Auditing of items in the statement of financial position

Verification of items in statements of financial position

It is important that the items in the financial position are free from material misstatements. Assets, liabilities and equity should be free from errors whether intentional or not, as these could distort the decisions of the users of such statement. Auditor should exercise profession scepticism in auditing to ensure that they

Audit procedures for the statement of financial position

Trade receivables

To audit receivable balances, auditors aim to test the existence, completeness, accuracy, ownership, and valuation of receivables.

1. External confirmation:
   • Positive confirmation: Requests a reply from customers, suitable when internal controls are weak.
   • Negative confirmation: Requests a reply only if the customer disagrees, suitable when internal controls are strong.
2. Audit steps:
   • Reconcile the receivables ledger balances with the control account.
   • Review aged debtor listings to ensure proper valuation and provision for doubtful debts.
   • Scrutinize communication with customers for disputes.
   • Check board minutes for debt write-offs or adjustments.
   • Analyze the collection period for recoverability and credit control efficiency.
   • Trace outstanding balances to tax invoices, delivery notes, and quotations.
   • Test completeness by tracing customer orders to delivery notes and receivable records.
   • Verify payments recorded in customer accounts by tracing them to the cash book.
   • Examine credit notes issued after the year-end for potential income manipulation.

Trade payables

Auditors focus on the possible understatement of payables balances.

Audit steps:

1. Reconcile the sum of payables to the control account.
2. Examine supplier communications and board minutes for disputes or unrecorded amounts.
3. Trace purchase orders to goods received notes (GRN), tax invoices, and supplier accounts.
4. Analyze the payment period for financial difficulties or missed cash discounts.
5. Re-perform reconciliations of payables balances with supplier statements.

Accruals and prepayments

Although smaller, these balances can still be material.

Audit steps:

1. Compare with prior year amounts for consistency.
2. Review payments made shortly before or after the year-end for accruals and prepayments.
3. Perform analytical procedures to detect unusual changes in expenses.
4. Obtain a letter of representation from directors regarding liabilities and prepayments.

Inventory

Inventory affects both the statement of financial position and the profit statement.

Audit steps:

1. Verify the quantity and condition of inventory.
2. Ensure valuation at the lower of cost and net realizable value.
3. Confirm ownership to exclude third-party inventory or items already sold.

Bank and cash

Audit steps:

1. Obtain bank confirmations to verify balances, loans, and security details.
2. Re-perform bank reconciliations.
3. Conduct cash counts for physical cash verification.

Non-current assets

Auditors confirm existence, ownership, completeness, accuracy, valuation, classification, and presentation.

Audit steps:

1. Perform physical inspections.
2. Check purchase invoices and cash receipts.
3. Examine repairs and maintenance accounts for capital items.
4. Reconcile carrying amounts with the asset register.
5. Re-perform depreciation calculations for accuracy.
6. Verify disposals and related profit/loss calculations.
7. Inspect ownership documents.

Audit procedures for the statement of profit or loss

Purchases

Audit steps:

1. Trace purchase transactions to orders, invoices, and delivery notes.
2. Analyze purchases for unusual patterns or smoothing of profit.
3. Ensure completeness by matching figures with source documents.
4. Perform cut-off tests for correct period recording.
5. Compare current-year prepayments to prior years.
6. Review post-year-end debit notes or invoice cancellations.
7. Recalculate discounts and taxes for accuracy.

Sales

Audit steps:

1. Trace sales transactions to customer orders, invoices, and delivery notes.
2. Analyze sales for unusual patterns or profit smoothing.
3. Ensure completeness by matching sales figures to invoices and delivery notes.
4. Perform cut-off tests for correct period recording.
5. Compare customer prepayments with prior years.
6. Examine credit notes or invoice cancellations after year-end.
7. Recalculate discounts and taxes for accuracy.