Concepts and Standards - Overview of Substantive Procedures Flashcards
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into
Cost of goods sold.
Note:
average inventory is divided into the cost of goods sold to calculate the inventory turnover.
Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
Unrecorded sales.
Note:
unrecorded sales would decrease both sales and gross profit by equal amounts and thus decrease the ratio.
Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
Review detail and test significant travel and entertainment expenses.
Why?
because the auditor may review the detail and test significant expenses prior to that date and then update the analysis at a subsequent date.
Which documentation is required for an audit in accordance with generally accepted auditing standards?
An indication in the working papers that the accounting records agree or reconcile with the financial statements.
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?
Reevaluate the risk of fraud, and design alternate tests for the related transactions.
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular objective?
Analytical procedures have revealed no unusual or unexpected results.
Why?
This answer is correct because analytical procedures performed as substantive procedures which reveal no likely misstatements may reduce the needed extent of other substantive procedures.
An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice
Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
Why?
such interim testing increases detection risk since end-of-year balances will receive less testing.
With respect to planning of a year-end audit what is always true?
It is an acceptable practice to carry out parts of the audit at interim dates.
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would
Perform tests of controls to support a lower level of assessed risk of misstatement.
Why?
Tests of controls may be used to support a lower level of the assessed risk of misstatement, and thereby restrict audit risk appropriately.
