What is the nature, timing, and extent of the substantive tests based on?
Understanding of internal control
Sufficiency relates to _____ of ______ _________
Sufficiency relates to EXTENT of Substantive Testing
Sufficiency relates to QUANTITY of Audit Evidence (Conclusive Evidence < Persuasive Evidence)
Appropriateness relates to ____ of ______ ________
Appropriateness Relates to the NATURE of Substantive Testing
Appropriateness relates to the QUALITY of audit evidence
The extent of Substantive testing relates to
Sufficiency of audit evidence
the nature of substantive testing relates to
appropriateness of audit evidence
What is the Quality of audit evidence Based on?
1. Relevance: Relates to Management Assertions (U-PERCV)
2. Reliability/Faithful Representation – Source (Persuasiveness) and nature
Why is persuasive evidence More Important Than conclusive evidence?
- Due to the limitations of the Audit
- Cost/Benefit Trade off
What should be considered when assessing Risk and Designing audit procedures?
Sufficiency And Appropriateness Of audit Evidence
What is the source of evidence indicate?
Persuasiveness Of audit evidence (Persuasive > Conclusive)
List the Sources of Audit evidence
(Most to least persuasive)
1. Directly obtained by Auditor (Auditor developed > indirectly obtained)
2. Obtained from outsider (Outside)
3. Prepared by outsider but Obtained from client (Outside/Inside)
4. Prepared by client (Inside)
*Concerned with Accuracy & Completeness when using info provided by the client
*No audit can rely Entirely on Client prepared accounting Data
What is the relationship between Validity of evidence and Detection Risk?
- Inverse relationship
- The higher the level of Validity (Persuasiveness), the Lower is the achieved level of Detection Risk in the audit
- And audit with low acceptable level Of Detection Risk usually requires Highest level of Persuasiveness
What Document represents lowest level of persuasiveness?
Management representation letter
- Due to the absence of any effective internal control over Management
“Other Information” Evidence used By the Auditor (except for the Client Accounting records)
With characteristics is Reliability of Audit evidence Directly related to?
1. Source in which it was obtained
2. Conditions Under which it is Developed and Acquired (original > photocopy)
3. its Form (written > orally)
Which levels should the Auditor respond to the assessed level of RMM to reduce Audit risk?
In 2 ways:
1. At the financial statement level
2. At the relevant assertion Level
At the financial statement, what will an Auditor consider to address RMM?
1. Users of the financial statements
2. Purposes for which F/S will be used
3. Economic and Industry Conditions
4. Management Compensation
5. Financing agreements
6. Changes in management
*to determine if there is any Incentive to Overstate/Understate Results
When is the Control environment weak?
*More sub. Testing (vs. interim period)
What does the nature of audit procedures include?
Purpose (Test of control vs. Sub Procedures)
What is the most important Consideration in responding to assessed risk?
The nature of Audit procedures
The HIGHER the auditor's risk Assessment (RMM).... the ….
1. The more relevant & reliable The audit evidence should be
2. The closer period end SUB procedures should be performed
3. The greater the extent of Audit procedures (more procedures or larger sample sizes)
What does Timing of audit tests refer to?
When Audit procedures performed
The period OR date Which the Audit evidence is Applicable
*tests performed at an Interim date or at period end)
What does the Extent of audit procedures refer to?
- The quantity of a Specific Audit procedure
What is the extent of audit procedures Based on?
The Auditor's Judgement which considers:
- Tolerable misstatement
- assessed RMM
- Degree of assurance they plan to obtain
At the relevant assertion level, what will an Auditor consider to address RMM?
The individual elements of Financial Reporting
- Operating items
- Account balances
*magnitude/materiality then procedures for SA evidence
Which assertion should an Auditor concentrate on if the asset is susceptible to theft?
Which assertion should an Auditor concentrate on if transactions include numerous shipping arrangements under various shipping terms?
- highly likely that the transaction (i.e. Sale) will be recognized on an inappropriate date
While assessing the level of RMM at the relevant assertion level, the auditor should identify....
1. Determine if E,A,T represents RMM
2. If RMM --- det. type of likely misstatement
3. Det. assertions most affected (U-PERCV)
*4. I/C reliance (if any – cost-benefit/don't exist) (combined approach)
*5. Test of Controls (if any) for S.A. Evidence (combined approach)
6. Sub. procedures (ICORRI-A) for S.A. Evidence
(required, at min. - Substantive Approach)
Which F/S elements is substantive procedures required for?
For Each Material:
- Transaction Class
- Account Balance
- Disclosure Item
When is Test of Controls required?
when Substantive testing alone cannot provide SUFFICIENT evidence to adequately reduce RMM
(i.e. not enough source documents to support Reasonable Assurance)
Define Management's Assertions
Implicit and explicit representations (11 assertions) made by management in the F/S being audited (AU-C 500)
- recognition, measurement, presentation, and disclosures (in F/S & related disclosures)
*U – PERCV* or *COCA-CURVE* (11 Assertions)