ACCA Applied Skills · Audit and Assurance

The audit of specific items: formula sheet

Full chapter guide

Key formulas

IAS 2 valuation rule: Inventory = lower of (cost, NRV); Apply item by item or by group of similar items, not to the total in one go.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated costs to sell; Use the best evidence of selling price, such as post year-end sales.
Direction of test counts (during the count): Floor to sheet = completeness; sheet to floor = existence; Select items on the floor and trace them to the count sheets to test completeness. Select items on the count sheets and trace them to the floor to test existence.
Cut-off check (sales): Goods despatched up to the year end = sales of the year and not inventory; goods despatched after the year end = inventory and not sales of the year; Goods despatched on or before the year end must be included in that year's sales (even if not yet invoiced) and excluded from inventory. Goods despatched after the year end must be excluded from that year's sales and included in inventory. Compare the last goods despatched note (GDN) number before the year end, recorded at the count, with the sales records to confirm this.
Cut-off check (purchases): Last goods received note (GRN) number before the year end must agree with the purchases and payables recorded in the year; Goods received after the year end must be excluded from inventory, purchases and payables for the year. The same cut-off applies to payables and inventory.
Net receivables: Net receivables = Gross receivables − Allowance for irrecoverable debts (expected credit losses); Test both the gross balance (existence) and the allowance (valuation).
Positive confirmation: Customer replies in every case, agreeing or stating the difference; More reliable evidence. Use for high-value or high-risk balances, or when expected error is high.
Negative confirmation: Customer replies only if they disagree; Less reliable because no reply is not proof of agreement. Use only for low risk, many small balances.
Non-reply rule: No reply to positive request → perform alternative procedures; Do not treat a non-reply as evidence. Use after-date cash and supporting documents.
Control of confirmations: Auditor selects, sends, and receives replies; If management controls the process, reliability falls sharply.
Payables days: Payables days = Trade payables ÷ Cost of sales (or credit purchases) × 365; Use for analytical review. A sharp fall in payables days may signal unrecorded liabilities or early payment; compare to prior year and industry.
Direction of testing for completeness: Completeness: independent source → ledger; For existence, test the other way: ledger → supporting documents.
Supplier statement reconciliation: Ledger balance ± reconciling items = Supplier statement balance; Typical reconciling items are goods in transit, invoices not yet recorded, cash in transit, disputed items and credit notes.
Reconciliation check: Balance per bank statement + outstanding lodgements − unpresented cheques = adjusted balance = cash book balance (after adjusting for bank items not yet recorded); Use this to check the arithmetic of a client's reconciliation. Only reconciling items that are genuine should appear.
Assertions for bank and cash: Existence, rights and obligations, completeness, valuation, presentation; Link every procedure you write to one of these assertions.
Cash count rule: Cash counted + vouchers/IOUs = imprest amount (for an imprest system); Any difference needs explanation and follow-up.
Carrying amount: Carrying amount = Cost (or revalued amount) − Accumulated depreciation − Accumulated impairment; Use this to recompute balances and check the register agrees to the financial statements.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Use for analytical recalculation. Check the policy is applied consistently and the useful life is reasonable.
Profit or loss on disposal: Profit/(loss) = Disposal proceeds − Carrying amount at date of disposal; Recalculate and check the entry in the statement of profit or loss.
Impairment rule (IAS 36): Impairment loss = Carrying amount − Recoverable amount, where recoverable amount is the higher of fair value less costs of disposal and value in use; An impairment loss arises only when carrying amount exceeds recoverable amount.
Capital vs revenue test: Capitalise if it is expected to give future economic benefits and cost is reliably measured; otherwise expense; Use when testing additions for repairs wrongly capitalised.
Analytical expectation for payroll: Expected payroll cost = prior year cost × (1 + pay rise %) ± change in headcount or hours effect; Use it to build an expectation and compare with the recorded figure. Investigate differences larger than your threshold.
Average cost per employee: Average cost per employee = total payroll cost ÷ average number of employees; Compare across years and between departments to spot ghost employees or unauthorised pay.
Gross to net pay: Net pay = gross pay − income tax − employee social security or pension deductions − other deductions; Used when recalculating pay. Rates depend on local law, so use those given in the question.
Total employment cost: Total cost = gross pay + employer's taxes and contributions + benefits; The expense includes employer contributions. Employee deductions are not an extra cost to the employer.
Ghost employee test direction: Payroll → HR file and personnel evidence (occurrence); HR records → payroll (completeness); Direction of testing matters. Starting from payroll tests for ghosts; starting from HR tests for omissions.
Provision recognition (IAS 37): Present obligation from past event + outflow probable + reliable estimate = recognise; All three conditions must be met. If any fails, consider contingent liability disclosure.
Contingent liability treatment: Possible outflow or failed recognition test: disclose unless remote; Do not recognise it in the statement of financial position.
Contingent asset treatment: Inflow probable: disclose. Inflow virtually certain: recognise as an asset; Auditors are cautious here because overstatement boosts profit.
Estimate measurement: Provision = best estimate of expenditure to settle the obligation; Discount if the time value of money is material.
ISA 540 responses: Events up to report date / test management's method / develop own estimate or range; Choose the response based on the assessed risk, and use one or more.

