Most of a company’s figures come from a few repeating cycles: selling and collecting, buying and paying, and paying staff. Around them sit cash, inventory and non-current assets. For each, the auditor asks four questions. What must the controls achieve? Which controls should exist? How can the auditor test that they work? What substantive tests give direct evidence on the balances?
This topic gives the checklist for each area. Examiners ask you to suggest controls for a system, to describe tests of controls, and to list substantive tests. The three always overlap, so keep them apart by remembering that a test of control looks at whether a control operated, and a substantive test looks at the figure itself.
In 30 seconds
The main cycles are revenue and receivables, purchases and payables, and payroll. Cash and bank, inventory and non-current assets are tested in the same way. For each area there are control objectives, key controls, tests of controls and substantive tests. Key controls include segregation of duties, authorisation, pre-numbered documents, matching of documents, reconciliations and custody of assets.
Tests of controls include sequence checks, evidence of authorisation, checking arithmetic and reviewing reconciliations. Substantive tests include checking books of prime entry back to source documents, cut-off tests, confirmation, observation of counts and analytical procedures. Tests for receivables aim at overstatement, tests for payables at understatement, and in payroll the main risk is payment to employees who do not exist.
How to use the checklists
The tables below give, for each area:
- the control objectives;
- the key internal controls;
- tests of controls that might be applied; and
- substantive tests, usually on a sample basis.
If a question asks only for controls, use the first two columns. If it asks how the auditor would test them, use the third. If it asks for procedures on the balance, use the fourth.
Revenue and receivables
Control objectives. Customer orders, goods returned and allowances are properly authorised and recorded. Revenue is recorded for all goods or services delivered. All documents and records are accurate. A policy exists for collecting receivables.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Segregation of duties between order acceptance, despatch and invoicing Orders checked against the customer’s credit limit and authorised Pre-numbered sales orders and despatch notes, matched with orders and invoices Invoices checked and authorised before sending, and recorded promptly Batching of invoices and batch totals Returns and allowances checked and authorised, credit notes recorded accurately Regular reconciliation of the receivables control account with the ledger Monthly statements to customers Debt collection policy followed Authorisation of bad debt write-offs | Sequence checks on all documents Evidence of authorisation at each stage Evidence that arithmetic and calculations were checked Documents matched where appropriate Control account reconciliations performed and reviewed, with adjustments made | Check arithmetic in books of prime entry Check entries in books of prime entry back to source documents Check postings to ledgers Check invoices and credit notes for arithmetic and pricing Check inventory records updated for despatches Review control account reconciliations Test sales cut-off Analytical procedures: trend analysis of sales and gross profit margin Receivables: confirmations, ageing, and post year-end receipts (see the topic on audit evidence) |
Purchases and payables
Control objectives. Goods and services are bought with proper authority, under proper procedures, for the business, from authorised suppliers. Before being recorded, invoices are authorised, checked and agreed to supporting documents. Recording is complete and accurate.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Segregation of duties between ordering, receiving goods, recording invoices and payment Pre-numbered documents, including purchase orders Authorisation procedures for orders and payments Goods inspected for description, quantity and quality, and goods received notes signed A policy for re-ordering regular inventory Invoices checked for arithmetic and pricing and agreed to orders and goods received notes Procedures for analysing invoices to the correct expense or asset accounts Control accounts and batch totals Accurate records of purchase returns, matched with supplier credit notes | Sequence checks on purchase orders and goods received notes Evidence of authorisation at each stage Evidence that arithmetic was checked Documents matched Control account reconciliations performed and reviewed | Check arithmetic in books of prime entry, and entries back to source documents Check postings to ledgers Check invoices and credit notes for arithmetic and pricing Check inventory records updated for goods received Review control account reconciliations Test purchases cut-off Analytical procedures Review other audit areas and prior year papers for unrecorded liabilities Payables: test for completeness by supplier confirmation and by tracing goods received notes forward |
The tests of controls here are essentially the same as for the sales cycle.
