University of Santo Tomas

Alfredo M. Velayo College of Accountancy

Substantive Testing Procedures -

Illustration

Assurance Principles, Professional Ethics and

Good Governance
(ACC 10)
General Scope of Substantive Testing
Scope Consideration
Nature Procedures to detect material
misstatements

Addresses detection risk

Timing  Interim + Yearend Update

Yearend
Extent  Based on the testing threshold and
acceptable level of detection risk
Common Substantive Testing
Procedures
 Cash
 Trade Receivables
 Inventories
 Property, Plant and Equipment*
 Trade Payables
 Long-term Debt *
 Equity
 Revenues
 Cost of Sales, Selling and Administrative Expenses

*including related comprehensive income accounts

Cash - Common Testing Procedures
Audit Procedures R E C V P
D
1. Bank Confirmation     
 Standard inquiry to depository
institutions
 Addresses all assertions
2. Bank Reconciliation Testing   
 Test validity of reconciling items
3. Cash Cutoff  
 Test significant period end interbank
transfers (to detect kitting).
4. Cash Valuation 
 Test reasonable valuation of foreign
currency-denominated accounts.
Trade Receivables - Common Testing Procedures
Audit Procedures R E C V P
D
1. SL – GL Agreement  
 Comparison of subsidiary ledger
versus control accounts
 Test significant reconciling items
2. Confirmation or Test of Subsequent    
Receipts
 Inquire with creditors
 Test subsequent collections
3. Cutoff Testing  
 Review significant sales transactions
before and after period end.
4. Reasonableness of Allowance for DA 
 Test reasonableness of management’s
judgment
Trade Receivables - Common Testing Procedures
(cont’d)
Audit Procedures R E C V P
D
5. Valuation 
 Test reasonableness of receivables
denominated in foreign currency
6. Review of Credit Balances and Other  
Adjustments
 Review proper classification of
accounts with credit balances.
Inventories - Common Testing Procedures

Audit Procedures R E C V P
D
1. Observation of Physical Inventory Count   
 Observe client’s stocktake procedures
 List to floor, floor to list testing
2. Confirm Inventories Held by Others   
 Standard inquiry for inventories held
outside the client’s premises
3. Review Reconciliation of Inventory  
Compilation Versus General Ledger
 Subsidiary records versus control
account
4. Inventory Cutoff  
 Last goods dispatched/received
 Proper period of recording
Inventories - Common Testing Procedures
(cont’d)

Audit Procedures R E C V P
D
5. Valuation 
 Reasonableness of inventory valuation
(lower of cost and NRV)
Property, Plant and Equipment - Common Testing
Procedures
Audit Procedures R E C V P
D
1. Agreement of SL with GL   
 Test reconciliation performed by client
2. Additions and Disposals     
 Test supporting documents for
significant additions and disposals
3. Leases, repairs and maintenance   
 Review significant lease transactions
and repairs and maintenance
4. Depreciation and amortization 
 Reasonableness of depreciation and
amortization charges
5. Impairment of PPE 
 Review for appropriateness of
impairment testing
Trade Payables - Common Testing Procedures
Audit Procedures R E C V P
D
1. Agreement of SL with GL  
 Agree component with control account
2. Unusual Item Review     
 Review for significant debit balances,
etc.
3. Accounts Payable Cutoff   
 Inspect transactions before/after period
end to ensure proper period of recording
4. Search for Unrecorded Payables  
 Review subsequent disbursements and
unmatched invoices and receiving
reports
5. Valuation of Trade Payables 
 Test reasonableness of valuation of trade
payables in foreign currency.
Long-term Debt - Common Testing Procedures
Audit Procedures R E C V P
D
1. Recalculation of Interest Expense  
 Test reasonableness of recorded
expenses
2. Review co mpliance with covenants  
 Review compliance with positive and
negative covenants
3. Inspection of New Agreements  
 Inspect original or authenticated
documents for new loans
4. Collaterals   
 Identify collaterals and cross refer them
to appropriate working papers
5. Verification of existence of loans     
 Confirm or inspect documents pertaining
to the loan
Equity - Common Testing Procedures
Audit Procedures R E C V P
D
1. Equity Reconciliation Procedures   
 Test movements in the equity accounts
for the year
2. Minutes and Equity Transactions  
 Review minute of meetings for significant
equity transaction (e.g., dividends, RE
appropriation)
3. Inquiry for Stock Options   
 Inspect minutes and inquire with
management for any stock options
4. Appropriateness of Dividend Payments     
 Verify that dividends are appropriately
approved.
 Verify compliance with regulatory
requirements
Revenue - Common Testing Procedures
Audit Procedures O C A C Cl P
u D
1. Overall Analytical Procedures   
 Perform overall analytical procedures
2. Review of Revenue Recognition     
Procedures
 Review appropriateness of
procedures
 Perform analytical procedures on
disaggregated data (CAATs)
 Review for unusual transactions
3. Test of Transactions      
 Vouch significant sales transactions
to supporting documents
Expenses - Common Testing Procedures
Audit Procedures O C A C Cl P
u D
1. Overall Analytical Procedures (PY vs. CY)     
 Perform overall analytical procedures
2. Review of Large and Unusual Items 
 Review appropriateness of
procedures
 Perform analytical procedures on
disaggregated data (CAATs)
 Review for unusual transactions
3. Test of Transactions      
 Vouch significant sales transactions
to supporting documents
General Notations
 Audit procedures may vary among practitioners

 Better quality of procedures and greater extent of testing

= higher reliance

 Large audit effort must be devoted to auditing significant

estimates, judgments and non-routine transactions

There must be specific audit procedures to address

significant risks

We design rollforward procedures in case we performed

interim testing.