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Module 7 - Substantive Test and Documentation (Autosaved)
Module 7 - Substantive Test and Documentation (Autosaved)
Substantive
Audit
Procedures
The Relationship of Evidential
Matter to the Audit Report
Financial Audit
Statements Report
Management
Assertions
Audit
Objectives
Audit Evidence
Procedures
PSA 500, Audit Evidence states that…
The auditor shall design and perform audit procedures
that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit
evidence.
Official Receipt
Sales invoice
AUDIT EVIDENCE
BASIC CONCEPTS OF
AUDIT EVIDENCE
ACCOUNT BALANCES
Completeness There are no omissions and assets, liabilities
and equity that should be recorded and
disclosed have been. In other words there
has been no understatement of assets or
liabilities.
Existence Assets, liabilities and equities really do exist
and there has been no overstatement
Rights and Obligations The entity has a legal title or controls the
rights to an asset or has an obligation to
repay a liability.
Valuation Amounts at which assets, liabilities and
equity interests are valued, recorded and
disclosed are all appropriate
FINANCIAL STATEMENT ASSERTIONS
CLASSESS OF TRANSACTIONS
Tests of details
Transactions
Balances
Analytical tests
SUBSTANTIVE TESTS
TESTS OF DETAILS
- used to gather evidence that the actual
details of balances, disclosures and underlying
transactions associated with the FS are fairly
stated.
- Considered as the auditor’s primary response
to risk of material misstatement.
- 2 TYPES:
Test of Transactions
Test of Balances
SUBSTANTIVE TESTS
TESTS OF DETAILS
- 2 TYPES:
Test of Transactions
- Address whether particular types of
transactions (i.e. purchases) have been
properly accounted during the period
Test of Balances
- Address whether there are misstatements
in the ending balance of an account
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
- involves a study and comparison of
relationships among data (financial and non-
financial) to identify unusual fluctuations.
- As substantive test, provides evidence about
the reasonableness of an account balance
- Steps:
- 1. develop an expectation
- 2. determine acceptable difference
- 3. compare actual data with expectation
- 4. investigate significant fluctuations (beyond
acceptable difference)
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
Trend analysis
the analysis of changes in an account over time.
Ratio analysis
the comparison, across time or to a benchmark, of
relationships between financial statement accounts
and between an account and non-financial data
Activity ratios
Profitability ratios
Liquidity ratios
Solvency ratios
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
Examples
Observation
Inspection
Confirmation
Recalculation
Reperformance
Analytical procedures
Inquiries
PROCEDURES TO GATHER EVIDENCE
Observation
- Looking at a process being performed by others.
- Limited to the point in time at which the observation takes
place
Inquiries
- Seeking information from knowledgeable persons
- May be in oral form or written form
Dec 10, 2019
$225,000
Dec 5, 2019
$325,000
VOUCHING
Dec 10, 2019
$225,000
Dec 5, 2019
$325,000
TRACING
PROCEDURES TO GATHER EVIDENCE
External Confirmation
- requesting a third party to affirm the accuracy of
items per records of client
Positive Confirmation
- 3rd party is requested to respond directly to auditor
whether or not it agrees or disagrees with the information
contained in the letter
- appropriate when: amount is material
: internal controls are ineffective
- response: AGREES no further procedures needed
- response: DISAGREES do further procedures
- no response: 1)Follow up or send another letter
2) Perform alternative procedures
PROCEDURES TO GATHER EVIDENCE
External Confirmation
Negative Confirmation
- 3rd party is requested to respond directly to auditor if
it disagrees with the information contained in the
letter
- appropriate when: amount is small
: internal controls are effective
: no reason to believe that
recipient will disregard
- no response: balance is confirmed
- response: DISAGREES do further procedures
PROCEDURES TO GATHER EVIDENCE
Recalculation
- Checking the mathematical accuracy of documents
or records
- Includes footing and cross footing
Reperformance
- Auditor performs the same procedure that client
personnel did
PROCEDURES TO GATHER EVIDENCE
Specific Procedure RAP TOC ST
Inspection
Observation
Inquiry
Confirmation
Recalculation
Reperformance
Analytical procedure
SAMPLE PROCEDURES FOR ASSERTIONS
ACCOUNT BALANCES ASSERTION
Extent
- Number of items or sample size
Timing
- Refers to when audit procedures are performed or the
period or date to which the audit evidence applies.
NATURE, EXTENT AND TIMING OF AUDIT
PROCEDURES
ACCEPTABLE LEVEL OF DETECTION RISK
HIGH LOW
Less effective and less More effective and more
NATURE costly costly
EXTENT Less evidence more evidence
Interim or months prior to
TIMING year end Near or at year end
EXISTENCE
- Observation of inventory count
- Confirmation of AR
- Bank reconciliation of cash
EXAMPLES OF AUDIT PROCEDURES
RELATED TO ASSERTIONS
RIGHTS AND OBLIGATIONS
- Examine bank statements
- Review contracts of loan agreements
VALUATION
- Testing for foreign currency translation
- Testing aging of AR
- Testing inventory pricing
FRAUD AND ERROR
Auditor should consider the risk of material
misstatements due to fraud or error
- PURPOSES:
Refresh auditors’ memories on items applicable over many periods
Provides new staff members with a quick summary of client’s policies
Preserve working papers on items that show relatively few or no changes
- EXAMPLES:
Articles of Incorporation, By-laws, Bond indentures
Accounts with continuing significance: SHE, PPE, Goodwill
Organizational charts, internal control questionnaire
Results of previous years analytical procedure
CLASSIFICATION OF WORKING PAPERS
CURRENT FILE
- Include all audit documentation applicable to the year under
audit
- INCLUDES:
Audit Program
General Information
Working Trial Balance
Adjusting Entries
Supporting Schedules
WORKING PAPER FILES
OWNERSHIP
- Documents prepared during audit, including schedules
prepared by client is the PROPERTY OF THE AUDITOR
CONFIDENTIALITY
- Do not disclose any confidential information except if
with consent of client or with legal or professional duty
to disclose
CUSTODY AND RETENTION
- Within premises of Auditor
- Completed w/in 60 days after auditor’s report date
- Retained at least 7 years from auditor’s report date or
date of group auditor’s date if later