Professional Documents
Culture Documents
MPr11 SGrp3
MPr11 SGrp3
MPr11 SGrp3
MINI PRESENTATION
GROUP 3 CAI WEIMING // GAO XINJUAN // LAU KAI CHING // SHERMAINE ANG // YEO KHAI SERN
“ Why does the auditor generally follow a substantive
strategy when auditing long-term debt and capital
accounts?
2
Substantive VS Reliance Strategies
Substantive audit strategy: the auditor Reliance strategy: the auditor relies on the
has made a decision not to rely on the entity's controls and sets control risk below
entity's controls and to audit the related the maximum. The reliance strategy
financial statement accounts directly. requires a more detailed understanding and
Control risk is set at the maximum documentation of internal control than that
when a substantive audit strategy is of the substantive strategy. The auditor
followed. also plans and performs tests of controls
to support the lower assessed level of
control risk.
Why follow a substantive strategy?
▰ Inherent risk for long-term debt (notes and bonds) would normally be assessed as
low to moderate because the volume of transactions are low, the accounting is
not complex, and the client often receives third-party statements or amortization
tables.
▰ However, the amounts are usually large and the financial markets have
developed sophisticated instruments that have characteristics of both debt and
equity. The inherent risk associated with these instruments is normally high.
▰ Normally more cost-effective to conduct substantive tests of the transactions
that compose of the account balances.
4
When to use a reliance strategy?
▰ The auditor may follow a reliance strategy for entities that engage in frequent
financing activities.
▰ When substantive procedures alone do not provide sufficient appropriate
evidence.
▰ If the test of controls on financial records are performed in order to set control
risk.
5
“
During the year, Broadwall Company Pte. Ltd. obtained a long-term
loan from a local bank pursuant to a financing agreement.
Maxwell should conduct substantive tests to examine the long term loan.
Maxwell should conduct substantive tests to examine the long term loan.
9
“ Why might an auditor perform test of details and vouch
selected transactions in income statement accounts such
as legal, travel and entertainment expenses?
Account balances of intrinsic interest
▰ These accounts are not directly affected by a business process and/or may
contain sensitive information or unusual transactions.
▰ For these accounts, detailed information is needed for tax return, specific
disclosure requirements or other schedules included in the financial
statements. Thus, they may be overlooked due the nature of the expense while
there is a likelihood of entities using these accounts to conduct fraudulent
activities.
▰ Hence, the auditor conducts account analysis and vouch to these accounts to
ensure that they have indeed occurred and are not misstated due to fraudulent
acts. 11
Any questions?
12