To obtain appropriate audit evidence for Steel Limited's financial year ended 30 September 2018, the following substantive audit procedures will be performed regarding the completeness of inventory, tax loss, and sundry expense items:
1. Completeness of Inventory
a. Analytical Procedures:
- Compare the inventory balances with prior periods and assess trends. Investigate any significant fluctuations that may indicate underreporting or overreporting.
- Analyze inventory turnover ratios (cost of goods sold/designated average inventory) to identify any unusual patterns and assess whether there are potential slow-moving or obsolete stock items.
b. Inventory Cut-off Procedures:
- Review transactions occurring immediately before and after the inventory count date (31 July 2018) to ensure that sales and inventory purchases are recorded in the correct accounting period.
c. Physical Inventory Observation (if applicable):
- If possible, attend the next scheduled inventory count or conduct roll-forward procedures from the July count to September, reconciling any discrepancies noted.
- Examine subsequent sales invoices or shipping documents to confirm that goods on hand at year-end were recorded as inventory.
d. Review of Inventory Valuation:
- Evaluate the valuation method applied to inventory and ensure that it is consistently applied, in line with accounting standards (e.g., FIFO, LIFO, or weighted average).
- Review the calculation of provisions for slow-moving and obsolete inventory, ensuring those items have been properly considered and included in expenses.
2. Tax Loss
a. Review Tax Returns:
- Obtain and examine copies of the tax returns filed by Steel Limited for the year, and ensure that the assessed tax losses are accurately reflected in the financial statements.
b. Supporting Documentation for Assessed Loss:
- Review supporting documentation for the assessed tax losses including working papers that detail the calculations made in determining the carried forward losses and assess the provisions regarding tax liability.
c. Discussions with Management:
- Hold discussions with the finance and tax departments to assess understanding of tax positions and future forecasts that may affect the recoverability of deferred tax assets.
d. Compliance with Tax Laws:
- Assess compliance with relevant tax laws and potential tax contingencies or disputes that may impact the recognized tax losses.
3. Sundry Expense Items
a. Sample Testing:
- Perform substantive tests by selecting a sample of transactions for each category of sundry expenses (water and lights, property taxes, auditor's fees, and legal expenses). Verify that these expenses are supported by invoices, contracts, or other relevant documentation.
b. System Documentation Review:
- Review the company’s accounts payable ledgers and other relevant financial documentation to identify any additional expenses that might not have been recorded in the financial year-end.
c. Comparison with Budgets:
- Compare the actual amounts reported for sundry expenses with the budgeted amounts and prior year figures to identify any discrepancies and understand reasons for variances.
d. Cut-off Testing for Expenses:
- Review payment records for transactions made after year-end to ensure that expenses incurred before year-end have been included in the financial statements.
e. Inquiry with Management:
- Conduct inquiries with management regarding the nature of sundry expenses, particularly any significant or unusual transactions, to assess their completeness and relevance.
Summary
The above procedures will be executed to ensure that inventory is complete and accurately reported, tax losses are properly stated and supported, and that sundry expense items are valid, complete, and correctly recognized in the financial statements. Each procedure aims to gather sufficient and appropriate audit evidence to conclude on the reliability of the financial statements and the disclosures therein.
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