Substantive test

Of TRANSACTIONS
AND BALANCES

Learning Objectives:
Understand

the nature of substantive test

and the rationale for performing such test.

Know

the substantive audit procedures to

test of details of transactions and balances
in relation to the financial statement
assertions.

Learning Objectives

Familiar with substantive testing as applied to different transactions

such as:
a. Sales
b. Cash receipts
c. Purchase
d. Cash payment
e. Payroll
f. Production
g. Inventory warehousing

h. Financing and investing Transactions and to Year-end account

balances

Introduction
Test of
Controls or
Compliance
tests

Substantive
Procedure

Types of Substantive Test

Substantive Test

Test of Details

Test of
Balances

Analytical
Procedure
Test of
Transactions

Substantive Test
Audit

procedures designed to substantiate the

account balances or to detect material
misstatements
in
transactions,
account
balances, and disclosures.

Substantive Test of
SALES TRANSACTIONS

Substantive Test of Transaction: Sales

Assertion
1. Existence /Occurrence
Recorded Sales are for
shipments actually made to
customers
2. Completeness
All sales transactions that
occurred are recorded
3. Rights and obligation
Sales recorded represent
only sales transactions

Potential Misstatements
Sales for which shipment of
goods was not made

Goods may be shipped but

not billed
Goods shipped on
consignment may be
recorded as sales

Sales: Test of Transaction

Assertion

Potential Misstatements

4. Valuation/ Measurement
Sales are correctly billed and Sales and accounts
recorded.
receivable may be
misvalued.
5. Presentation and
Disclosure
Sales and accounts
receivable are recorded to
result in presentation in
accordance with PFRS.

Revenues may not be

properly classified

Substantive Test of Balances: Sales

Existence/
Occurrence

Completeness

Confirm accounts receivable

Perform analytical procedure

Perform sales cut-off test

Substantive Test of Balances: Sales

Rights and
obligations

Valuation /
Measurement

Review minutes of BODs meeting

Inquire of client personnel
Read contracts and agreements
Confirm with lenders any indications that
accounts have been assigned, sold or
pledged

Verify the mathematical accuracy of

accounts receivable aging schedule and
trace it to the accounts receivable ledger
Test the adequacy of the allowances for
uncollectible accounts

Substantive Test of Balances: Sales

Presentation
and
Disclosure

Review the FS
Perform analytical procedure

Analytical Procedure: Sales

Overstatement or
Understatement of
Sales
Sales
amount and
gross profit
rate by
month
(current
year)
Gross Profit
(current
year)

V
E
R
S
U
S

Sales
amount and
gross profit
rate by
month
(previous
year)
Industry
data

Overstatement or
Understatement of
Sales Return and
Allowances
Sales
return
and
allowanc
es as % of
gross
profit
(current
year)

V
E
R
S
U
S

Sales
return
and
allowanc
es as % of
gross
profit
(previous
year)

Analytical Procedure: Sales

Overstatement or Understatement of Allowance
for Uncollectible Accounts
Current Year
Accounts
Receivable
Turnover
Bad Debts as a
% of sales
Allowance
accounts as a
% of AR

V
E
R
S
U
S

Previous Year
Accounts
Receivable
Turnover
Bad Debts as a
% of sales
Allowance
accounts as a
% of AR

V
E
R
S
U
S

Industry
data

Analytical Procedure: Sales

Errors in individual customers

accounts receivable
Individual
customer
balances
(current
year)

V
E
R
S
U
S

Individual
customer
balances
(current
year)

Substantive Test of
CASH RECEIPTS TRANSACTIONS

Substantive Test of Transactions

Assertion

Potential Misstatements

1. Existence /Occurrence
Recorded receipts represent actual
collections of cash from customers

Fictitious cash receipts may be

recorded

2. Completeness/ Rights and

obligation
All Receipts of cash and checks are
recorded

Cash may be Misappropriated

3. Valuation/ Measurement
Debits to cash and credits to A/R
are valued at amounts received

A customer may be given credit for

an amount bigger than actual
payment

4. Presentation and Disclosure

Cash receipts transactions are
properly classified

Entries may be made to wrong

accounts

Substantive Test of Balances:

Cash Receipts
Count cash on hand
Confirm bank balances
Examine interbank transfers
Perform analytical procedure

Existence
/Occurrence

Completeness

Cash cutoff test

Proof of cash

Substantive Test of Balances: Cash

Receipts

Rights and
obligations

Valuation/
Measurement

Examine standard bank

confirmation
Read the BODs minutes of
meeting

Bank cutoff statements

Bank reconcillation

Substantive Test of Balances:

Cash Receipts

Presentation
and
Disclosure

Review the FS
Perform analytical
procedure

Analytical Procedure:
cash Receipts
Actual Cash
Balances

V
E
R
S
U
S

Budgeted
Cash
Balances

Substantive Test of
PURCHASES TRANSACTIONS

Substantive Test of Transactions: Purchases

Assertion

Potential Misstatements

1. Existence /Occurrence
Recorded purchases are for
items acquired

Purchases that didnt occur

may be recorded
Documents may be reused
Acquisitions may be recorded
twice

2. Completeness
Purchases are recorded
3. Rights and Obligation
Purchases are acquisitions
and liabilities of the entity

Purchases may be unrecorded

Purchases may be legitimate
purpose
Goods received on
consignment may be recorded
as purchases

Substantive Test of Transactions:

