / there has been no 

    impairment not adjusted through discussion with management.

    2. Research and development (R&D) costs

    • Confirm that capitalized development costs conform to IAS 38 criteria 
    by inspecting details of projects and discussions with technical 

    managers. 

    • Confirm feasibility and viability by inspection of budgets. 

    • Recalculate amortization’s calculation to ensure it commences with 

    production / is reasonable. 

    • Inspect invoices to verify expenditure incurred on R&D projects.

    3. Other intangible assets

    • Agree purchased intangibles to purchase documentation agreement 

    by inspection. 

    • Inspect specialist valuation of intangibles and ensure it is reasonable.

    • Review amortization calculations and ensure they are correct by 

    recalculation.

    12.3.3. Substantive audit procedures for Account Receivables

    Receivables are usually audited using a combination of test of details and 
    analytical procedures. The audit of receivable is important as this is likely to be 
    a material area. A combination of analytical procedures and tests of details are 

    used, with sales also being tested in conjunction with trade receivables.

    Existence, completeness and valuation are the key assertions relating to the 
    audit of receivables. Receivables are often tested in conjunction with sales. The 

    key assertions for sales are occurrence, completeness and accuracy.

    The following are the audit procedures that can be performed during the audit 

    of receivables:

    Note that part of the substantive audit procedures, the auditor should always 
    endeavour to request for confirmation for all financial position balances (those 

    included in the sample) from third parties ie debtors, creditors and banks.

    Part of the audit procedures, the auditor need to request confirmation from the 

    concerned debtors.

    a) Receivables confirmation

    ISA 505 states that when it is reasonable to expect customers to respond, 
    the auditor should ordinarily plan to obtain direct confirmation of receivables 
    to individual entries in an account balance. Verification of trade receivables by 
    direct confirmation the normal means of providing audit evidence to satisfy the 
    objective of checking whether customers exist and owe bonafide amounts to 

    the company (existence and rights and obligation).

    b) Two methods of confirmation

    • Positive
    A positive external confirmation requests the confirming party to reply to the 
    auditor in all cases, either by indicating the confirming party’s agreement with 

    the given information, or by asking the confirming party to provide information.

    • Negative
    Negative confirmation provides less persuasive audit evidence than positive 
    confirmation. Accordingly, the auditor shall not use negative confirmation 
    requests as the sole substantive audit procedure to address an assessed risk 
    of material misstatement at the assertion level unless all of the following are 

    present: 

    • The auditor has assessed the risk of material misstatement as low 
    and has obtained sufficient appropriate audit evidence regarding the 
    operating effectiveness of controls relevant to the assertion; 
    • The population of items subject to negative confirmation procedures 
    comprises a large number of small, homogeneous account balances, 
    transactions or conditions;
    • A very low exception rate is expected; and 
    • The auditor is not aware of circumstances or conditions that would 
    cause recipients of negative confirmation requests to disregard such 

    requests.

    12.3.4. Cash and bank Balances

    a) Bank balances 

    The following are key procedures the auditor should consider during the audit 
    of bank balances. During the audit of bank balances, the auditor has to test the 

    assertions of completeness, valuation, existence, cut-off and presentation.

    The auditor shall perform the following audit procedures: 

    • Obtain standard bank confirmations from each bank with which the 

    client conducted business during the audit period. 

    • Reperform arithmetic of bank reconciliation.

    • Trace cheques shown as outstanding from the bank reconciliation 
    to the cash book prior to the year end and to the after-date bank 
    statements and obtain explanations for any large or unusual items 

    not cleared at the time of the audit.

    • Compare cash book(s) and bank statements in detail for the last 
    month of the year, and match items outstanding at the reconciliation 

    date to bank statements.

    • Review bank reconciliation previous to the year-end bank reconciliation 
    and test whether all items are cleared in the last period or taken 

    forward to the year-end bank reconciliation.

    • Obtain satisfactory explanations for all items in the cash book for 
    which there are no corresponding entries in the bank statement and 

    vice versa by discussion with finance staff.

    • Verify contra items appearing in the cash books or bank statements 

    with original entry.

    • Verify by inspecting paying-in slips that unclear banking is paid in 

    prior to the year end.

    • Examine all lodgments in respect of which payment has been refused 
    by the bank; ensure that they are cleared on representation or that other 
    appropriate steps have been taken to effect recovery of the amount 

    due.

    • Verify balances per the cash book according to the bank reconciliation 

    by inspecting cash book, bank statements and general ledger. 

    • Verify the bank balances with reply to standard bank letter and with 

    the bank statements. 

    • Inspect the cash book and bank statements before and after the year 
    end for exceptional entries or transfers which have a material effect 

    on the balance shown to be in-hand. 

    • Identify whether any accounts are secured on the assets of the 

    company by discussion with management.

     Consider whether there is a legal right of set-off of overdrafts against 

    positive bank balances.

