ne y

yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
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Cop i v e
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MODULE 4 Cop
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gy S
Topic 2 – Substantive testing o f Te c h n ol o

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© Dr Amanda White - University of Technology Sydney

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In this Topic gy S
h n o lo y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
1. When U n and why do we need to gather substantive f Te c
ig h t yo
y r s i t
Cop evidence n i ve
r
h t U
yr i g
2. Types of substantive procedures Cop
3. Designing substantive audit procedures
4. Sampling and substantive testing ne y
yd
o gy S
5. Executing substantive tests h n ol
Te c
o f
6. Evaluating substantive testing results and making e rs ity
i v
conclusions h t Un
g y ri
Cop
© Dr Amanda White - University of Technology Sydney
 y
Context lo gy S
yd ne

c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
Cop

ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.1 When and why do we Cop

gather substantive evidence gy S

yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

 ne y
yd
Inside our eclient gy S
h n o lo y
c T yd ne
i t y of o gy S
i ve r
s
h n ol
n
• Supporting
U documentation & accounting records Te c
gh t i o f
p yr e rs ity
C o i v
h t Un
yr i g
existence (of account balance components)/ Cop
occurrence (of transactions in accounting records)
Source Accounting
Documents Records
ne y
yd
gy S
Completeness (of accounts balance components or
transactions in accounting records)
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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When do we gather substantive gy S
yd ne
o lo
evidence?
ty o
f Tec h n
gy S
yd ne y

e rsi n ol o
• Where U n iv
there is a ROMM Te c h
i g ht o f
r ity
C o py i v e rs
• Where there is a specific control weaknesst Un
y r ig h
• Where there is greater inherent risk Cop

ne y
• Typically collected after we’ve tested internal controls yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.2 Types of substantive audit Cop

procedures gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
Controls vs. gy S
h n oSubstantive
lo Testing y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
• Controls U n
testing Te
aims to obtain evidence that entity’s controls operate effectively c
ig h t y o f
Co pyr the transaction was appropriately authorised before being processed)
(E.g. rsit
i ve
t U n
r i g h
• Substantive tests are procedures performed on specific transactions and balances
y
Copor transaction.
to test for dollar misstatements in an account balance

• The main difference between these tests is that controls testing does not directly
measure dollar ($) error in the accounting records.
ne y
• When an auditor tests if a document has been appropriately authorised = Test of Control. yd
o gy S
• When an auditor tests if a dollar amount is correct h n ol
Te c
= Substantive Test. o f
e rs ity
i v
t Un
y r ig h
Co p

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Types of Audit gy S
h n olo Procedures y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
Cop

ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Types of Substantive Tests gy S Which procedure is
n o lo
ec h best to use? n ey yd
y o fT y S
e rs it o lo g
i v c hn
• There Un
are three types of Substantive tests: Te
y g ht
r i s i t y of
Cop• Substantive Tests of Transactions: Where an auditor nfocuses i ve r on testing
t U
r ig h
individual transactions by verifying them to supporting
y documentation.
C o p
• Substantive Tests of Balances: Where an auditor focuses on
substantiating the ending balance of an account (which is comprised of
multiple transactions) ey
d n
E.g. through external confirmations.
g y Sy
n o lo
• Analytical Procedures: Use of comparisons and relationships to assess Te ch
i t y of
whether account balances appear reasonable. e rs
i v
Note: Analytical Procedures is the most basic type of substantive
h t Un test.
yri g
C o p

© Dr Amanda White - University of Technology Sydney

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Substantive Tests and Assertions gy S
h n o lo y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
• The hauditorUn must perform audit procedures and collect of Te c
t
p y r ig
sufficient appropriate evidence for each account and rs i y
tassertion.
Co i ve U n
ig h t
y r
• But for each of the major account balances or classes of Cop
transactions, there are different assertions at higher risk of
misstatement and therefore the substantive audit procedures
used to test them are also different. ne y
yd
o gy S
h n ol
Te c
• NOTE: Procedures must LINK to the assertions being rtested o f in
e s ity
both controls and substantive testing. U n iv
r i g ht
y
Cop
© Dr Amanda White - University of Technology Sydney
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lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.3 Designing substantive Cop

audit procedures gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Reminder of gy S
h n othe
lo list of procedures y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
1. Inspection U n Te c
ig h t o f
y r rs ity
Cop Observation
2. i v e
h t Un
3. External confirmation yr i g
Cop
4. Recalculation
5. Reperformance
6. Analytical procedures ne y
yd
o gy S
7. Enquiry h n ol
Te c
o f
8. Vouching
e rs ity
i v
9. Tracing t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Substantive Tests and Assertions gy S
h n o lo y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
c
t Un
• Theghdirection of testing relates to the assertion tested.
of T
e
p y ri rs i ty
Co • Individual transactions can be traced forward through
U n ive each step
i g h t
of the accounts to their inclusion in the financial
p y r report (assertion
of completeness); or Co