Purchases
Assertion
4. Valuation/ Measurement
Recorded for proper
amounts
5. Presentation and
Disclosure
Properly classified and with
adequate disclosure

Potential Misstatements
Client could overpay for
goods and services
Purchases may be charged to
wrong accounts

Substantive Test of Balances:

Purchases
Completeness

Cutoff test
Reconcile accounts payable to vendors
statement
Apply analytical procedure
Search unrecorded liabilities

Valuation

Verify the mathematical accuracy of the

payables
Trace the balance to GL

Presentation
and Disclosure

Proper classification and disclosing of

accounts

Analytical Procedures:
Puchases
Current
Accounts Payable
Expense Account
Purchases/Accounts
Payable
Accounts Payable/
Current Liabilities

V
E
R
S
U
S

Previous
Accounts Payable
Expense Account
Purchases/Accounts
Payable
Accounts Payable/
Current Liabilities

Substantive Test of
CASH PAYMENT TRANSACTIONS

Substantive Test of Transactions

Assertion

Potential Misstatements

1. Existence /Occurrence
Recorded cash payments
occurred

Unauthorized and
inappropriate payments may
be made

2. Completeness
All payments are recorded

Checks issued-not recorded

Accounts-not reconcile or
discrepancy may not be
disclosed

3. Rights and Obligation

All payments were the
entitys obligation

Unauthorized payment may be

made

Substantive Test of Transactions

Assertion

Potential Misstatements

4. Valuation/ Measurement
Various accounts debited
and cash credited are valued
properly

Improper amounts may be

paid

5. Presentation and
Disclosure
Transactions are properly
classified and adequately
disclosed

Payments may credited to

wrong accounts

Substantive Test of

PAYROLL TRANSACTIONS

Substantive Test of Transaction:

Payroll
Assertion

Potential Misstatements

1. Existence /Occurrence
Transactions occurred

Payroll may include fictitious

or former employee

2. Completeness
Payroll earned are recorded

Paychecks issued may not be

recorded

3. Rights and Obligation

Payroll are for services
rendered

Employees may be paid for

hours they didnt work

Substantive Test of Transaction:

Payroll
Assertion
4. Valuation/ Measurement
Recorded for proper
amounts
5. Presentation and
Disclosure
Transactions are properly
classified and adequately
disclosed

Potential Misstatements
Employees may be overpaid
or underpaid

Wages expenses may be

charged to wrong accounts

Analytical Procedures: Payroll

Fictitious
employees may
exist or significant
overpayments

Overstatement or
understatement of
payroll expense

Review the payroll register, general

ledger, and payroll earnings records

Current
Average pay per
employee
Cost of sales:Direct
Labor

V
E
R
S
U
S

Previous
Average pay per
employee
Cost of sales:Direct
Labor

Analytical Procedure: Payroll

Overstatement
or
understatement
of commission
expense

Commissi
on
expense:S
ales
(current)

V
E
R
S
U
S

Commissi
on
Expense:S
ales
(previous)

Fictitious
employees
may exist or
overstatement
of # of hours

# of
hours
worked

V
E
R
S
U
S

# of hours
on
productio
n report
and
budget

Overstatement
or
understatement
of payroll tax
expense
Payroll
Tax
Expense:
Cost of
Salaries
and
Wages
(current)

V
E
R
S
U
s

Payroll
Tax
Expense:
Cost of
Salaries
and
Wages
(current)

Substantive Test of
PRODUCTION TRANSACTION

Substantive Test of Transaction:

Production
Assertion

Potential Misstatements

1. Existence /Occurrence
Recorded transactions
occurred

Transaction that didnt occurrecorded

2. Completeness/ Rights
and Obligation
All transactions are
recorded

Completed production not

recorded
Goods issued not recorded
Time worked in production not
recorded

Substantive Test of Transaction:

Production
Assertion
3. Valuation/ Measurement
Recorded for proper
amounts
4. Presentation and
Disclosure
Transactions are properly
classified and adequately
disclosed

Potential Misstatements
Not based on cost inccurred

Charged to wrong accounts

Substantive Test of
INVENTORY WAREHOUSING
TRANSACTIONS

Substantive Test of Transactions:

Inventory Warehousing
Assertion

Potential Misstatements

1. Existence /Occurrence
Recorded transactions
occurred

Receipts that didnt occur may

be recorded

2. Completeness
All transactions are
recorded
3. Rights and Obligations
Transactions are for the
company

Goods may have been

received or issued but not
recorded
Consigned Goods may be
included as inventory

Substantive Test of Transactions:

Inventory Warehousing
Assertion
4. Valuation/ Measurement
Recorded for proper
amounts
5. Presentation and
Disclosure
Transactions are properly
classified and adequately
disclosed

Potential Misstatements
Inventory may be Misvalued

Receipt or issue may be

charged to wrong accounts

Substantive Test of Balances:

Inventory Warehousing

Substantive Test of Balances: Inventory

Warehousing

Substantive Test of Balances:

Inventory Warehousing

Inventory: Analytical
Procedure

Substantive Test of
PROPERTY, PLANT and
EQUIPMENT

Property, Plant and

Equipment

Property, Plant and

Equipment

Substantive Test of
INVESTMENTS

Investments

Investments

Substantive Test of
NOTES PAYABLE

Notes Payable

Notes Payable

Shareholders Equity

Shareholders Equity

 The end
Gomabseubnida!!!!