Week 9 Flashcards
(12 cards)
Extent of substantive procedures:
Determined by risk assessment.
Trivial or immaterial accounts are either ignored or subjected to analytical procedures only.
Audit risk model used to make a risk assessment on each significant account or disclosure.
High IR, CR
do not rely on and test controls, use significant amount of substantive testing to reduce DR to acceptable level.
Low IR, CR
testing controls shows them to be effective, limited substantive testing required.
Timing of substantive procedures:
Also determined by risk assessment. Lower DR, more work done at year-end. Audit firm must also consider availability of resources to conduct procedures around year-end. Use techniques to influence schedule: review events prior to year-end e.g. acquisitions.
Matters to consider when designing substantive procedures:
Ensure procedures respond to specific risk faced by client from both IR and CR factors.
Different clients may have same overall level of risk but risk caused by different factors.
Procedures would be also different.
Substantive testing of cash
Three most important assertions:
Existence:
usually addressed by bank confirmation
Completeness:
test bank reconciliation and cut-off of cash transactions
verify reconciling items to next period bank statement.
Classification:
important because of special disclosure requirements.
Substantive testing of trade receivables
2
Existence:
Usually addressed by debtors’ confirmation (ASA 505; ISA 505).
Positive confirmation:
auditor requests reply in all circumstances.
Negative confirmation:
auditor requests reply only if debtor disagrees with balance shown.
Valuation and allocation:
Use subsequent receipts test.
Analytical procedures based on ageing.
Other assertions may also be important in the audit of trade receivables.
Substantive testing of inventory
twomost important assertions:
Existence
Usually addressed by testing client’s annual or cyclical stock take (ASA 501; ISA 501).
Auditor tests client’s verification of physical inventory with records, and auditor must sight inventory.
Lower CR, less likely stocktake is performed only annually.
Valuation and allocation:
Lower of cost and NRV - AASB 102 (IAS 2).
Sighting inventory at stock take allows auditor to assess slow-moving, damaged, obsolete, impaired, excess stock which should be written down.
Typical techniques:
vouching to invoices to verify initial cost
vouching to sales details to verify cost of sales
test provision for impairment calculations.
Substantive testing of property, plant and equipment
Two most important assertions:
Existence:
Verify items recorded in client’s fixed asset register.
Physically sight assets listed in first audit and periodically.
Focus on additions and disposals in later years
Valuation and allocation:
Evidence about condition gathered when sighting physical assets.
Consider cost and fair value and asset impairment.
Change in client operations could impact fair values.
Vouch initial cost to invoices and contracts.
Vouch disposals to sales contracts, receipts.
Test depreciation through reasonableness testing of charge based on useful lives.
Substantive testing of payables
Two most important assertions are:
completeness
valuation and allocation.
For both assertions:
Major risk is understatement.
Use subsequent payments testing.
Vouch payments after balance date to invoices to verify invoices dated prior to year-end are included in payables.
Cut-off testing.
Select sample of purchases either side of year-end and verify that each included or excluded from payables based on invoice date.
Assessing the results of substantive procedures
Auditor’s objective is to identify and quantify any errors:
understand why error occurred
assess need for additional testing
make final estimate of misstatement, assess materiality and recommend adjustments.
Special considerations for auditing other balance sheet accounts
Most other accounts are typically audited substantively because they do not rely on high volume processes and specific application controls. These account balances include: prepayments investments taxation provisions leases and equity.