• From the financial report the transactions can be vouched back

to the original supporting documents (relates to existence or y
occurrence). yd ne
existence (of account balance components)/
o gy S
occurrence (of transactions in accounting records)
h n ol
c
Source Accountingof Te
ty
Documents
ni ersi
Records
v
t U
i
Completeness (of accounts balance components
y r gh or
Cop
transactions in accounting records)

© Dr Amanda White - University of Technology Sydney

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How do weechdecide
o what procedure to use? gy S
nol n ey
o fT y Syd
it y lo g
i v e rs hn o
• What Un
assertion are we testing? Te c
g ht
yri s i t yo f
p er
•CoNature timing and extent of audit procedures
t Un
iv
r ig h
op y
• Nature C
• Timing
• Extent ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.3.1 Examples of substantive Cop

procedures - sales gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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• What assertions are ato higher ROMM? gy S
nol ch ne y
Te yd
i ty of o gy S
Occurrence nive
rs
h n ol
U Te c
h t o f
p y r ig rs ity
o
CCompleteness i v e
h t Un
yr i g
Cop
Accuracy

Cutoff y
yd ne
o gy S
Classification h n ol
Te c
o f
e rs ity
i v
Presentation
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
Cop 2.3.2 Examples of substantive
y r

yr i g h t Un i v e rs ity

procedures – accounts Cop

receivable gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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• What assertions are ato higher ROMM? gy S
nol ch ne y
Te yd
i ty of o gy S
Existence
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
Completeness
h t Un
yr i g
Cop
Accuracy, Valuation
and Allocation
ne y
yd
gy S
Rights and
obligations ol o
c h n
o f Te
Presentation e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.3.3 Examples of substantive Cop

procedures – cash gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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yd
• What assertions are ato higher ROMM? gy S
nol ch ne y
Te yd
i ty of o gy S
Existence
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
Completeness
h t Un
yr i g
Cop
Accuracy, Valuation
and Allocation
ne y
yd
gy S
Rights and
obligations ol o
c h n
o f Te
Presentation e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

 ne y
yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.4 Sampling and substantive Cop

testing gy S
yd ne y
ol o
Do we even need to sample? Te c h n
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Sampling for gy S
h n olodifferent Audit Tests y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
c
ht Unof test
Type Where to sample
o f Te
y r ig rs ity
Cop Tests of Controls Controls operating over the entire year i v e
h t Un
yr i g
C op
Tests of Details of End of year balances and sub-account
Balances balances at year-end
(e.g. Accounts Receivable per customer)
ne y
yd
Tests of Transactions Transactions over the entire year
o gy S
h n ol
Te c
o f
Analytical Procedures No Sampling involved
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Which Sampling method should be used? gy S
n o lo
ec h n ey yd
y o fT y S
e rs it o lo g
i v c hn
ht Un Sampling method f Te
y r i g s i t yo
Cop commonly used method
Most n iv er
t U
y r ig h
Most appropriate for testing across Cop
the entire year

Most appropriate for testing the

ne y
assertion of Cut-off yd
o gy S
h n ol
When you want to treat/investigate Te c
o f
sub-groups differently – e rs ity
i v
what do you do? t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Sampling and gy S
h n olo Stratification y
ec d ne
y o fT gy S
y
• Stratified Sampling:e rs it n o lo
U n iv Te ch
r i g ht
Stratification is the process of dividing the population into a series of sub-
t y of
py
populations which are then treated separately in terms of sampling e s i
rmethods and
Cotesting. n i v
t U
y r ig h
• For example: Cop
Auditing Accounts Receivable – stratified by days the receivables have been
overdue:
0-30 days 31-60 days 61-90 days 91+ days Total
ne y
yd
$350,000 $300,00 $200,000 $150,000 $1,000,000
o gy S
h n ol
Te c
o f
ity
• Note: Stratification is not a sampling method - it is simply the process ofrsdividing
e
the population. U n iv
r i g ht
y
Cop
© Dr Amanda White - University of Technology Sydney
 n ey
Factors Influencing g y Sy Sample Size for
d
o lo
Substantivef TTests ec h n ASA 530 – Appendix 3
Syd n ey
y o g y
e rs it n o lo
Factor
U n iv Effect on sample
Te ch size
g ht
1. Anriincrease in the auditor’s assessment of the risk of material t y of
Increase
i
o py
Cmisstatement n i v e rs
t U
y r ig h
C o p
2. An increase in the use of other substantive procedures directed Decrease
at the same assertion
3. An increase in the auditor’s desired level of assurance Increase