Quick revision

Match every procedure to a risk and an assertion. A procedure with no link earns little.
Existence: test from the records to the physical item. Completeness: test from the physical item or outside source to the records.
Inventory count attendance: observe the count, test count sheets both ways, check cut-off and note damaged or slow-moving items.
Inventory valuation: check cost to invoices and compare with net realisable value using post year-end sales.
Receivables: external confirmation gives strong evidence on existence, but non-replies need alternative procedures such as checking later cash receipts.
Valuation of receivables: review ageing, post year-end receipts and the basis of the allowance.
Payables: the main risk is understatement, so test supplier statements, unmatched goods received and post year-end payments.
Bank: obtain a confirmation directly from the bank and review the bank reconciliation for old or unusual items.
Non-current assets: test additions to invoices, disposals to proceeds, and depreciation by recalculation and a reasonableness check.
Payroll: test for ghost employees, unauthorised changes and wrong deductions, and use analytical procedures on monthly totals.
Provisions: check the IAS 37 conditions, review post year-end events and legal letters, and obtain written representations.
Be ready to say what you would do if evidence is not obtained, such as extending testing or considering the effect on the audit opinion.

Common mistakes

Saying the auditor performs or controls the count. Fix: State that management is responsible for the count and that the auditor observes and performs test counts.
Testing only from count sheet to floor. Fix: Do both directions. Sheet to floor supports existence. Floor to sheet supports completeness.
Saying a negative confirmation with no reply proves the balance is correct. Fix: State that silence may mean the customer ignored the letter. Negative confirmations give weaker evidence and suit only low-risk populations.
Letting the client send the requests or receive the replies. Fix: The auditor must control selection, despatch and receipt. Otherwise the client could interfere or alter replies.
Selecting items from the payables ledger to test completeness. Fix: Start from independent sources such as statements, GRNs and post year-end payments, then trace to the ledger.
Writing 'send confirmations to all suppliers'. Fix: Say you would reconcile supplier statements and use confirmations only where statements are unavailable or the risk is high.
Saying the auditor should get the bank letter from the client. Fix: State that the auditor sends the request and the bank replies directly to the auditor, with the client's consent.
Listing procedures without saying what you are looking for. Fix: For each step say what you compare and what error it could reveal, for example cheques unpresented for months or lodgements that never appear on the statement.
Writing generic procedures such as 'check the assets' with no detail. Fix: State the document and the comparison, for example 'agree the addition to the supplier invoice and board approval'.
Testing only existence and ignoring completeness. Fix: Also select assets on the factory floor and trace them to the register to find unrecorded or unrecorded-disposal items.

Exam tips

Structure count answers as before, during and after. It keeps you organised and shows the marker the breadth.
Use action verbs and name the document, for example GRN, GDN, count sheet or supplier invoice.
In OT cases, read carefully for the direction of the test: floor to sheet tests completeness, sheet to floor tests existence.
For valuation, name both cost testing and NRV testing, and mention post year-end sales as evidence.
If a question mentions inventory held at third-party locations or a count at a different date, think confirmation from the third party and roll-forward or roll-back procedures.
Always tie the procedure to an assertion. Existence is confirmed by circularisation; valuation is tested through ageing, cash after date and credit status.
In positive versus negative questions, justify the choice from the scenario: risk, size, number of balances and expected error rate.
For non-replies, name alternative procedures and put after-date cash receipts first. Say what it proves.