SUBSTATIVE PROCEDURES

BANK & CASH

Bank Bal Cash Bal Must Exist

Bank Count Physical

Confirmation Ltr Cash

Bank Bal in Cash Book will be the figure in SFP but it may differ from bank
statement bal. Review BRS to get explanation of differences.
The bank confirmation letter (BCL) provides direct confirmation of bank balances from the bank.
(3rd party, independent, written evidence) very reliable.
Client permission is required to get the bank this information to the auditor(duty of confidentiality). Sent minimum of two
weeks before the client's year-end.

Cash Count should be arranged to verify existence.

Make sure that all cash balances are counted simultaneously to avoid manipulation of the balances
between different sites.
Be accompanied by a member of the client staff to avoid any allegations from the client of theft by the
auditor.
The details of the cash counts should be recorded (Locations counted, the amount counted at each
location, the client staff present, the auditor performing the tests and the date performed)
NON CURRENT ASSET
NCAR NCAS Legal Documents SI/ PI Bank / Cash Book Disclosures Physical Asset CapX /
, Estimates Replace
Policy
NON CURRENT ASSET – REVALUATION - ELOUNDA
Elounda Co manufactures chemical compounds using a continuous production process. Its yr/e was 31 July

20X6 and the draft PBT is $13·6 million. You are the audit supervisor and the year-end audit is due to

commence shortly. The following matters have been brought to your attention.

Revaluation of property, plant and equipment (PPE)

At the beginning of the year, management undertook an extensive review of Elounda Co’s non-current asset

valuations and as a result decided to update the carrying value of all PPE. The finance director, Peter

Dullman, contacted his brother, Martin, who is a valuer and requested that Martin’s firm undertake the

valuation, which took place in August 20X5. (5 marks)

Required:

Describe substantive procedures you should perform to obtain sufficient, appropriate audit evidence in

relation to the above matter.

Substantive procedures for revaluation of PPE
• Obtain a schedule of all PPE revalued during the year and cast to confirm completeness and accuracy of the
revaluation adjustment and agree to trial balance and financial statements.
• Consider the competence and capability of the valuer, Martin Dullman, by assessing through enquiry his
qualification, membership of a professional body and experience in valuing these types of assets.
• Consider whether the valuation undertaken provides sufficiently objective audit evidence. Discuss with
management whether Martin Dullman has any financial interest in Elounda Co which along with the family
relationship could have had an impact on his independence.
• Agree the revalued amounts to the valuation statement provided by the valuer.
• Review the valuation report and consider if all assets in the same category have been revalued in line with
IAS 16 Property, Plant and Equipment.
• Agree the revalued amounts for these assets are included correctly in the non-current assets register.
• Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.
• Recalculate the depreciation charge for the year to ensure that for the assets revalued during the year, the
depreciation was based on the correct valuation and was for 12 months.
• Review the Fin/ Statement disclosures relating to the revaluation to ensure they comply with IAS 16.
Substantive procedures – PPE Depn
Balotelli Beach Hotel Co (Balotelli) operates a number of hotels providing accommodation, leisure facilities and restaurants.
You are an audit senior of Mario & Co and are currently conducting the audit of Balotelli for the year ended 31 December 20X4.
During the course of the audit a number of events and issues have been brought to your attention:
Non-current assets and depreciation
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the company’s hotels.
Depreciation is charged monthly on all assets on a straight line basis (SL) and it is company policy to charge a full month’s
depreciation in the month of acquisition and none in the month of disposal.
During the audit of non-current assets, the audit team has obtained the following extract of the non-current assets register detailing
some of the new leisure equipment acquired during the year.

Extract from Balotelli’s non-current assets register

In order to verify the depreciation expense for the year, you have been asked to perform a proof in total. This will involve developing
an expectation of the depreciation expense for the year and comparing this to the actual expense to assess if the client has calculated
the depreciation charge for the year correctly.
What is the expected depreciation expense for the above assets for the year ended 31 December 20X4 and the
resultant impact on non-current assets?
A. Depreciation should be $10,660, assets are understated
B. Depreciation should be $18,583, assets are understated
C. Depreciation should be $9,111, assets are overstated
D. Depreciation should be $12,549, assets are overstated

Depreciation should be $10,660, assets are understated

Date Description Original Depreciation Accumulated Charge for Carrying Expectation
cost policy depreciation the year value

$ $ $ $

1 May 20X4 15 treadmills 18,000 36 months SL 0 4,000 14,000

4,000
15 May 20X4 20 exercise bikes 17,000 3 years SL 0 5,667 11,333
3,778
17 August 20X4 15 rowing 9,750 36 months SL 0 2,167 7,583
machines 1,354
19 August 20X4 10 cross trainers 11,000 36 months SL 0 1,528 9,472
1,528

55,750 0 13,362 42,388 10,660

Substantive procedures – PPE Depn
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the
company’s hotels. Depreciation is charged monthly on all assets on a straight line basis (SL) and it is company policy
to charge a full month’s depreciation in the month of acquisition and none in the month of disposal.
The audit assistant who has been assigned to help you with the audit work on non-current assets has expressed some
uncertainty over why certain audit procedures are carried out and specifically is unsure what procedures relate to the
valuation and allocation assertion.
Which of the following audit procedures are appropriate to test the VALUATION assertion for non-current
assets?

(1) Ensure disposals are correctly accounted for and recalculate gain/loss on disposal
(2) Recalculate the depreciation charge for a sample of assets ensuring that it is being applied consistently and in
accordance with IAS 16 Property, Plant and Equipment
(3) Review the repairs and maintenance expense accounts for evidence of items of a capital nature
(4) Review board minutes for evidence of disposals during the year and verify that these are appropriately reflected
in the non-current assets register

A. 1 and 2
B. 1, 3 and 4
C. 2, 3 and 4
D. 2 and 3 only