Payroll
Control objectives. Gross pay is calculated at the correct rates. Employees are paid only for work done. Gross pay, net pay and deductions are recorded completely and accurately in the payroll, cash records and ledger accounts. The right employees are paid the right amounts. The right deductions are paid to the tax authorities and other bodies.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Segregation of duties: establishing pay rates, calculating pay and recording pay Up-to-date personnel records Authorisation of joiners and leavers, pay rates, overtime and voluntary deductions Regular management review of the overall cost of payroll Standard procedures and timetables for processing Approval of the payroll once prepared A control account for payroll Review of payroll for unusual amounts and tax liabilities Cash pay: safe custody of cash, verification of identity, signature on receipt, custody and investigation of unclaimed pay packets Bank pay: authorisation of cheques or transfers, a separate bank account for payroll | Check that payroll information is reconciled between periods and changes are explained Check entries in the wages control account Check accuracy and completeness of ledger entries Check that payroll records agree with cash and bank records Review payroll for unusual amounts If paid in cash: check unclaimed wages are kept safe and reasons explained, attend and observe distribution, compare names on payroll to pay packets, examine signed receipts, check no employee receives more than one packet | Check arithmetic in payroll calculations and records, and postings to ledger Check that correct pay rates are used Check that correct, authorised rates are used for statutory deductions and for voluntary deductions Check that overtime, bonuses and similar payments are properly authorised Check that joiners are properly authorised Check that employees have not been paid for periods before they join or after they leave Check pay for hours worked or output against authorised documents Check payments of deductions to the appropriate authorities Check entries in the wages control account Test the existence of a sample of employees on the payroll Observe cash distribution Analytical procedures: trend analysis, average pay per employee |
Bank and cash
Control objectives. Money due to the company is received, promptly and accurately recorded. Payments are properly authorised and promptly and accurately recorded. There is enough physical custody control over cheques and cash.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Segregation of duties Listing and prompt banking of all receipts Authorisation of all payments Regular reconciliations, performed and reviewed Physical custody controls over cheques and cash Cash: procedures for opening mail and handling cash | Review bank reconciliations for unusual items and evidence of management review Review the cash book for unusual entries Check additions in the cash book and entries in ledgers Review large or round-sum payments for authorisation Cash: observe the procedures for opening mail and handling cash; check amounts recorded against remittance advices; check receipt books or till rolls against paying-in slips, the cash book and bank statements; check whether cash is banked daily; check payments out of takings and petty cash payments for authorisation and support | Send bank confirmation letters Check or prepare the bank reconciliation Assess the audit significance of unusual entries and other information in the bank’s reply Review large or round-sum amounts just before and just after the period end Analytical procedures Cash: attend or carry out cash counts; check postings to ledger accounts |
Inventory
Many controls for purchases and sales, such as authorisation and segregation of duties, also apply to inventory. The table covers the extra points.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Regular inventory counts, with reconciliations of physical counts to records and differences explained Reviews of inventory for items where net realisable value may be below cost Quantities maintained at a level suited to the business, with levels reviewed for adequacy Accurate, up-to-date records Cut-off procedures Appropriate physical custody | Review and observe inventory counting procedures Check that any necessary changes to inventory records are made Confirm that cut-off procedures are operating Check that reviews are performed Check that physical custody procedures are applied in practice | Attend the count: observe procedures, record test counts, record cut-off information Check inventory valuation, at the lower of cost and net realisable value Review inventory for items where net realisable value may be below cost Check inventory cut-off Perform analytical procedures Confirm the existence of inventory held at outside locations Check the treatment of inventory on the client’s premises that is owned by a third party |
Non-current assets
Controls and tests for purchases apply here too. The table gives additional points.
| Key controls | Tests of controls | Substantive tests |
|---|---|---|
| Authorised capital expenditure budgets and project evaluation A non-current asset register, regularly checked and reconciled to the main ledger accounts Impairment reviews as necessary Adequate controls for safe custody Depreciation, revaluations and disposals dealt with correctly | Check for proper authorisation of additions and disposals Check reconciliations of ledger balances with the register | Review the movement in non-current assets for the period Check additions, and the calculation of depreciation and of gains or losses on disposals Physically verify a sample of additions Trace proceeds of disposals to cash records Review for unrecorded disposals Review evidence on any revaluations during the period |
The rules in more depth
Why the same tests appear in more than one cycle
Sales and purchases are mirror images. Both use orders, delivery documents, invoices and control accounts, so sequence checks, matching, authorisation and reconciliation appear in both. Learn the pattern once and adapt the nouns.
Why a test of control is not a substantive test
A test of control looks at the process. Is the order signed, was the credit limit checked? A substantive test looks at the result. Is the balance right, does the invoice agree to the despatch note? If a question asks how to confirm that a control works, give the first. If it asks how to confirm a balance, give the second.
Why direction matters in the cycles
Receivables, a debit, are tested for overstatement, so the auditor starts from the ledger and goes back to evidence. Payables, a credit, are tested for understatement, so the auditor starts from documents such as goods received notes and goes forward. This links to directional testing in the audit evidence topic.
Why payroll is a fraud area
Pay is a large cost, paid regularly, often in cash, and made to a list the auditor cannot check from outside. Fictitious employees, payments after leaving and unauthorised pay rises are the main frauds. That is why the controls stress authorisation of joiners and leavers, separation of the personnel and payroll functions, and why the tests include the existence of employees and observation of pay-out.
