4.10 Substantive Procedures for Non-Current Assets, Payables & Accruals
Key Takeaways
- Non-current assets are tested for existence by physical inspection, for rights by inspecting title deeds and registration documents, and for valuation by recalculating depreciation and considering impairment.
- Additions are vouched to invoices and board authorisation, while the completeness of disposals is tested by reviewing the fixed asset register against physical assets and scrap or sale proceeds.
- Trade payables carry a risk of understatement, so the dominant test is the search for unrecorded liabilities rather than confirmation of recorded balances.
- Supplier statement reconciliations are usually stronger evidence than circularising payables, because the statement is external evidence the auditor can obtain for every major supplier.
- Accruals and provisions are tested by recalculation against the underlying obligation and by reviewing after-date payments, board minutes and legal correspondence.
Substantive Procedures for Non-Current Assets, Payables & Accruals
The direction of risk differs between assets and liabilities, and that difference drives everything else. Management under pressure tends to overstate assets and understate liabilities. Testing must be designed against the risk that actually exists.
1. Non-current assets: the risk is overstatement
| Assertion | Substantive procedures |
|---|---|
| Existence | Select a sample from the fixed asset register and physically inspect the assets. Confirm serial numbers and location. |
| Completeness | Select assets observed physically and trace them to the register. Review repairs and maintenance expense for items that should have been capitalised. |
| Rights and obligations | Inspect title deeds and mutation records for land and buildings; inspect registration documents for vehicles; inspect purchase invoices for plant. Check whether assets are charged as security by inspecting loan agreements and board minutes. |
| Accuracy — additions | Vouch additions to supplier invoices; confirm the amount capitalised includes only directly attributable costs; agree authorisation to board or capital expenditure committee minutes. |
| Accuracy — disposals | Vouch disposals to sales documentation and cash received; recalculate the profit or loss on disposal; confirm the asset and its accumulated depreciation have been removed. |
| Valuation — depreciation | Recalculate the charge for a sample; assess whether the rate and method remain appropriate given the condition and expected use of the assets; check the treatment in the year of acquisition and disposal is consistent with policy. |
| Valuation — impairment | Consider indicators: idle assets, damage, obsolescence, plans to dispose, regulatory or climate-driven change. Where indicators exist, examine management's calculation. |
| Presentation | Agree the movement schedule — opening balance, additions, disposals, depreciation, closing balance — to the ledger and the disclosure note. |
Intangible non-current assets
Candidates are expected to distinguish tangible from intangible assets and to know that development costs meeting the recognition criteria are an intangible asset, whereas research expenditure is expensed. Land, buildings and equipment are tangible. Testing focuses on whether the recognition criteria were met, on amortisation, and on impairment.
Long-term loans and borrowings
For borrowings, the strongest evidence is direct confirmation from the lender together with inspection of the loan agreement. Board minutes are the key internal source for authorisation of new borrowings and for identifying facilities the entity has taken out but not yet recorded. Recalculate interest accrued and check the split between current and non-current portions.
2. Trade payables: the risk is understatement
Because the risk runs the other way, the emphasis moves from confirming what is recorded to finding what is missing.
The search for unrecorded liabilities
This is the central payables procedure. The steps:
- Review payments made after the year end from the cash book and bank statements; for each significant payment, examine the supporting invoice and determine the period in which the goods or services were received.
- Review goods received notes raised before the year end and confirm a corresponding liability was recorded.
- Inspect unmatched or unprocessed invoices held in the accounts department at the year end.
- Review the prior-year list of accruals for recurring items absent this year.
- Inquire of the entity's principal suppliers and review correspondence for disputed or unpaid amounts.
Supplier statement reconciliations
Reconciling the supplier's own statement to the balance in the purchase ledger is generally stronger and more efficient than circularising payables, because:
- the supplier statement is externally generated evidence already in the client's possession;
- it can be obtained for all major suppliers rather than a sample; and
- reconciling differences directly reveals unrecorded invoices and goods in transit.
Where a major supplier does not issue statements, or where the balance is unusually low relative to the volume of trade during the year — a classic indicator of unrecorded purchases — direct confirmation is appropriate. Note the counter-intuitive selection rule: for payables, an auditor may deliberately select low or nil balances with high turnover rather than large balances, precisely because understatement is the risk.
| Assertion | Procedures for trade payables |
|---|---|
| Completeness | Search for unrecorded liabilities; supplier statement reconciliations; review after-date payments |
| Existence and obligation | Agree a sample of balances to supplier statements and invoices |
| Accuracy | Recalculate the reconciliation of the purchase ledger to the control account; test the arithmetic of the listing |
| Cut-off | Match the last GRNs before the year end to recorded invoices, and the first GRNs after the year end to invoices excluded |
| Presentation | Confirm debit balances within payables are reclassified; check related party and long-term amounts are disclosed |
3. Accruals and provisions
Accruals are estimates of amounts owed for goods or services received but not yet invoiced. The procedures:
- Recalculate the accrual from the underlying obligation: for an accrued electricity charge, from the last meter reading and tariff; for accrued interest, from the loan balance and rate; for accrued bonus, from the scheme terms and eligible headcount.
- Compare with the prior year and investigate significant movements or omissions, adjusting for known changes in activity.
- Review after-date payments and invoices to establish the correct amount and period.
- Inspect board minutes for decisions creating obligations — bonuses declared, settlements agreed, restructuring approved.
- Review legal correspondence and, where appropriate, obtain confirmation from the entity's legal advisers on outstanding claims.
- Obtain written representations on the completeness of liabilities and on the existence of any unrecorded claims — supporting, never sufficient, evidence.
Bangladesh-specific accruals
Scenarios frequently involve statutory obligations that must be accrued: provident fund and gratuity, the Workers' Profit Participation Fund contribution, withholding tax deducted at source and payable to the National Board of Revenue, VAT payable, and festival bonuses. Each is recalculated against the relevant statutory formula and agreed to the after-date payment.
4. Contrast to carry into the exam
| Non-current assets | Trade payables | |
|---|---|---|
| Dominant risk | Overstatement | Understatement |
| Sample selection | Largest additions; high-value assets | Low or nil balances with high annual turnover |
| Key external evidence | Title deeds, registration documents, invoices | Supplier statements |
| Signature procedure | Physical inspection and depreciation recalculation | Search for unrecorded liabilities |
| Direction of testing | From register to asset for existence | From after-date payment back to the period of receipt |
When testing trade payables, an auditor deliberately selects supplier accounts with nil or unusually low year-end balances despite high purchase volumes during the year. Why?
Which source provides the most persuasive evidence that a company's ownership of its land and buildings is properly recorded?
An auditor reviews payments made from the bank account in the two months after the year end, examines the supporting invoices and determines when the goods or services were received. What procedure is this and which assertion does it primarily address?