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Substantive Testing

A. Cash and Cash Equivalents

Objectives:
a. All cash on the balance sheet is held by the entity or by others (e.g., a bank) for the entity.
b. All cash owned by the entity at the balance sheet date is included on the balance sheet.
c. Cash, including bank balances, is stated at its realizable value.
d. The entity owns, or has a legal right to, all the cash on the balance sheet at the balance sheet date. All cash
is free of restrictions on use, liens, or other security interests or, if not, such restrictions, liens, or other
security interests are identified.
e. Cash, including bank balances, is properly classified, described, and disclosed in the financial statements,
including notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Obtain a complete list of bank accounts (debit and credit balances) as well as related loan and similar
contracts. Obtain bank confirmations for all accounts, including the accounts closed during the year to
confirm the relationship with the bank including contingencies, liens, pledges, restrictions on the client’s
assets, guaranteed amounts etc. If there is a valid reason for not confirming all accounts, document the
rationale in the working papers.
b. Examine the client's bank reconciliation as of year-end, including cash-in-transit accounts, (e.g., in sub
ledgers) to verify the proper reconciliation of bank statements and general ledger accounts. When
appropriate (e.g., to determine whether receipts or disbursements are recorded on a timely basis, or to verify
the appropriateness of reconciling items), obtain cutoff bank statements.
c. Test cutoff of cash receipts and cash disbursements for transfers between different bank accounts at the
balance sheet date.
d. Test appropriate valuation of cash and cash equivalents (including overdrafts) in foreign currencies.

B. Accounts Receivables

Objectives:
a. All receivables on the balance sheet are real claims of the entity.
b. All real claims of the entity for amounts receivable are included on the balance sheet.
c. Receivables are carried at their net realizable (collectible) value (i.e., the gross receivables are properly
stated with appropriate allowances provided for uncollectible accounts, discounts, returns, warranties, and
similar items).
d. The entity owns, or has a legal right to, all the receivables on the balance sheet at the balance sheet date.
All receivables are free of liens, pledges, or other security interests or, if not, such liens, pledges, or other
security interests are identified.
e. Receivables are properly classified, described, and disclosed in the financial statements, including notes, in
conformity with prescribed accounting principles.

Substantive Procedures:
a. Agree receivables subledger to the general ledger control account and investigate large and unusual
reconciling items.
b. Confirm accounts receivable. Examine subsequent cash receipts, shipping records, sales contracts, and
other evidence to verify the validity of accounts receivable for which replies to confirmation requests are
unsatisfactory or were not obtained or as part of supporting year-end receivables balances.
c. If accounts are verified at an interim date, review the “roll-forward” of activity from the interim date to the
balance sheet date in a manner responsive to our combined risk assessment and compare level of activity
with prior periods. Investigate unusual items; consider confirming (at the balance sheet date) significant new
accounts and those accounts with significant increases or decreases between the interim date and the
balance sheet date.
d. Perform analytical procedures to identify peaks in sales volume in the last few days or weeks of the year and
test cutoff by inspecting sales register, billings, shipping documents and other supporting documents before
and after the year-end date. Where we perform substantive procedures at an interim date, we perform cutoff
testing at that date also. Interim cutoff testing can include either tests of controls over the timely recording of
transactions or relevant substantive testing.
e. Evaluate the adequacy of the allowance for doubtful accounts.
f. Evaluate the adequacy of other adjustments to accounts receivables, such as rebates, credit memos,
discounts.
g. Test appropriate valuation of accounts receivables in foreign currencies.
h. Inquire about or review list of credit balances and investigate large items.

C. Inventories

Objectives:
a. All inventories included on the balance sheet are held by the entity or by others for the entity.
b. All inventories owned by the entity at the balance sheet date are included on the balance sheet.
c. Inventories are carried at the lower of cost or market value. The cost and market determinations are
appropriate, including adequate provisions for excess, slow-moving, obsolete, and damaged goods, and for
losses on purchase and sales commitments.
d. The entity owns, or has a legal right to, all the inventories on the balance sheet. All inventories are free of
liens, pledges, or other security interests or, if not, such liens, pledges, or other security interests are
identified.
e. Inventories are properly classified, described, and disclosed in the financial statements, including notes, in
conformity with prescribed accounting principles.