    • Determine whether the bank accounts are subject to any restrictions 

    by enquiries with management.

    • Review draft accounts to ensure that disclosures for bank are complete 

    and accurate and in accordance with accounting standards.

    b) Cash balances 

    Cash balances/floats are often individually immaterial but they may require some 
    audit emphasis because of the opportunities for fraud that could exist where 

    internal control is weak. 

    The auditor will be very much concerned whether the cash exists, is complete, 
    and belongs to the company (rights and obligations) and is also stated at the 

    correct value.

    The following are some of the substantive audit procedures the auditor has to 
    perform:
    • Count all cash balances and agree to petty cash book or other record 
    kept. 
    • Count all cash at same time and ensure all work is done in presence 
    of staff. 
    • Obtain a certificate of cash in hand from staff member.
    • Enquire about IOUs or cheques cashed.
    • Confirm balances are in agreement with the accounts. 
    • In addition, check whether the IOUs and un-cashed cheques have 

    subsequently been cleared timely.

    12.3.5. Liabilities

    Liabilities are classified into:
    • Accounts payables and accruals 
    • Non-current Liabilities 
    • Capital and 

    • Reserve

    During the audit of these balances, the auditor should consider the nature and 
    transactions that effect each balance. Below are audit procedures for each of 

    the balances of the above highlighted balances:

    a) Audit procedure for accounts payables and accruals

    Note that payables are audited with purchases/expenses. This therefore 
    requires the auditor to adopt some audit procedures for income statements 
    items (classes of transactions and events). In this regard, some of assertions 

    like cut off and occurrence are tested.

    • Substantive audit procedures for provisions

    The auditor should observe the requirements of IAS 37 during the audit of 
    provisions. As per IAS 37 provision, a provision is a liability of uncertain timing 
    and amount. It is therefore of paramount importance for audit to apply appropriate 
    audit procedures while carrying the audit of the provisions. The auditor should 

    endeavour to apply these audit procedures.

    – Obtain details of all provisions which have been included in the 
    accounts and all contingencies that have been disclosed

    – Obtain a detailed analysis of all provisions showing opening 
    balances, movements and closing balances.

    – Determine for each material provision whether the company has a 
    present obligation as a result of past events 

    – Review of correspondence relating to the item

    – Discussion with the directors. Have they created a valid 

    expectation in other parties that they will discharge the obligation? 

    – Determine for each material provision whether it is probable that 
    a transfer of economic benefits will be required to settle the 

    obligation by:

    – Checking whether any payments have been made in the post year 

    end period in respect of the item by reviewing after-date cash

    – Review of correspondence with solicitors, banks, customers, 

    insurance company and suppliers both pre and post year end

    – Sending a letter to the solicitor to obtain their views (where 

    relevant) 

    – Discussing the position of similar past provisions with the 

    directors. Were these provisions eventually settled? 

    – Considering the likelihood of reimbursement.

    – Recalculate all provisions made.

    – Compare the amount provided with any post year end payments 

    and with any amount paid in the past for similar items.

    – In the event that it is not possible to estimate the amount of the 
    provision, check that a contingent liability is disclosed in the 

    accounts.

    – Consider the nature of the client’s business. Consider likely 
    provisions not disclosed by the management of a company under 

    audit.

    – Consider the adequacy of disclosure of provisions, contingent 

    assets and contingent liabilities in accordance with IAS 37.

    b) Audit procedures for Non-Current Liabilities

    c) Substantive audit procedures for capital and related issues

    The auditor should review transactions and events could have affected the 
    equity. This helps the auditor in collecting sufficient and appropriate audit 
    evidences. Thus, come up with the appropriate audit conclusion. The following 
    are some of audit procedures auditors perform during the review of capital 

    balance disclosed in the financial statements of a company.

    • Share capital

    – Agree the authorised share capital with the statutory documents 

    governing the company’s constitution.

    – Agree changes to authorised share capital with properly 

    authorised resolutions.

    • Issue of shares

    – Verify any issue of share capital or other changes during the year 

    with general and board minutes.

    – Ensure issue or change is within the terms of the constitution, and 

    directors possess appropriate authority to issue shares. 

    – Confirm that cash or other consideration has been received or 

    receivable(s) is included as called-up share capital not paid.

    • Transfer of shares
    – Verify transfers of shares by reference to: 
    • Correspondence
    • Completed and stamped transfer forms
    • Cancelled share certificates

    • Minutes of directors’ meeting

    – Review the balances on shareholders’ accounts in the register of 
    members and the total list with the amount of issued share capital in 

    the general ledger.

    – Agree dividends paid and declared pre year end to authority in 
    minute books and reperform calculation with total share capital 
    issued to ascertain whether there are any outstanding or unclaimed 

    dividends.

    – Agree dividends payment to documentary evidence (say, the 

    returned dividends warrants).

