Unit 9

Question 1

What are substantive procedures? What are some examples?

Answer 1

Substantive procedures are designed to detect material misstatements at the assertion level and include:
Inspection
Observation
Enquiry
Confirmation
Recalculation
Re-performance
Analytical reviews

Question 2

What are non-analytical procedures refered to as?

Answer 2

Tests of details.

Question 3

When are substantive procedures performed?

Answer 3

When internal controls cannot be relied on. (control risk is high)

Question 4

What kind of testing do you do when control risk is meoderate or low.

Answer 4

Combined testing. This includes testing internal controls and using substantive procedures.

Question 5

What are substantive procedures documented in an what do they contain?

Answer 5

• Documented in a audit program
• contains details list of audit procedures to be performed.
• Describes both tests of controls and tests of details

Question 6

How detailed should the program be?

Answer 6

The program should include enough detail that the auditor can easily understand the:

• nature,
• timing and
• extent (or scope) of the testing required.

Question 7

What do tests of details do?

Answer 7

Designed to verify balances or a transaction back to supporting documentation (vouching or tracing).

Question 8

What is vouching?

Answer 8

Vouching is when a balance or transaction is taken from the accounting records and verified by agreeing the details to supporting evidence outside the accounting records of the company

Question 9

What is the primary purpose of vouching?

Answer 9

The primary purpose of vouching is to test the existence of account balances and the occurrence of transactions.

Question 10

What is tracing?

Answer 10

Tracing is when a source document is traced back to the underlying accounting records.

Question 11

What is the primary purpose of tracing?

Answer 11

The primary purpose of tracing is to test the completeness of account balances and transactions.

Question 12

When are substantive procedures performed?

Answer 12

• Typically at or near year end.

- can be performed at interim over accounts that accumulate transactions over reporting period

Question 13

What are factors that influence how much substantive procedures are done?

Answer 13

• The nature of the test. Some tests are easier to test at year end as opposed to during the interim audit visit (the year end inventory count, for example)
• The level of assurance necessary (the higher the level of assurance sought, the greater the extent of testing)
• The type of evidence required (are the procedures designed to provide persuasive, corroborative or minimal audit evidence? If the procedure is designed to provide persuasive evidence, the extent of testing will be greater)
• The complexity of the client’s data capturing system (the more complex the system, the more complex and sophisticated the substantive audit procedures need to be)

Question 14

What do you do when misstatement is identified?

Answer 14

Document in audit working papers.

Question 15

What results do auditors look at when reaching their conclusion.

Answer 15

• testing related to account balance or disclosure
• responses to inquiries made during performance of procedures
• resolution of any identified misstatement

Question 16

Where are conclusions captured?

Answer 16

• Written in a lead sheet
• Documents conclusion statement for each signifigant account, the results and any significant findings, including misstatements.

Question 17

What assertions are most important when using substantive testing for cash/cash equivalents?

Answer 17

• Existence: that all cash on the Balance Sheet is held by the entity (in a petty cash fund, for example) or is held by others for the entity (by a bank, for example).
• Rights and obligations: that the entity has the rights to the cash on the Balance Sheet.
• Valuation: that the cash on the Balance Sheet at year end is appropriately valued (most relevant to accounts held in a foreign currency).

Question 18

What procedures address each of the key assertions for cash/cash equivalents?

Answer 18

• Existence and rights and obligations: Bank confirmation

- Existence, valuation and completeness: Examine the bank reconciliation

Question 19

What assertions are most important when using substantive testing for accounts receivable?

Answer 19

• Existence: that all trade receivables on the Balance Sheet are real claims of the entity.
• Valuation: that all trade receivables are carried at their net realizable (collectible) value.

Question 20

What procedures address each of the key assertions for accounts receivable?

Answer 20

• Existence: Accounts receivable confirmation

- Existence and valuation: Subsequent receipt testing

Question 21

What assertions are most important when using substantive testing for inventory?

Answer 21

• Existence: that all inventory on the inventory listing is included in the financial statements.
• Valuation: that inventory is carried at the lower of cost or net realizable value.
• Rights and obligations: that the entity has a right to the inventory held.

Question 22

What procedures address each of the key assertions for inventory?

Answer 22

• Existence: Sheet to floor testing: year end inventory count
• Valuation: Lower of cost or NRV testing and physical inspection: year end inventory count
• Rights and obligations: Inquire and review board minutes for evidence of consignment inventory

Question 23

What assertions are most important when using substantive testing for property, plant and equipment?

Answer 23

• Existence: that all PP&E on the Balance Sheet are held by the entity or by others for the entity.
• Valuation: that PP&E assets are carried at the appropriate amount.

Question 24

What procedures address each of the key assertions for property, plant and equipment?

Answer 24

• Existence: Physical inspection and inspection of supporting purchase invoices
• Valuation: Physical inspection and recalculation of depreciation expense

Question 25

What assertions are most important when using substantive testing for accounts payable?

Answer 25

• Completeness: that all accounts payable owed by the entity at year end are included on the Balance Sheet.
• Valuation when there are accounts payable balances held in a foreign currency, valuation.

Question 26

What procedures address each of the key assertions for accounts payable?

Answer 26

Completeness: Search for unrecorded liabilities