Substantive Procedures:
a. Observe the taking of physical inventories to establish that:
1. The client’s personnel are complying with the instructions for taking the inventories.
2. Items belonging to the client, or belonging to others but for which the client is responsible, are
accurately counted and recorded.
3. Items to be excluded from inventory (no-value items, non-inventory items, items belonging to others)
are either subject to satisfactory control and excluded from the counting process or are accurately
counted and recorded, including a clear description of their non-inventory status.
b. Count tags, sheets, or cards are properly controlled.
c. Perform tests of the client’s counts (from the floor to the recorded counts and from recorded counts to the
floor); record sufficient information to be able to trace the test counts into the inventory compilation at a later
date; record selected information concerning the tags, sheets, or cards that are used, partially used, unused
and voided.
d. Inspect shipping, receiving, and transfer documents and the related inventory items, when appropriate, to
establish the numbers of the last documents used and other information needed for subsequently verifying
cutoffs in the accounting records.
e. Review the physical inventory compilation.
f. If significant, confirm inventories held by others at the physical inventory date and trace confirmed quantities
to the inventory compilation; consider observing these physical inventories as well.
g. Review the reconciliation of the valued physical inventory compilation with the general ledger account
balances and the perpetual inventory records. Investigate large and unusual reconciling items.
h. If inventories are taken at an interim date, review the "roll-forward" documentation in a manner responsive to
our combined risk assessment and investigate unusual items.
i. Trace the cutoff information obtained during the physical observation to the accounting records of sales and
purchases.
j. Test the valuation of inventory to ensure that it is performed in accordance with the client’s accounting policy
or applicable financial reporting framework.
k. Test the allowances to reduce the valuation of inventory to net realizable value, e.g., reserves for slow
moving items, obsolescence or lower of cost or market.

D. Prepaid Expenses, Deferred Charges, and Other Assets

Objectives:
a. All prepaid expenses on the balance sheet represent expenditures that will benefit the succeeding period.
b. All expenditures that will benefit the succeeding period and that can be properly included in prepaid
expenses at the balance sheet date are included on the balance sheet.
c. Prepaid expenses are included on the balance sheet at the appropriate amounts.
d. The entity is entitled, at the balance sheet date, to the future benefits related to the prepaid expenses
included on the balance sheet.
e. Prepaid expenses are properly classified, described, and disclosed in the financial statements, including
notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Verify existence and carrying amounts through examination of supporting documents, or confirmation or a
combination of those procedures.
b. Compare the account balances with those of prior periods and investigate any unexpected changes (or the
absence of expected changes).
c. Review the prepaid expense and related expense accounts in the general ledger for unusual items.
d. Examine invoices, contracts, agreements, and other support for additions to the accounts.
e. Test expense accounts for items inappropriately charged directly to expense.
f. Confirm significant balances or transactions with insurers or others.
g. Test calculations of the prepaid amounts.
h. Inspect (or confirm) insurance policies as to coverage, beneficiaries, and evidence of liens on property.
i. Determine that prepaid expenses are properly classified, described, and disclosed in the financial
statements.

E. Long-Term Receivables, Non-Current Deposits, and Other Long-Term Financial Assets

Objectives:
a. All long-term receivables and deposits on the balance sheet represent valid claims against the indicated
debtors. All the other assets on the balance sheet exist. All recorded income and expense relating to these
assets have accrued to the entity at the balance sheet date.
b. All assets in this classification owned by the entity are included on the balance sheet. All income and
expense accruing from these assets at the balance sheet date have been recorded.
c. Assets in this classification are included on the balance sheet at the appropriate amounts. The related
income and expense are stated on the income statement at the appropriate amounts.
d. The entity owns, or has a legal right to, all the assets in this classification. All the assets are free of liens,
pledges, or other security interests or, if not, such liens, pledges, or other security interests are identified.
e. Assets in this classification and the related income and expense accounts are properly classified, described,
and disclosed in the financial statements, including notes, in conformity with prescribed accounting
principles.

