Topic 8 - Substantive Testing Flashcards by s marty

What are substantive tests?

Tests performed to obtain audit evidence to detect material misstatement in the financial report.

How well did you know this?

Not at all

Perfectly

which type of risk does substantive testing reduce?

Substantive tests are used to reduce detection risk

How well did you know this?

Not at all

Perfectly

What are the three categories of substantive tests?

■ Substantive Tests of Transactions (Tests to substantiate transactions)
■ Substantive Tests of Details of Balances
(Tests to substantiate account balances)
■ Substantive Analytical Procedures (Use of analytical procedures to
substantiate account balances)

How well did you know this?

Not at all

Perfectly

What is the Difference Between Substantive Tests of Transactions and Tests of Controls?

Substantive Test of Transactions- substantiate transactions

Test of Controls - tests effectiveness of controls over processing transactions

How well did you know this?

Not at all

Perfectly

List four Evidence Sources?

￭Accounting records
￭Corroborating information (documents)
￭Board, management and staff, physical resources
￭Third parties, market data, other information

How well did you know this?

Not at all

Perfectly

List five Procedures of substantive testing?

￭Inspection 
￭External Confirmation 
￭Enquiry
￭Recomputation 
￭Analytical Procedure

How well did you know this?

Not at all

Perfectly

what are three forms of

Evidence Gathering for Substantive Testing?

￭Sampling
￭Selecting specific items
￭100% examination

How well did you know this?

Not at all

Perfectly

What five aspects influence the selection of audit procedures?

￭Nature of the item
￭Size and volume of transactions
￭Location
￭Custody of the asset
￭Availability of particular evidence

How well did you know this?

Not at all

Perfectly

What are the 6 Transactions assertions?

￭completeness
￭cut-off
￭classification
￭occurrence
￭accuracy
￭presentation

How well did you know this?

Not at all

Perfectly

What are the 5 Balance assertions?

￭rights and obligations
￭existence
￭accuracy valuation
and allocation
￭presentation
￭completeness

How well did you know this?

Not at all

Perfectly

For the balance of Cash at Bank, which assertions is the emphasis on?

existence and completeness

How well did you know this?

Not at all

Perfectly

For transactions that increase or decrease Cash at bank what assertions is the emphasis on?

Occurrence and completeness

How well did you know this?

Not at all

Perfectly

with Bank Reconciliation, what items must be added/deducted from Cash at bank Balance (Accting Record) so as to match Bank Statement?

Deposits in transit
Unrecorded bank fees
+ Outstanding cheques
+/- Other reconciling amounts.

How well did you know this?

Not at all

Perfectly

How would you test existence of cash balance?

Confirm client’s balances with bank. Perform a bank reconciliation (vouching)

How well did you know this?

Not at all

Perfectly

How would you test Completeness of Cash Balance?

Cash Balance in Balance Sheet includes all cash items, Perform a bank reconciliation (tracing)

How well did you know this?

Not at all

Perfectly

How would you test Occurrence of Cash Receipts?

Vouch a sample of entries in the Cash

Receipts Journal to supporting documentation.

How well did you know this?

Not at all

Perfectly

How would you test Completeness of Cash Receipts?

Trace from source document to Cash

Receipts Journal

How well did you know this?

Not at all

Perfectly

How would you test Occurrence of Cash Payments?

Vouch a sample of entries in the Cash

Receipts Journal to supporting documentation.

How well did you know this?

Not at all

Perfectly

How would you test Completeness of Cash Payments?

Trace from source document to Cash

Receipts Journal

How well did you know this?

Not at all

Perfectly

Which assertions are emphasised for Sales and AR?

Sales/Cash receipts- occurrence,
accuracy and cut-off
AR - existence
and valuation of accounts receivable

How well did you know this?

Not at all

Perfectly

Auditor undertakes a STOT to find out if all
transactions are bona fide, and that no fictitious
sales transactions have been recorded, what is the assertion, and test?

Occurrence
Test: Vouch a sample of entries in the sales
journal to shipping order/ sales order

How well did you know this?

Not at all

Perfectly

Auditor undertakes STOT to find out whether

all sales that were made were actually recorded, what is the assertion, and test?

Completeness

Test: Trace a sample of shipping orders/ sales orders and to the sales journal

How well did you know this?

Not at all

Perfectly

STOT to gather evidence that transactions

were recorded in the correct period, what is the assertion, and test?

Cut Off
Test: Inspect the last sales invoice before balance date and the first sales invoice after balance date for cut off. Compare with shipping orders

When are Analytical Procedures for

Sales and Collections performed? why?

￭Performed after balance date

￭Close relationship between accounts

what three things are used in Analytical Procedures for | Sales and Collections for comparisons?

￭Prior year ￭budget ￭industry

list three examples for Analytical Procedures for | Sales and Collections?

- Compare sales by month over time - Compare individual customer balances (over a certain amount) with previous years - Compare allowance for doubtful debts as a percentage of accounts receivable with prior years

list three types of Tests of Details of the Accounts Receivable Balance?