ne y
4. An increase in the tolerable misstatement Decrease
yd
o gy S
h n ol
5. An increase in the amount of misstatement the auditor expects to Increase Te c
o f
find in the population
e ity
rs
i v
6. Stratification of the population when appropriate
t UnDecrease
y r ig h
C o p
7. An increase in the number of sampling units in the population Negligible effect
© Dr Amanda White - University of Technology Sydney
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lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
2.5 Executing substantive Cop

tests gy S
yd ne y
ol o
We will cover this in our workshop in a f Te c h n
yo
follow-along activity n i ve
rs i t
ht U
y r i g
Cop
© Dr Amanda White - University of Technology Sydney
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yd
lo gy S
c h no ne y
e d
i ty of T o gy S
y
i ve rs
h n ol
U n Te c
ig h t o f
Cop 2.6 Evaluating substantive
y r

yr i g h t Un i v e rs ity

testing and making Cop

conclusions gy S
yd ne y
ol o
c h n
o f Te
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

 ne y
yd
Audit evidencehno–lo it helps us ask more questions!ey gy S
f Tec Sydn
s it yo o gy
v e r h n ol
ht Uni o f Te c
y r i g ity
Cop i v e rs
h t Un
yr i g
Cop

ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

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Is the misstatement material? gy S
h n o lo y
ec T yd ne
i t y of o gy S
i ve r
s
h n ol
U n Te c
ig h t o f
y r rs ity
Cop i v e
h t Un
yr i g
Cop

ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney

 Evaluationdof
ney Substantive Testing
g y Sy
lo
hno
Substantive Testing
ec d ne y
f T y
rs i ty
Misstatement/Error: o
Any situation where the amount is incorrect (i.e. the lo gy S
niveamount differs from that recorded in the client’s records)
audited c h no
t U e fT
i g h y o
o p yr Set Tolerable level of Misstatement: Amount of misstatement e rsitthat the
C
auditors are willing to tolerate or accept - does this soundt U nivfamiliar?
y r ig h
Conduct the substantive tests of transactions Cop and/or balances
according to the procedures designed and identify any misstatements
Calculate PROJECTED = Misstatement Amount x Value of
Misstatement Total Value of Sample Population ne y
yd
Evaluation: o gy S
h n ol
Investigate the source of the misstatements – one-off or systematic issue? e
T c
o f
e rs ity
Collect another sample and re-perform the test? Is the issue still present?
n i v
If Projected Misstatement > Tolerable Amount = MaterialUMisstatement
h t
Advise management to make the required adjustments,
p y rigotherwise =
Modified Report Co
© Dr Amanda White - University of Technology Sydney
 ne y
yd
Basic Example gy S
n olo of Projected Misstatement
ec h n ey yd
y o fT y S
e rs it o lo g
• Misstatements n iv found in the sample: $250,000 e c hn
ht U f T
r i g
y of the sample:
• oValue $2,000,000 s i t yo
C p n iv er
t U
• Value of the population $5,000,000
y r ig h
Cop
• Calculate the Projected value of misstatements over
the entire population y
yd ne
=
o gy S
h n ol
Te c
o f
e rs ity
i v
• Is this material? What information do you need to make hthis t Undecision?
p y r ig
Co
© Dr Amanda White - University of Technology Sydney
 ne y
yd
A more complex example - stratification gy S
n o lo
ec h
T n ey yd
o f y S
rs i ty o l o g
i ve
• AuditingUnAccounts Receivable - stratified by days overdue e c hn
i g h t y o fT
o p yr e rs it
C 0-30 days 31-60 days 61+ U
t n iv
days
y r ig h
Errors Found $2,000 $4,500 Cop $3,000
Value of Sample $100,000 $85,000 $100,000

Value of Population $850,000 $450,000 $100,000 y

yd ne
Projected misstatement $ $ $ o gy S
h n ol
Te c
o f
e rs ity
i v
• Total misstatement for Accounts Receivable:___________ h t Un
p y r ig
Co
© Dr Amanda White - University of Technology Sydney
 ne y
yd
To sum upechnolo gy S
ne y
T yd
i t y of o gy S
i ve r
s
h n ol
c
t Un knowledge of the client – inherent risks, y of Te
• Useighyour
o p yr e rs it
C significant risks, control risks – to determine nwhat iv
t U
assertions are at greatest risk and you y igh to gather
need
r
Cop
evidence on.
• Remember how to apply the 4 design rules
ne y
yd
o gy S
h n ol
Te c
o f
e rs ity
i v
t Un
y r ig h
Co p

© Dr Amanda White - University of Technology Sydney