⋆
⋆
AUE3702: Substantive Proce-
dures & Finalising an Audit
OCT/NOV Examination 2026 Preparation Guide
Covers Past Paper Questions: Oct/Nov 2023 to Oct/Nov 2025
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
[ Auditing / College of Accounting Sciences [
_ Exam Revision Guide
AUE3702
Module Code:
Substantive Procedures & Finalising an Audit
Module Name:
Oct/Nov 2023, Oct/Nov 2024, Oct/Nov 2025
Papers Covered:
OCT/NOV 2026 Examination
Prepared For:
100 marks (3 hours)
Total Marks:
Use this guide to revise thoroughly. Focus on understanding, not memorisation.
Exam Revision Notes | AUE3702 | 2023–2026
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
PAPER 1: OCT/NOV 2025 EXAMINATION
AUE3702 — Substantive Procedures and Finalising an Audit 100 Marks 3 Hours
Page 2 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
QUESTION 1 (2025) [25 marks]
(a) [10 marks]
Question: Brightstone Ltd is a manufacturing company whose year-end is 31 December
2024. As the senior audit clerk, you are required to formulate substantive audit procedures
to obtain sufficient appropriate audit evidence regarding the inventory balance as pre-
sented in the statement of financial position. Formulate ten substantive audit procedures.
(10 marks)
Answer:
Key Concept
Substantive Procedures are audit procedures designed to detect material mis-
statements at the assertion level, including tests of details and substantive analytical
procedures (ISA 330).
Substantive audit procedures for the Inventory balance:
1. Attend the physical stock count at year-end (or close to year-end) and perform test
counts; compare results to management’s count sheets to verify the existence of inventory.
2. Recount a sample of inventory items and trace quantities counted back to inventory
records to confirm completeness and accuracy.
3. Obtain and inspect a copy of the inventory count sheets and agree the quantities to the
final inventory listing to verify valuation is based on actual quantities held.
4. Test the cut-off by inspecting the last goods received note (GRN) and last goods despatched
note (GDN) before year-end and the first of each after year-end to confirm inventory is
recorded in the correct period.
5. Inspect a sample of items for signs of obsolescence, damage, or slow movement; evalu-
ate whether the write-down to net realisable value (NRV) is appropriate (ISA 501 / IAS
2).
6. Recalculate the unit costs of a sample of inventory items by inspecting purchase in-
voices, production records, or standard cost sheets to verify accurate valuation.
Page 3 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
7. Compare the carrying value of inventory with subsequent selling prices (post year-end
sales invoices) to confirm the lower-of-cost-and-NRV rule is applied (IAS 2).
8. Obtain written confirmation from third-party warehouses (if any) of inventory held on
consignment or off-site, to verify existence (ISA 501.8).
9. Perform analytical procedures by comparing the current year’s inventory days (inven-
tory/COGS × 365) to the prior year and budget; investigate any significant variances.
10. Agree the total on the inventory listing to the general ledger and to the amount dis-
closed in the financial statements to verify the inventory balance is correctly stated (rights
and obligations, presentation and disclosure).
⋆ Exam Tip
For a 10-mark procedure question, each procedure should be one clear, complete sen-
tence that states what you do and why/what evidence it gives. Vague answers like
“check inventory” earn no marks. Always link to an assertion: existence, completeness,
valuation, cut-off, rights and obligations.
(b) [5 marks]
Question: Briefly explain the five attributes of reliable audit evidence as outlined in ISA
500. (5 marks)
Answer:
ISA 500 Audit Evidence requires auditors to evaluate the reliability of audit evidence. The
following factors influence reliability:
1. Source: Evidence obtained from independent external sources (e.g., bank confirmations,
debtors’ circularisation) is more reliable than evidence obtained from the client.
2. Nature: Documentary evidence (written) is more reliable than oral representations; origi-
nal documents are more reliable than photocopies.
3. Auditor-generated vs. client-generated: Evidence obtained directly by the auditor
(e.g., physical inspection, observation, recalculation) is more reliable than evidence sup-
plied by the client.