￭External confirmation ￭Alternatives to external confirmation ￭Aged trial balance

what is Confirmation of Accounts Receivable? what does it show?

- External confirmation from a third party | - Tests whether or not Accounts Receivable balance exists and the client has the right to the asset

what are the two types of AR confirmation that an auditor may receive?

￭Positive | ￭Negative

What must an auditor do in regards to AR confirmation process?

￭Follow-up non-responses ￭Analysis of differences ￭Alternative procedures

what are four assertions and two procedure when preforming Substantive Testing of Acquisitions and Payments Cycle?

■ Completeness of acquisitions ■ Completeness of cash payments ■ Purchases cut-off ■ Occurrence of acquisitions ■ Analytical procedures for accounts payable ■ Tests of details of balance for accounts payable

Which assertion is being tested when an auditor - Vouches a sample of entries in the Purchases Journal to the Receiving Note and PO (supporting documentation)?

Occurrence

Which assertion is being tested when an auditor - Traces a sample of Receiving Notes to the Purchases Journal to ensure that each is recorded?

Completeness

Which assertion is being tested when an auditor preforms a STOT to gather evidence that transactions were recorded in the correct period?

Cut Off Test: Compare dates on receiving reports and vendors’ invoices in the purchases journal

Which assertion is emphasis placed on for AP?

Emphasis is on the audit objectives of completeness of Accounts Payable. Rights and obligations and purchases cut-off are also important.

The auditor compared the closing balance of | Accounts Payable with those of previous years, which assertion are they testing?

Accounts Payable-Completeness

The auditor inspected the Cash Payments Journal after balance date and traced payments to the list of Acc. Payable recorded by the client at balance date, which assertion are they testing?

Completeness of Acc. | Payable Balance

which assertions have emphasis on them for inventory matters?

Existence, Valuation and Allocation

Why is inventory a high priority for an auditor?

■ Significant account balances. ■ Significant volume of transactions. ■ Audit of account balances is often complex and time consuming.

list five auditing tests for inventory?

■ Tests of cost accounting records ■ Substantive analytical procedures ■ Tests of physical inventory observation (combination of observation of count; inquiry and inspection) ■ Cut-off – clarity over shipping and receiving ■ Tests of valuation of inventory

if you think there is Obsolete inventory, which affects Inventory and COGS or Overstatement/ understatement of inventory, how would you test this?

Compare inventory turnover ratio with those of previous years

if you think there is Overstatement/ understatement | of inventory and COGS, how would you test this?

Compare gross margin percentage with those of previous years

Audit Evidence – | Specific Considerations for Inventory what must an auditor do?

Establish existence and condition of inventory ``` ■ Attend stocktake ■ Evaluate management’s instructions ■ Observe count ■ Inspect inventory ■ Perform test counts ```

The auditor attended the stocktake. He selected a sample of items in the Inventory Record and vouched them to the actual items of inventory, which assertion is being tested?

Existence of Inventory

The auditor attended the stocktake. He inspected inventory | on hand and traced it to the inventory record, which assertion is being tested?

Completeness of Inventory

The auditor determined the sales price of inventory in the market (by inspection and inquiry) and compared it to the book value of the inventory, what is being tested?

Valuation of Inventory

Which assertions have emphasis placed on them for Property Plant & Equipment?

existence, rights and obligations, and | valuation and allocation

Inspect asset register and note additions or Inspect vendor’s invoice for newly acquired assets, which assertion is being test?

Existence of Acquisitions

Search for unrecorded disposals. Inquire whether a newly acquired asset replaced an existing asset. Inspect miscellaneous income, which assertion is being tested?

Completeness of | Disposals of PP&E

Inspect asset register and verify by | physically examining the item, which assertion is being tested?

Existence: PP&E included in the B S actually exists

``` Inspect a sample of items in the asset register; vouch to contract of purchase/ valuation certificate/ insurance papers (depends on nature of the item), which assertion is being tested? ```

PP&E are appropriately valued (valuation and allocation assertion)

what are four key things that an auditor should do to test that PP&E are Appropriately Valued?

``` ■ Evaluate data estimates are based. ■ Testing assumptions of management ■ Testing management’s calculations ■ Compare with prior period ```

what is Dollar Unit Sampling?

Sampling technique where the sampling unit is an individual dollar rather than a transaction or balance

why is Dollar Unit Sampling useful?

■ Method of identifying and selecting the specific items for testing ■ Greater chance that the sample will include the larger items in the population

how is the sample interval calculated?

Population/Sample Size

``` how do you Determine the projected error ($ misstatement) in population (book value of all additions to PP&E)? formula? ```

(difference between recorded value and value of corresponding invoices/ total value of invoices) x (total population of interest value) then you compare this amount to the materiality amount set

what needs to be done if Projected Error > Allocated Materiality? 3

■ Ask management to investigate & make adjustments ■ Modify planned audit procedures, and undertake more Substantive Testing; ■ Consider result with results of other STs and their effect on the audit report.