CASE STUDY FOR SUBSTANTIVE PROCEDURES FOR INVENTORY ANNUAL REPORT 2016 FOR ABBEY PLC AND EXTERNAL INFORMATION
Substantive procedures are processes or tests that create conclusive evidence regarding the audit assertions of wholeness, existence, disclosure, rights or estimation of assets and accounts on the financial statement, (Wiley.I, 2011).The two categories of substantive procedures are analytical and test of detail. Analytical methods provide less reliable evidence than the tests of detail. They can also be applied in several different audit stages, whereas tests of detail are only applied in the substantive testing stage.
The largest components of the inventory figure in Abbey’s financial statements are buildings, land, and roads and work in progress I.e houses in construction Swaminathan.V(2008).The financial statement assertions relevant to the company’s inventory are completeness, valuation, existence and ownership rights.
The completeness assertion means that all the transactions have been recorded in the financial statement. All the assets, liabilities, equity interests (capital and reserve) and other disclosures have been included in the financial statement. The valuation and allocation assertion ensures that items have been included in the financial statements at appropriate amounts according to the company’s policy and the relevant financial reporting framework. Furthermore, any allocations or valuation adjustments required like impairment have been made, and the financial and other data is disclosed fairly and at appropriate amounts. The existence assertion ascertains that assets, liabilities, and equity interests are physically present and belong to the organization on the reporting date. The rights and obligations assertion ensures that an organization has a right to its assets. This means the organization is free to use or dispose of the assets as it sees fit and it is obliged to pay off the liabilities that are shown in the statement of financial position(Ainapure.V,2009, p.447). In the case study of Abbey organization the auditor carried out the substantive procedures and wrote down the following:
The auditor assessed the cost of land to the figures brought forward from previous years and for the new sites to further verify the large payments from the company’s cashbook. This confirmed the assertion of completeness review the financial statements.
The auditor checked supporting contracts for land purchases and the legal documents at the land registry to the ownership of the land.The assertion of rights and obligations was confirmed through ascertainment of legal ownership documents.
The auditor verified road building and infrastructure costs to job costing by visiting a sample of construction sites to the actual existence of costs and whether they are valued appropriately and to check whether such projects actually exist. This confirmed the assertion of existence through the valuation of infrastructure costs to job costing details.
The auditor verified material costs and direct costs to supporting documents such as invoices and time sheets respectively to review large payments from the company’s cashbook have been recorded. The auditor assessed the material costs and direct labor to check for accuracy and ensure that all transactions have been recorded. This confirmed assertion of completeness in recording transactions in the financial statement.
The auditor traced material costs to invoices and direct labor costs to time sheets. This enabled the auditor to assess the progress of construction on the sites and confirm whether the costs had been fairly and approximately disclosed. This confirmed the assertion of valuation of the assets and appropriate disclosure of amounts through fair allocation of costs.
The auditor assessed the reasonability of labor costs to the large payments from the company’s cashbook for accuracy. That involved checking whether the labor costs had been fairly allocated and disclosed in the financial statements. This confirmed the assertion of valuation.
The auditor confirmed year-end valuations to valuer’s certification for work in progress by checking the documentation and paying a visit to a sample of construction sites to assess whether the development on the site had been fairly and accurately disclosed in the financial statements. This is for confirmation of valuation assertion.
The auditor assessed and recalculated inventory for the sites by the number of houses sold by visiting sample sites and checking inventory sheets to ensure that the inventory recorded on the sheets actually exists. This confirmed the assertion of the existence of the inventory assets in the financial statements.
The auditor confirmed the year-end valuations to valuer’s certification for work in progress to ensure that costs and events have been recorded in the correct accounting period. This enabled cut off since events and transactions were confirmed to have been recorded in the accurate period in the financial statement. This enabled the assertion of valuation.
The auditor also assessed the cost of land to figures brought forward from previous years and for new sites by verifying the large payments from the company’s cashbook and ensuring the accurate sums have been disclosed in the financial statements. This was achieved through verification of payment vouchers to ensure all transactions had been recorded. This confirmed the assertion of valuation.
Gay.G & Simnett.R ” Auditing and Assurance services in Australia “McGraw -Hill,5th edition, 2012.
Karla.J, Gramling.A & Ritterberg.L” Business & Economics, Auditing Standards issued by the IAASB”, 2015.
Roebuck. P & Bennie. N” Case Studies in Auditing & Assurance ” Lexis Nexis, 5th edition, 2010.