    – Test that dividends do not contravene distribution of provisions by 

    reviewing the legislation.

    • Reserves

    – Agree movements on reserves to supporting authority.

    – Ensure that movements on reserves do not contravene the
    legislation and the company’s constitution by reviewing the 

    legislation.

    – Confirm that the company can distinguish distributable reserves 

    from those that are non-distributable.

    – Ensure that appropriate disclosures of movements on reserves 
    are made in the company’s accounts by inspection of the financial 

    statements.

    12.3.6. Substantive audit procedures for expenses

    During the audit of expenses, the auditor should focus on potential risks. The 

    following are key potential risks:

    • Occurrence- recorded transactions may have not occurred /not valid
    • Completeness- not all transactions are recorded
    • Accuracy- some transactions are inaccurate 

    • Cut- off- some transactions are recorded in wrong accounting period

    The following are some of audit procedures for expenses;
    • For transactions sample, obtain their relevant supporting documents 
    such as invoice, goods received note and payment advice note 
    • Review the supporting documents and check whether the transactions 
    occurred and relate to the entity
    • Check whether all expenses were recorded in the books of accounts 
    at the correct amounts by agreeing the recorded amounts with their 
    relevant supporting documents such as invoices, good delivered note 
    and good received note and invoice register, verify the accuracy of the 
    amounts shown on the invoices by reconciling the invoices with good 
    received note and payment advice.
    • Ensure that the transactions were recorded in the correct accounts 
    following the entity’s chart of accounts by agreeing the entries passed 
    with the entity’s chart of accounts
    • Confirm whether the expenses relate to the correct period( accounting 
    period) by comparing when services have been consumed/benefited( 
    in accrual basis of accounting) and the period of accounting for the 

    expenses.

    12.3.7. Substantive procedures for revenue

    During the audit of revenue both test of controls and substantive audit procedures 
    are applied. The following are some of substantive audit procedures that should 

    be executed by the auditor during the audit of revenue:

    • Compare the total revenue with that reported in previous years and the 

    revenue budgeted, and investigate any significant fluctuations. 

    • For a sample of customer orders, trace the details to the related 
    despatch notes and sales invoices and ensure there is a sale recorded 

    in respect of each (to test the completeness of revenue). 

    For a sample of sales invoices for larger customers, recalculate the discounts 

    allowed to ensure that these are accurate. 

     Select a sample of despatch notes in the month immediately before and 
    month immediately after the year end. Trace these through the related 
    sales invoices and resultant accounting entries to ensure each sale 
    was recorded in the appropriate period.
    • Obtain an analysis of sales by major categories of toys manufactured 
    and compare this to the prior year breakdown and discuss any unusual 
    movements with management. 
    • Calculate the gross profit margin for the year and compare this to the 
    previous year and expectations. Investigate any significant fluctuations. 
    • Recalculate the sales tax for a sample of invoices and ensure that the 
    sales tax has been correctly applied to the sales invoice. 
    • Select a sample of credit notes issued after the year end and trace 
    these through to the related sales invoices to ensure sales returns were 

    recorded in the proper period.

    Note that the audit of revenue should always linked with audit of 

    receivables.

    Application activity 12.3

    You are the Senior auditor at MK CPA Ltd and you are requested to perform 

    the audit of the following balances disclosed in the financial statements of 

    MT Ltd for year ended 30 October 2022.

    a) Stock of FRW 10,000,000

    b) PPE of FRW 50,000,000

    c) Receivables FRW 50,000,000 

    d) Revenue FRW 100,000,000

    Identify four substantive audit procedures you would perform during the audit 

    of the above balances.

    Skills lab activity 12

    With the guidance of the teacher, the learners should be shared the school 
    financial statements and underlying records (accounting information).

    • Students will use financial information and carry out analytical 
    review of different informations presented in financial statement 
    where deemed necessary. They will be asked to carry out the 
    comparison of the current financial information with the previous 
    year and asses the relationships of the identified differences , and 
    be helped to assess the explanations 

    • Students will use financial information and evaluate the reliability 
    of the data from which the expectation has been developed

    • Students will be helped on how to establish substantive audit tests 
    on each balance, class of transactions and disclosure included in 
    the financial statement

    • Students will be helped on how to obtain audit evidences 
    during performance of the substantive audit tests on individual 

    transactions, balances and disclosures

    End unit 12 assessment

    1. What is the purpose of substantive audit procedures? 

    2. Differentiate substantive audit procedures from analytical procedures

    3. What are the different methods of collecting audit evidences?

    4. What is the main purpose of audit evidences? 

    5. What are the key audit procedures you would perform on the 

    following financial statements balances

    a) Cash and bank balances

    b) Liabilities

    c) Property plant and equipment

    d) Revenue

    e) Expenses

    ◄UNIT 11: TEST OF CONTROLUNIT 13: AUDIT JUDGEMENT►