Substantive Procedures:
a. Verify the existence and ownership of long-term receivables through confirmation or examination of
supporting documentation.
b. Test the carrying amounts of long-term financial assets.
c. Compare the account balances with those of prior periods and investigate any unexpected changes (or the
absence of expected changes).
d. Perform an overall test of the reasonableness of interest income by multiplying the average interest rates by
the average interest-bearing balances outstanding.
e. Review the accounts in this classification and the related income and expense accounts in the general
ledger for unusual items.
f. Examine invoices, contracts, agreements, cash records, premium notices, and other support for additions to
or reductions in the accounts in this classification.
g. Test accrued interest and interest earned during the period; determine whether interest should be imputed
on long-term receivables arising during the period.

F. Property, Plant, and Equipment and Related Income Statement Accounts

Objectives:
a. All property, plant, and equipment on the balance sheet are held by the entity or by others for the entity.
b. Property, plant, and equipment are carried at the appropriate amount (taking into account accumulated
depreciation, depletion, or amortization). The cost of the property, plant, and equipment is allocated to the
appropriate accounting periods in a systematic and rational manner. The undepreciated cost of the property,
plant, and equipment used in the business is expected to be recoverable through future use. Impaired
assets are recorded at estimated fair value. Property, plant, and equipment held for disposal are carried at
the lower of their carrying amount or fair value less cost to sell.
c. The entity owns, or has a legal right to, all the property, plant, and equipment on the balance sheet at the
balance sheet date. All property, plant, and equipment are free of liens, pledges, security interests, and
restrictions or, if not, such liens, pledges, security interests, and restrictions are identified.
d. Property, plant, and equipment, and related accounts are properly classified, described, and disclosed in the
financial statements, including notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Obtain a schedule of property, plant and equipment, including capitalized leases, and related additions,
disposals, reclassifications and depreciation, depletion and/or amortization (PPE subledger) and agree
balances to the respective general ledger accounts.
b. For significant additions and disposals during the year, examine invoices, capital expenditure authorizations,
leases and other data that support these additions and disposals.
c. Review and examine support for rentals under operating leases and for significant charges to repairs,
maintenance and other expense accounts to determine if they should be capitalized as property, plant and
equipment.
d. Review reasonableness of depreciation, depletion and amortization charge by reference to the client's
accounting policy or applicable financial reporting framework and expectation for current year.
e. Use information obtained during the audit in determining whether management has identified appropriate
indicators of impairment.

G. Notes Payable

Objectives:
a. All notes payable on the balance sheet are real debts due to creditors of the entity. All recorded interest on
notes payable has accrued at the balance sheet date.
b. All notes payable owed by the entity at the balance sheet date have been recorded. All related interest
expense which has accrued at the balance sheet date has been recorded.
c. Notes payable are included on the balance sheet at the appropriate amounts. Interest expense is stated on
the income statement at the appropriate amount.
d. The notes payable on the balance sheet represent obligations of the entity at the balance sheet date. They
are not secured by liens on, pledges of, or security interests in assets or by other collateral, nor have they
been assumed or guaranteed by others unless otherwise indicated. There has been compliance with the
provisions of loan agreements.
e. Notes payable and related interest accounts are properly classified, described, and disclosed in the financial
statements, including notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Confirm notes payable as to amounts owed, terms, collateral and restrictions and the debtor's compliance
with the loan provisions. If not identified through confirmation with creditors, identify liens, security interests,
and assets pledged as loan collateral by confirmation with the appropriate public filing offices or by
inspection of public records.
b. Inspect documentation of loan agreements or other short-term lending arrangements (e.g., factoring) to
determine the terms, restrictions, revolving lines of credit, and other pertinent provisions of notes payable.
c. Test calculations and other evidence relating to compliance with the terms, restrictions, or other provisions
of loan agreements.
d. Review refinancing agreements and notes payable transactions subsequent to the balance sheet date to
determine their effects on balance sheet classification or on disclosure.

