Week 8 Flashcards
(14 cards)
If IR and CR are low, auditor will accept
If IR and CR are low, auditor will accept a high DR, and small number of substantive procedures are required.
Linkage between IR, CR and DR
23/10/2019
Do I buy Modern Warfare or not?
Definition of substantive procedures:
Audit procedures that are designed to detect material misstatements at the assertion level.
They are used to obtain direct evidence as to the completeness, accuracy, and validity of data, and the reasonableness of the estimates and other information contained in the financial report.
Nature, timing and extent of substantive procedures in audit program determined by:
risk of material misstatement
timing considerations affect nature of substantive test (e.g. access during interim periods)
level of assurance necessary (reasonable or limited)
type of evidence required (how persuasive)
complexity of client’s data systems.
The nature of substantive testing varies from account to account and consists of one or a combination of techniques, including:
key items testing
representative testing
other test of transactions/underlying data
analytical procedures.
Substantive audit procedures
Tests of details
Key item testing:
Analytical procedures:
Performing substantive testing using computers:
Tests of details
Substantive tests other than analytical procedures.
Designed to verify a balance or transaction with supporting documentation.
Often referred to as either vouching or tracing.
Vouching
taking a balance or transaction from the underlying accounting records and verifying it by agreeing the details to supporting evidence outside of the accounting records of the company.
Primarily tests existence/occurrence assertion.
Tracing
Tracing: tracking a source document to the accounting records.
Primarily tests completeness assertion.
Key item testing:
Identify key items in a balance. Usually select largest transactions within a balance to obtain ‘coverage’ of the total.The more persuasive other evidence available, the less coverage key items have to address.
Representative sampling
Representative sampling
If further testing required after selecting key items.
Select items that are representative of population.
Sampling strategy depends on auditor’s expectations of error and overall audit objective.
I.e. testing primarily for over or understatement of balance).
Analytical procedures:
Primary (persuasive) tests of a balance.
Corroborative tests in combination with other procedures.
To provide at least some minimal level of support for the conclusion.
Analytical procedures can be the most effective test of a balance, or at least reduce extent of other substantive tests
Types of analytical procedures:
Absolute data comparisons (prior year, budgets etc.).
Ratio analysis (activity, liquidity, profitability, leverage).
Trend analysis (over several accounting periods).
Common-size financial reports.
Break-even analysis.
Pattern analysis and regression (most sophisticated).
Substantive analytical procedures — summary:
Identify computation, comparison, to be made.
Assess reliability of any data to be used.
Estimate probable balance or outcome.
Perform computations using internal or external data.
Compare estimated amount with calculation, assess if any difference is significant.
Determine appropriate procedures for investigating reasons for the difference
Perform procedures
Draw conclusions