4. Internal controls: When a client has effective internal controls, internally generated
evidence (e.g., invoices, journals) is more reliable than from an entity with weak controls.
Page 4 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
5. Corroborating evidence: Evidence from multiple independent sources that all point to
the same conclusion is more persuasive than a single source.
(c) [10 marks]
Question: Sunshine Retailers Ltd has significant trade receivables at 31 December
2024. You have decided to use the positive circularisation method to obtain audit evi-
dence. Explain the positive circularisation process and discuss four limitations of using
this technique. (10 marks)
Answer:
The Positive Circularisation Process (ISA 505):
• The auditor selects a sample of debtor accounts from the accounts receivable ledger.
• With the client’s permission, the auditor sends confirmation requests directly to the se-
lected debtors, asking them to confirm the balance owed as at the audit date.
• The positive method requires the debtor to respond whether the balance is agreed or not;
no response is treated as a non-response requiring follow-up.
• Replies are sent directly to the auditor (not via the client) to maintain independence.
• Non-responses must be followed up with a second request; if there is still no response,
alternative procedures are performed (e.g., inspect subsequent cash receipts).
• Disputed or disagreed balances are investigated to determine whether a misstatement
exists.
Four Limitations:
1. Low response rate: Debtors may fail to respond, requiring additional alternative proce-
dures that are time-consuming and costly.
2. Debtor may not check carefully: Even if a response is received, the debtor may con-
firm the balance without actually verifying it against their own records, reducing the
reliability of the confirmation.
3. Timing differences: The debtor’s records may differ from the client’s records due to
goods in transit or cash in transit, making reconciliation difficult and increasing audit
effort.
Page 5 of 50
, AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
4. Fraud not detected: Fictitious debtors controlled by management may confirm fabri-
cated balances, meaning this procedure provides little assurance in cases of management
fraud.
. Watch Out
Do not confuse positive and negative circularisation: positive requires a response in
all cases; negative only requires a response if the debtor disagrees. Negative is less
reliable. Examiners often ask you to distinguish between the two.
Page 6 of 50
⋆
AUE3702: Substantive Proce-
dures & Finalising an Audit
OCT/NOV Examination 2026 Preparation Guide
Covers Past Paper Questions: Oct/Nov 2023 to Oct/Nov 2025
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
[ Auditing / College of Accounting Sciences [
_ Exam Revision Guide
AUE3702
Module Code:
Substantive Procedures & Finalising an Audit
Module Name:
Oct/Nov 2023, Oct/Nov 2024, Oct/Nov 2025
Papers Covered:
OCT/NOV 2026 Examination
Prepared For:
100 marks (3 hours)
Total Marks:
Use this guide to revise thoroughly. Focus on understanding, not memorisation.
Exam Revision Notes | AUE3702 | 2023–2026
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
PAPER 1: OCT/NOV 2025 EXAMINATION
AUE3702 — Substantive Procedures and Finalising an Audit 100 Marks 3 Hours
Page 2 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
QUESTION 1 (2025) [25 marks]
(a) [10 marks]
Question: Brightstone Ltd is a manufacturing company whose year-end is 31 December
2024. As the senior audit clerk, you are required to formulate substantive audit procedures
to obtain sufficient appropriate audit evidence regarding the inventory balance as pre-
sented in the statement of financial position. Formulate ten substantive audit procedures.
(10 marks)
Answer:
Key Concept
Substantive Procedures are audit procedures designed to detect material mis-
statements at the assertion level, including tests of details and substantive analytical
procedures (ISA 330).
Substantive audit procedures for the Inventory balance:
1. Attend the physical stock count at year-end (or close to year-end) and perform test
counts; compare results to management’s count sheets to verify the existence of inventory.
2. Recount a sample of inventory items and trace quantities counted back to inventory
records to confirm completeness and accuracy.
3. Obtain and inspect a copy of the inventory count sheets and agree the quantities to the
final inventory listing to verify valuation is based on actual quantities held.
4. Test the cut-off by inspecting the last goods received note (GRN) and last goods despatched
note (GDN) before year-end and the first of each after year-end to confirm inventory is
recorded in the correct period.