Why cut-off matters
If sales are recorded in the wrong period, revenue and receivables are wrong in both years. Cut-off tests compare the last despatches and receipts before the year end and the first after it with the period in which they were recorded. The same applies to purchases and inventory.
Worked example: purchases and inventory at a distributor
Scenario. Rivers Distribution Ltd buys goods from 200 suppliers and holds them in two warehouses. The purchasing clerk orders goods, receives them, enters supplier invoices and prepares payments. Inventory counts are done once a year by warehouse staff without supervision. Required: identify control weaknesses, suggest controls and describe the tests the auditor would apply to purchases and to inventory.
- Weakness 1: no segregation. One clerk orders, receives, records and pays, so fictitious purchases and unrecorded liabilities are possible. Control: separate ordering, receiving, recording and paying, with pre-numbered purchase orders and signed goods received notes.
- Weakness 2: no matching. Invoices are not checked to orders and goods received notes. Control: match all three before an invoice is recorded and authorised, and check arithmetic and pricing.
- Weakness 3: unsupervised count. Control: regular counts with management supervision, reconciliation of counts to records and explanation of differences.
- Tests of controls. Sequence checks on orders and goods received notes. Evidence of authorisation and matching on a sample of invoices. Observation of count procedures.
- Substantive tests. Trace a sample of goods received notes near the year end through invoices to the ledger for completeness of payables. Test purchases cut-off. Write to major suppliers. Attend the count, make test counts both ways, record cut-off information and check the valuation to the lower of cost and net realisable value. Use analytical procedures on purchases and margins.
Conclusion. Control risk is high because one person does everything. The auditor should plan more substantive work on completeness of payables and existence of inventory.
How to score full marks
- Use the four columns in your head: objective, control, test of control, substantive test, and answer in the one that the question asks for.
- For a weakness, state the weakness, the risk and the control, in that order.
- Give controls from the list: segregation, authorisation, pre-numbering, matching, reconciliations, custody.
- Tests of controls are about operation: sequence, signatures, matching, review of reconciliations.
- Substantive tests start from the balance, and the direction depends on the risk, overstatement for debits and understatement for credits.
- For payroll, mention existence of employees and observation of the pay-out.
- Time. Spend time in proportion to marks.
Common mistakes in the exam
- Giving substantive tests when asked for tests of controls.
- Listing controls with no link to the system in the scenario.
- Starting a payables completeness test from the payables list.
- Forgetting cut-off.
- Forgetting segregation of duties in the very first answer.
- Leaving out the check for unrecorded disposals of non-current assets.
- In payroll, forgetting to test that employees exist.
Quick revision
- Four columns: control objectives, key controls, tests of controls, substantive tests.
- Revenue: segregation, credit limits, pre-numbering, matching, reconciliation, statements, authorised write-offs. Test cut-off and margins.
- Purchases: separate order, receipt, record, pay; match order, goods received note and invoice. Test for unrecorded liabilities.
- Payroll: authorised joiners and leavers, review of cost, custody of cash. Test existence of employees, observe pay-out.
- Cash and bank: reconciliations, prompt banking, confirmations, counts.
- Inventory: counts, net realisable value (NRV) reviews, cut-off. Non-current assets: register, authorisation, depreciation, disposals.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. A sequence check on pre-numbered sales documents is:
- A test of control
- A substantive test of the balance
- An analytical procedure
- A cut-off test
Show the answer
A. It checks whether the control operates.
Question 2. A key control over receivables is:
- Regular reconciliation of the control account with the ledger
- Counting inventory
- Confirming bank balances
- Checking payroll
Show the answer
A. Monthly statements to customers is another.
Question 3. The best starting point to test purchases for completeness is:
- The payables list
- A sample of goods received notes
- The sales ledger
- The bank statement of the previous year
Show the answer
B. It finds items that were received but not recorded.
Question 4. Which control prevents fictitious employees in payroll?
- Authorisation of joiners by human resources (HR), separate from payroll
- Counting inventory
- Sending customer statements
- Reconciling the bank
Show the answer
A. The existence of employees is also tested substantively.
Question 5. Observing the distribution of wages is:
- A test of control and a substantive test in payroll
- An analytical procedure
- A sampling method
- A recalculation
Show the answer
A. It shows the control operating and that employees exist.
Question 6. A bank confirmation letter is a:
- Substantive test
- Test of control only
- Sampling method
- Reconciliation
Show the answer
A. It gives independent evidence of balances and loans.
Question 7. A cut-off test checks that:
- Transactions are recorded in the correct period
- Staff are honest
- Cash is banked daily
- Prices are correct
Show the answer
A. It looks at items just before and after the year end.
Question 8. Attending an inventory count is a substantive test of:
- Existence of inventory
- Valuation only
- Payroll
- Share capital
Show the answer
A. Test counts are done both ways, and cut-off is recorded.
Question 9. A non-current asset register should be:
- Regularly checked and reconciled to the main ledger
- Kept secret from management
- Updated only at year end
- Ignored by the auditor
Show the answer
A. It supports the control over additions and disposals.
Question 10. A review for unrecorded disposals is a test for:
- Overstatement of non-current assets
- Understatement of liabilities
- Payroll fraud
- Revenue cut-off
Show the answer
A. An asset that has been sold but remains on the register is overstated.
Written questions
Question 11 (10 marks). Describe the key internal controls an entity should have over its revenue and receivables cycle.
