7. Substantive procedures

Question 1

What are financial statement assertions? 

Answer 1

Assertions are therefore representations by those charged with governance that financial statements have been prepared in accordance with the applicable financial reporting framework.

Question 2

Why are assertions needed in external audit? 

Answer 2

Assertions are needed to consider the different types of potential misstatements that may occur when identifying, assessing and responding to the risks of material misstatement.

Either:
1. Assertions about account balances, and related disclosures, at the period end.

2. Assertions about classes of transactions and events, and related disclosures, for the period under audit.

Question 3

What does sufficient, appropriate evidence mean?

Answer 3

Sufficiency - A measure of the quantity of evidence.

Appropriateness - A measure of the quality of evidence (that is, its relevance and reliability).

aka Does the auditor have enough quality evidence to reduce that risk to an acceptably low level.

Question 4

What factors affect the appropriateness of evidence?

Answer 4

1. Relevance - whether the evidence obtained addresses (is relevant to) the assertion being tested.
2. Reliability - Auditor generated, Client generated, Third part/Externally generated.

Question 5

What factors affect the sufficiency of evidence?

Answer 5

Quantity of evidence provided

Question 6

How does an auditor make sure that each material figure etc is free from misstatement?

Answer 6

By checking off the assertions for that material balance, transaction or disclosure.

This then helps the auditor give an audit opinion that they are free from material misstatement.

Question 7

What is audit sampling?

Answer 7

Audit sampling is when conclusions can be drawn about an entire population on the basis of testing a sample drawn from it.

Question 8

What 3 things does the selection of sampling approach are determined by?

Answer 8

1. The characteristics of the population:
   - For example, the population may be made up of a handful of large items or a large number of similar, smaller items.
2. The risk of material misstatement (RoMM):
   - Generally, higher risk areas require more testing. If the RoMM is higher, the auditor will need to lower the detection risk, resulting in more work being performed to mitigate the higher risk of misstatement.
3. The audit efficiency of the approach.
   - If the auditor has sophisticated computer programs to perform simple repetitive tasks, sample sizes may be able to be increased.

Question 9

What are some examples of sampling methods?

Answer 9

• Random selection (Random number generator)
• Haphazard selection (No structured technique)
• Monetary unit sampling (Value-weighted selection to higher $)

Question 10

What evidence collection techniques are available to the auditor?

Answer 10

• Inspection of records and documents or tangible assets
• Confirmation from a third party
• Analytical procedures
• Recalculation by the auditor to check mathematical accuracy
• Inquiry of client staff
• Observation of a process or procedure (ie a control)
• Re-performance of a process or procedure (ie a control)

Question 11

Which evidence collection techniques are more appropriate at the Test of controls stage or Substantive testing?

Answer 11

Test of controls:
- Observation
- Re-performance
- Inspection of documents
- Inquiry

Substantive testing:
- Confirmation
- Analytical procedures
- Inspection of assets
- Recalculation
- Inquiry
- Inspection of documents.

Question 12

What is the difference between analytical procedures and test of details?

Answer 12

Analytical procedures are the systematic study and comparison of relationships among elements of financial and non-financial information and the investigation of significant fluctuations and variances from the expected relationship.

Test of details are carried out to obtain evidence of individual debits and credits that make up an account, to reach a conclusion about the account and the accuracy of the closing balances on the reporting date.

Question 13

The audit opinion is based on audit evidence, which is obtained by performing:

Answer 13

• Risk assessment procedures (Module 5)

Further audit procedures, which comprises:
a) Tests of controls (Module 6)
b) Substantive procedures, including tests of details and substantive analytical procedures

Question 14

How is data prepared for use in data analytics at the substantive testing stage?

Answer 14

1. Data acquisition - make sure its in the right formats etc and is quality to support data analytics
2. Making sure the data is relevant and reliable before using -

Question 15

What are substantive analytical procedures?

Answer 15

Procedures that allow the auditor to analyse patterns/fluctuations over balances/transactions to easily see where the expectation vs actual is more different than expected, thus investigate if its an error etc in the planning stage of the audit.

For balances Substantive analytical procedures cover the following assertions:
- Completeness
- Existence
- Accuracy, valuation and alloation
- Classification

For transactions, SAP cover following assertions:
- Completeness
- Occurence
- Cut-off
- Accuracy
- Classification

Question 16

How can audit data analytics be used for performing substantive analytical procedures? 

Answer 16

Can be used to analyse information and provide calculations using the clients information e.g. reasonableness tests where it can extra GL and produce a calculation.

Question 17

What areas of statistics may be relevant during the audit process?

Answer 17

DAY 6

Question 18

How can statistics be used in the sample selection process?