5. Inspect a sample of items for signs of obsolescence, damage, or slow movement; evalu-
ate whether the write-down to net realisable value (NRV) is appropriate (ISA 501 / IAS
2).
6. Recalculate the unit costs of a sample of inventory items by inspecting purchase in-
voices, production records, or standard cost sheets to verify accurate valuation.
Page 3 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
7. Compare the carrying value of inventory with subsequent selling prices (post year-end
sales invoices) to confirm the lower-of-cost-and-NRV rule is applied (IAS 2).
8. Obtain written confirmation from third-party warehouses (if any) of inventory held on
consignment or off-site, to verify existence (ISA 501.8).
9. Perform analytical procedures by comparing the current year’s inventory days (inven-
tory/COGS × 365) to the prior year and budget; investigate any significant variances.
10. Agree the total on the inventory listing to the general ledger and to the amount dis-
closed in the financial statements to verify the inventory balance is correctly stated (rights
and obligations, presentation and disclosure).
⋆ Exam Tip
For a 10-mark procedure question, each procedure should be one clear, complete sen-
tence that states what you do and why/what evidence it gives. Vague answers like
“check inventory” earn no marks. Always link to an assertion: existence, completeness,
valuation, cut-off, rights and obligations.
(b) [5 marks]
Question: Briefly explain the five attributes of reliable audit evidence as outlined in ISA
500. (5 marks)
Answer:
ISA 500 Audit Evidence requires auditors to evaluate the reliability of audit evidence. The
following factors influence reliability:
1. Source: Evidence obtained from independent external sources (e.g., bank confirmations,
debtors’ circularisation) is more reliable than evidence obtained from the client.
2. Nature: Documentary evidence (written) is more reliable than oral representations; origi-
nal documents are more reliable than photocopies.
3. Auditor-generated vs. client-generated: Evidence obtained directly by the auditor
(e.g., physical inspection, observation, recalculation) is more reliable than evidence sup-
plied by the client.
4. Internal controls: When a client has effective internal controls, internally generated
evidence (e.g., invoices, journals) is more reliable than from an entity with weak controls.
Page 4 of 50
,AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
5. Corroborating evidence: Evidence from multiple independent sources that all point to
the same conclusion is more persuasive than a single source.
(c) [10 marks]
Question: Sunshine Retailers Ltd has significant trade receivables at 31 December
2024. You have decided to use the positive circularisation method to obtain audit evi-
dence. Explain the positive circularisation process and discuss four limitations of using
this technique. (10 marks)
Answer:
The Positive Circularisation Process (ISA 505):
• The auditor selects a sample of debtor accounts from the accounts receivable ledger.
• With the client’s permission, the auditor sends confirmation requests directly to the se-
lected debtors, asking them to confirm the balance owed as at the audit date.
• The positive method requires the debtor to respond whether the balance is agreed or not;
no response is treated as a non-response requiring follow-up.
• Replies are sent directly to the auditor (not via the client) to maintain independence.
• Non-responses must be followed up with a second request; if there is still no response,
alternative procedures are performed (e.g., inspect subsequent cash receipts).
• Disputed or disagreed balances are investigated to determine whether a misstatement
exists.
Four Limitations:
1. Low response rate: Debtors may fail to respond, requiring additional alternative proce-
dures that are time-consuming and costly.
2. Debtor may not check carefully: Even if a response is received, the debtor may con-
firm the balance without actually verifying it against their own records, reducing the
reliability of the confirmation.
3. Timing differences: The debtor’s records may differ from the client’s records due to
goods in transit or cash in transit, making reconciliation difficult and increasing audit
effort.
Page 5 of 50
, AUE3702 | Exam Revision 2023–2025 Substantive Procedures & Finalising an Audit
4. Fraud not detected: Fictitious debtors controlled by management may confirm fabri-
cated balances, meaning this procedure provides little assurance in cases of management
fraud.
. Watch Out
Do not confuse positive and negative circularisation: positive requires a response in
all cases; negative only requires a response if the debtor disagrees. Negative is less
reliable. Examiners often ask you to distinguish between the two.
Page 6 of 50
