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Copy of 1 Substantive Testing ---- Cost

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on 12 November 2013

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Transcript of Copy of 1 Substantive Testing ---- Cost

Agenda
Introduction

Substantive tests of purchase

Payroll and related expenses

Substantive tests of account balances

Conclusion & other consideration

Substantive tests of account balances
Substantive tests of purchase
Substantive Testing ---- Cost
BinLi Zhao
Jingjia Zhang
Nestor Mutshipayi
Yu He
Wencui Yang
Principal objectives in auditing cost and expenses
Substantive tests of Purchases
Payroll and related expenses
Example substantive test of transactions – purchases and other expenses
For costs and expenses, there are typically two important types of transactions that affect the balances:
Purchases
Payroll
It illustrates example procedures the auditor may use when substantively auditing costs and expenses.

Example tests always performed
Example analytical procedures
Example other general procedures
Example tests always performed
Example analytical procedures
Example other general procedures
Requisition
Receiving Goods
Purchasing
Invoices Processing
Disbursements
Recording
Purchases and Payables
Q & A
Thank you!
A significant number of payroll transactions are processed in a routine way during the period.

Controls over the payroll cycle tend to be good, as balances may be audited by tax authorities.

The risk of understatement is minimal, as employees insist on corrections when there has been an underpayment.
Whether the payroll function is performed within the organization or outsourced, the auditor is still responsible for auditing payroll-related balances and ensuring that sufficient and appropriate evidence is documented in the audit file to support the audit opinion.
The transaction flow of the payroll process affects a number of financial statement accounts, including salaries and wage expenses, payroll liabilities, and payroll-related accruals.
Payroll is generally one of the most significant expenses of the income statement; therefore, the auditor usually gives it some specific consideration.
The auditor tests the controls over the payroll cycle and then performs substantive analytical procedures over the related expense accounts.
Three characteristics
Substantive test of payroll transactions comprises:
Compare the payroll at the beginning and end of the period to identify changes in employees and in pay rates.
(Accuracy)
Compare hours paid with the record of hours worked – timecards.
(Accuracy)
Trace the payroll payments to the payroll clearing account.
(Occurrence, Accuracy)
Compare the names, net pay, and other data in the payroll ledger to the amount recorded in the pay run (which is then processed through the payroll clearing account).
(Existence, Accuracy)
Examine payments of accrued payroll liabilities and/or payroll disbursements subsequent to the end of the period.
(Completeness, Cut-off)
Substantive test of payroll balances includes:
Review the client’s comparison of budgeted and actual costs and expenses by month or quarter. Corroborate the reasons identified by the client for important variations. Investigate any unexpected variations or the absence of expected variations not identified by the client.
(Completeness, Accuracy)
Compare sales commission or bonuses with the related sales.
(Completeness, Accuracy)
Compare the current period’s relationship of employee benefits to payroll, hours worked, or number of employees with the same relationship in prior years. Investigate any unexpected variations or the absence of expected variations.
(Completeness, Accuracy)
Compare the current period’s superannuation contribution with that of prior years. Investigate any unexpected variations or the absence of expected variations.
(Completeness, Accuracy)
Compare the payroll tax expenses to the annual payroll multiplied by the statutory tax rate.
(Completeness, Accuracy)
Conclusion & Other Considerations
Substantive Testing on other cost accounts
Other significant accounts

Appropriate substantive procedures

Nature, timing and extent of testing
Other expenses manipulation
Opinion forming regarding the fair presentation
Unmodified
opinion
Adverse
opinion
Understated expense
Reclassifying expenses
Deferrals
Pension plan
Off-balance-sheet items
Synthetic leases
Overstated expenses
Non-recurring expenses
Big bath accounting
Key assertions are:

accuracy
completeness
cut-off
Accuracy
• Cost of sales is verified to:
– Opening inventory balance (last year closing balance)
– Purchases and payables
– Closing inventory balance part of inventory valuation

• Purchases typically subjected to additional testing through controls testing, and if necessary, vouching to supplier documentation
– Sophisticated analytical procedures can be used, based on client’s production processes
Completeness and Cut-off
Assertions combined- Auditor to verify that client has not understated expenses and cost of sales by deferring recording expenses to next period
- Examine invoices around year-end to verify dates
Full transcript