H. Accounts Payable

Objectives:
a. All accounts payable on the balance sheet are real debts due to suppliers or other creditors of the entity for
goods received or services performed.
b. All accounts payable owed by the entity at the balance sheet date are included on the balance sheet.
c. Accounts payable are stated at the amounts owed at the balance sheet date.
d. The accounts payable on the balance sheet represent obligations of the entity at the balance sheet date.
The accounts payable are not secured by liens on assets, security interests, or other collateral unless
otherwise indicated.
e. Accounts payable are properly classified, described, and disclosed in the financial statements, including
notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Agree the accounts payable subledger to the general ledger control account and investigate large and
unusual reconciling items.
b. Inquire about or perform a review of accounts payable subledger for unusual items, e.g., significant debit
balances in the accounts payable subledger or other unexpected amounts to verify proper classification and
valuation.
c. Perform cutoff tests for goods and services received as well as for supplier credit memos to ensure that
transactions are completely recorded in the correct period.
d. Perform a search for unrecorded liabilities at the year-end date by selecting subsequent disbursements and
unmatched invoices and receiving reports.
e. Compare supplier balances post year end to those at year end and investigate unusual or significant
changes.
f. Test appropriate valuation of accounts payable in foreign currencies.

I. Equity

Objectives:
a. All the equity accounts on the balance sheet either (a) represent shares or other units of ownership that are
appropriately authorized, issued, and outstanding; or (b) reflect other properly authorized transactions that
are appropriately recorded in the equity accounts.
b. All the shares or other units of ownership that are appropriately authorized, issued, and outstanding, and all
other properly authorized transactions that affect the equity accounts at the balance sheet date are included
in the equity accounts.
c. The equity accounts are stated on the balance sheet at the appropriate amounts.
d. Stock options, stock purchase plans, stock purchase warrants, conversion privileges, or other contingent
share issuances that exist have been appropriately recognized.
e. The equity accounts are properly classified, described and disclosed in the financial statements, including
notes, in conformity with prescribed accounting principles. (Presentation and Disclosures)

Substantive Procedures:
a. Obtain an equity reconciliation schedule, including retained earnings, agree to general ledger accounts and
test movements from prior year end to current year end to ensure proper accounting for changes in equity,
(e.g., profit distributions, other equity reductions or increases) and determine completeness and compliance
with laws and regulations including taxation issues.
b. Review the minutes and other supporting documents for the authorization for, and the details of, the
transactions that affected the equity accounts and disclosures during the period, including equity restrictions.
c. Review board or authorized committee minutes and inquire of management for any stock option
agreements. Determine that options have been appropriately accounted for and disclosed. 3
d. Ensure that all dividend payments are appropriately approved and declared, and that tax regulations have
been followed.
e. Confirm the capital stock authorized and issued and, when applicable, the treasury shares held with the
transfer agent and registrar; confirm the partners’ or the proprietor’s account balances. If the client acts as
its own transfer agent, examine the stock certificate book or the detailed records to determine that numbers
of authorized shares and outstanding shares; inspect unused certificates on hand; test the issuance and
cancellation of shares during the period.

J. Revenues/Sales/Other Income

Objectives:
a. All sales included in the income statement represent the exchange of goods or services with customers for
cash or other consideration during the period. All other revenues included in the income statement for the
period have accrued to the entity at the balance sheet date. Revenues applicable to future periods have
been deferred.
b. All sales and other revenues that accrued to the entity during the period are included in the income
statement.
c. Sales and other revenues are stated in the income statement at the appropriate amounts.
d. Sales and other revenues are properly classified, described, and disclosed in the financial statements,
including notes, in conformity with prescribed accounting principles.