Answer 18

DAY 6

Question 19

What is substantive testing?

(AEIOU)

Answer 19

Substantive testing involves performing audit procedures that are designed to detect material misstatements over Account balances, Class of transactions and Disclosures.

Question 20

What type of substantive procedures can we do generally?

Answer 20

1. Substantive analytical procedures (testing whole population at once) [P&L Mainly]
2. Test of details (Specific items within the population) [BS Mainly acct balances]

Question 21

What are the stages to the approach for test of details, and why do we use this process to select the correct sample?

Answer 21

1. Source document/Evidence
2. Sub-ledgers/ Supporting evidence
3. Nominal ledger/ Trial balance
4. Financial Statements

Helps us select sample as we start with sub-ledger and tie this into the TB and then into the FS to make sure we have the right sample.

Question 22

State some examples of source documents that tie back to:
- Sales sold in year
- Purchases purchased in year
- Fixed assets purchased in year

Answer 22

Sales:
 Sales invoices
 Goods despatch notes (GDN)

Purchases:
 Purchase invoices
 Goods received notes (GRN)

Fixed assets:
 Bank statements
 Calculations of depreciation
 Board minutes
 Fixed assets (the physical asset itself)

Question 23

What is directional testing?

Answer 23

Thinking about whether the thing you are testing is more likely to either be OVERSTATED or UNDERSTATED.

Based on this when testing for overstatement (or existence/occurrence),

a different approach is used from testing for understatement (or completeness).

Question 24

What is the approach to writing substantive procedures?

Answer 24

“What” and “Why” aka Source and Purpose of what we are going to test.

Question 25

What is the general rule towards Existence and Completeness, in regards to directional testing?

(& Exception to rule)

Answer 25

• A/C Records to Source documents is existence. Unless: its a decreasing item then it would be completeness as it would need to have been reversed.
• Source documents to Accounting Records is completeness as it may have not been recorded in A/C records hence start from invoices etc.
  Unless: its a decreasing item then it would be existence as it would need to have been reversed.

Question 26

What are the assertions for transactions?

Answer 26

• Accuracy ( A );
• Cut-off ( CO );
• Occurrence ( O );
• Completeness ( C );
• Classification ( CL ); and
• Presentation ( P ).

Question 27

What are the assertions for balances?

Answer 27

• Existence ( E );
• Completeness ( C );
• Accuracy, valuation and allocation ( AVA );
• Classification ( CL );
• Rights and obligations ( R&O ); and
• Presentation ( P ).

Question 28

What are the key assertions and substantive procedures for:
- Cash at bank?
- Trade receivables?
- Inventory?
- Trade payables?

[Key Assertion/Test/Assertions]

Answer 28

Key Assertion/Test/Assertions

Cash at bank:
Key assertion: All of them [E, RO, AVA, CO, CL]
- Bank reconciliation [C, E, AVA, R&O, Cl]
- Bank confirmation letter [C, E, AVA, R&O, Cl]
- Physical verification of cash balances [E, AVA]
- Foreign currency rates recalculated [AVA]

Trade receivables:
- Debtors circularisation [E, R&O, Cl]
- Subsequent cash testing [AVA, E, R&O]
- Testing the allowance for doubtful debt [AVA]

Inventory:
- Stock count follow up [C, E]
- Cut-off testing [C, E]
- Cost vs. NRV testing [AVA]

Trade payables:
Key assertion = Completeness
- Creditors circularisation [C, E, AVA, R&O, Cl]
- Supplier statement reconciliations [C, E, AVA, R&O, Cl]
- Search for unrecorded liabilities [C]

Question 29

What are the key assertions and substantive procedures for:
- Sales and other income?
- Purchases and other expenses?
- Payroll expense?

Answer 29

Sales and other income:
- Substantive analytical procedures [O, C, Cl, CO, A]
- Cut-off testing [C]

Purchases and other expenses:
- Substantive analytical procedures [O, C, Cl, CO, A]
- Cut-off testing [C]

Payroll expense:
- Substantive analytical procedures
- Payroll reconciliation [O, C, Cl, CO, A]
- Joiners and leavers testing [O, CO]

Question 30

How can substantive analytical procedures be used to test transactions in the SPL?

Answer 30

They can be used over the most significant account e.g. Sales, COS, Depreciation expense and Payroll expense.

As a general rule, substantive analytical procedures will provide evidence over completeness, occurrence, accuracy, cut-off and classification.

Question 31

How are disclosures related to account balances and classes of transactions tested?

Answer 31

Using a disclosure checklist to ensure all matters have been presented and disclosed in accordance with CA 2006 and any applicable accounting standards.

This is done by a senior member of the engagement team.