ACCT 3204 · Substantive Procedures

Led by Dorothy Rigour Simulacrum

1. Module 4 ○ Open

   Substantive Procedures

   Led by Dorothy Rigour Simulacrum

   The question

   Substantive procedures — the audit's last line of defence, directly testing account balances and transactions. The module covers the assertions framework (existence, rights and obligations, completeness, accuracy/valuation, cut-off, classification), tests of details (vouching, tracing, confirmation, recalculation, inspection), substantive analytical procedures with explicit expectations, the journal-entry testing required for fraud risk under ISA UK 2400, and the management-estimates testing under ISA UK 5400 (revised). The worked scenario designs the substantive procedures on Halberd plc's revenue with the channel-stuffing fraud risk.

   Outcome

   The student can map substantive procedures to assertions for the key financial-statement areas (revenue, receivables, payables, inventory, PPE, intangibles, provisions, equity); can design a substantive analytical procedure with explicit expectation and threshold; and can articulate the discipline of journal-entry testing for fraud risk. (Substantive procedures)

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   Practice scenarios

   Substantive Procedures on Halberd's Revenue

   You design the substantive procedures on Halberd plc's £375m revenue with the channel-stuffing fraud risk requiring journal-entry testing and rigorous cut-off work. The work tests whether you can map procedures to assertions, design a defensible substantive analytical procedure, and conduct ISA UK 2400 journal-entry testing on senior finance management without losing professional courtesy.

   Your goals

   • Design a substantive analytical procedure for revenue: develop an expectation based on units shipped × average selling price (a non-financial data point if available; the warehouse system records dispatches independently of finance). Expected revenue ~£375m × ±2% threshold = ±£7.5m; compare to actual; investigate any variance above threshold.
   • Design tests of details for revenue: vouching — sample 25 invoices to dispatch records and customer purchase orders; tracing — sample 25 dispatches in the last 10 days of the year to invoices, verify recorded in correct period.
   • Design specific cut-off testing: sample 40 invoices recorded in the last 5 working days of December and the first 5 working days of January; trace to dispatch documentation; verify the dispatch date is consistent with the recognition period (revenue is recognised on dispatch under the firm's IFRS 15 policy).
   • Design journal-entry testing for revenue: extract all manual journal entries to revenue accounts during the year (not auto-generated by the ERP); sample 15 of the largest and 5 of the year-end entries; obtain explanation and supporting documentation; particular attention to entries by senior finance management.
   • Design the procedure for the channel-stuffing risk: review post-year-end customer credit notes and returns; inquire of the credit-control function for unusual return patterns; review sales-rep commission scheme to understand year-end pressure.
   • Frame the substantive procedures memo for the audit file: 1,000 words documenting the planned work, the rationale, the expected evidence, the threshold for follow-up.

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