Substantive Procedures:
Revenue/Sales:
a. Perform an overall analytical review for all significant income statement accounts and investigate any
significant changes or lack of expected changes.
b. Perform revenue recognition procedures (if not already covered by tests of accounts receivables, trade and
intercompany), for example, analytical procedures using disaggregated data (e.g., by month, by product line,
by geographical area, by segment), inquiry of sales and marketing personnel for any unusual transactions,
or similar items, review of the terms of sales agreements - including sales incentives- and client's policies for
handling returns, to identify potential unusual transactions or events.
c. Compare sales to the current year’s budget and to prior periods’ actual sales by product line or geographic
area.
d. Compare sales volume to industry output in total or by geographic area (e.g., exports).
f. Compare gross profit ratios with prior periods by product line or geographic area (e.g., exports); compare
other operating relationships (e.g., both sales and cost of sales to units shipped) with prior periods.
g. Compare sales for several days prior to and after year end to the average daily sales for the year.
h. Compare the current period’s sales returns and allowance for sales returns as percentages of sales by
product line with prior periods’ percentages.
i. Compare the number and amounts of credits issued with those of prior periods.
j. Review the relationships between sales and cost of sales, such as gross profit analyses, comparisons of
standards and actual costs, and reconciliations between cost of sales and outgoing shipments.
k. Review the relationships between certain types of expenses and sales (e.g., freight-out to units billed and
sales bonuses to sales).
l. If inventory overstatement can result from unbilled inventory, observe physical inventory at or near year end.
Arrange for heavy coverage of counts. Investigate book-to-physical adjustments.
m. Compare the volume of cash sales with corresponding days or periods in prior years. Investigate any
unexpected changes or the absence of expected changes.
n. Review gross margins from cash sales and compare with prior periods.
Other Income:
a. Understand contents of miscellaneous income accounts. Investigate significant unusual transactions, if not
already covered by balance sheet account testings.
b. Perform an overall test of revenue (e.g., published tuition rates for a school times the number of students, by
classification).
c. Perform an overall test of interest and dividend income on investments and receivables (e.g., by multiplying
the average amounts invested or receivable by average interest rate or dividend yields).
Finance Income
a. Test interest and dividend income for significant investments or check reasonableness by comparing with
the related investment balances.
b. Determine that changes in the value of investments is properly recorded in the income statement.

K. Cost of Sales and Expenses

Objectives:
a. All cost of sales and expenses in the income statement are properly supported as charges against the entity
in the period and are appropriately matched with revenues. Cost of sales and expenses applicable to future
periods are carried forward as inventories, prepaid expenses, deferred charges, or property, plant, and
equipment.
b. All cost of sales related to the current period’s revenues and all expenses of the current period are included
in the income statement.
c. Cost of sales and expenses are stated in the income statement at the appropriate amounts.
d. Cost of sales and expenses are properly classified, described, and disclosed in the financial statements,
including notes, in conformity with prescribed accounting principles.

Substantive Procedures:
a. Obtain detail of Cost of Sales accounts in comparison with the prior period. Investigate and explain major
changes, large or unusual transactions, or the lack of expected changes and the appropriateness of these
changes, if not already covered through analytical review of sales accounts including gross-margin analysis.
b. Obtain detail of Selling and Distribution Expense accounts in comparison with the prior period. Investigate
and explain major changes, large or unusual transactions, or the lack of expected changes and the
appropriateness of these changes.
c. Understand contents of Administrative and Other expense accounts, e.g., in the areas of professional
services fees, repairs and maintenance, leases and rents, management compensation, political
contributions and donations, and miscellaneous. Compare with previous period. Investigate and explain
major changes, large or unusual transactions, or the lack of expected changes and the appropriateness of
these changes.
d. Determine that changes in the value of investments is properly recorded in the income statement.
e. Verify through a review of lawyers’ fees that all lawyers and in-house legal counsels, who handle significant
litigation or other claims, have been covered in the lawyers' confirmation work
f. Review the expense accounts in the general ledger for unusual items; investigate any such items observed.
g. Review components of significant prepaid and accrual accounts for reasonableness if not significant. If not
significant, compare prepaid expense and accrued liability balances with those of prior periods. Investigate
significant fluctuations (or the absence of expected fluctuations).
h. Review minutes, agreements, union contracts, budgets, and plans for evidence of new types of expenses
that may have been incurred. Investigate significant items noted.
i. Identify and examine items that may require separate disclosure in the financial statements, including the
notes thereto (e.g., extraordinary items, discontinued operations, and segment information).
j. Review journal vouchers on a test basis for unusual items; investigate any such items observed.
k. Review the voucher register for unusual items; investigate significant items noted.
l. Review allocation of expense to departments for reasonableness.
m. Trace the total of detailed listing of accounts payable to the total accounts payable in the general ledger.

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