Question 12 (20 marks). (a) Describe the key controls over payroll. (6 marks) (b) Describe the tests of controls an auditor would apply to payroll. (4 marks) (c) Describe substantive tests on payroll. (4 marks) (d) Describe the procedures an auditor follows when attending an inventory count. (6 marks)
Question 13 (10 marks). Tunde Plastics Ltd has no register of non-current assets, authorises purchases of equipment orally, never reconciles ledger balances to physical assets, and disposes of old machines through its factory manager, who records the proceeds as he thinks fit. Identify the control weaknesses and the audit tests you would carry out. (10 marks)
Model answers
Show the model answer to Question 11
Authorisation and segregation (4 marks). Segregation of duties between order acceptance, despatch and invoicing. (1) Orders authorised and checked against the customer’s credit limit. (1) Pre-numbered sales orders and despatch notes, matched with orders and invoices. (1) Returns, allowances and write-offs authorised. (1)
Recording and accuracy (3 marks). Invoices checked and authorised before sending, recorded promptly, with batching and batch totals. (1.5) Credit notes and returns recorded accurately. (0.5) Regular reconciliation of the receivables control account with the ledger. (1)
Collection (3 marks). A debt collection policy followed systematically. (1) Monthly statements sent to credit customers. (1) Authorisation of bad debt write-offs. (1)
Show the model answer to Question 12
(a) Payroll controls (6 marks, any six at 1). Segregation of duties between setting pay rates, calculating pay and recording it. Up-to-date personnel records. Authorisation of joiners, leavers, pay rates, overtime and deductions. Management review of the overall cost of payroll. Standard procedures and timetables, with approval of the payroll once prepared. A control account and review of unusual amounts.
Safe custody of cash, identity checks, signed receipts and investigation of unclaimed packets. A separate bank account and authorised transfers.
(b) Tests of controls (4 marks). Check that payroll is reconciled between periods and changes are explained. (1) Check entries in the wages control account. (1) Review payroll for unusual amounts and check records agree with cash and bank records. (1) For cash pay, observe distribution, compare names on the payroll to pay packets and examine signed receipts. (1)
(c) Substantive tests (4 marks). Check arithmetic of payroll calculations and postings. (1) Check pay rates, deductions and overtime to authorised documents. (1) Check joiners are authorised and no one is paid before joining or after leaving, and test the existence of a sample of employees. (1) Check payment of deductions to the authorities and use analytical procedures such as average pay per employee. (1)
(d) Attending the count (6 marks). Review the counting instructions and observe whether staff follow them. (1.5) Make test counts from records to floor and from floor to records. (1.5) Note damaged or slow-moving items for valuation. (1) Record cut-off information, including the last goods received and despatched. (1) Record details of inventory held by third parties or at other locations. (0.5) Retain copies of count sheets to compare with the final records. (0.5)
Show the model answer to Question 13
Weaknesses (5 marks). There is no non-current asset register, so records are incomplete and assets cannot be reconciled. (1.5) Oral authorisation of purchases means no evidence and no capital expenditure budget. (1) No reconciliation of ledger balances to physical assets, so missing or impaired assets go unnoticed. (1) The factory manager handles disposals and records proceeds himself, with no segregation, so proceeds may be diverted or recorded wrongly. (1.5)
Audit tests (5 marks). Review the movement in non-current assets for the period. (1) Check additions to invoices and authorisation, and physically verify a sample. (1.5) Check depreciation and the calculation of gains or losses on disposals. (1) Trace disposal proceeds to the cash records and review for unrecorded disposals. (1) Consider impairment where assets are old or idle. (0.5)
Pathfinder on auditing transaction cycles
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
No written question in these two diets tests this topic on its own. The procedures that May 2026 Question 2(c) asks for, such as inspection, observation and confirmation, are the same ones used in these cycles. Revenue and inventory risks appear in the case facts of several questions.
Revise first: Revenue and receivables
Section A is a single compulsory case with several requirements. It has drawn on ethics, quality management, group audits and reporting. Practise the scenario method in this topic before you attempt it.
Revise first: How to score full marks
Source: ICAN Pathfinder, Advanced Audit, Assurance and Forensics. Diets covered: May Diet, 2026 and November Diet, 2025.
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