Assertion - Execution - Substantive Procedures

Question 1

What CAS is used to describe substantive procedures?

Answer 1

CAS 330 - Auditor responses to asses divided substantive test into two categories
1. Substantive analytical procedures - evaluate financial information through the analysis of reasonable relationships between financial and non-financial
2. Test of detail

Question 2

What is the purpose of performing analytical procedures

Answer 2

• Performing analytical procedures at the planning stage is to provide insight into the operation of the entity
• Comparison and rating are used during the planning stage to identify issues or areas for further investigation
• Analytical procedures can also be performed near reporting stages to assess the overall review of F/S that is consistent with the auditor
• CAS 520
  -CAS 315 - Substantive analytical procedures of the planning phase

Question 3

Provide the types of analytical procedures

Answer 3

1. Horizontal or trend analysis - Measures change as % in F/S line item year over year to see the trend. Budget, forecast
2. Vertical Analysis - Measuring the B/S line item % of another item, typically, total asset for B/S and total sales of I/S
3. Ratio Analysis - Sales growth, gross margin, current ratio, inventory ratio, quick ratio, A/R turnover
4. Reasonableness test - Information available involves using the information to develop on expected. Ex. figures of magazines could be used to predict sales. Benchmarks
5. Large and unusual item review - Every account line & balance in F/S will result from various transactions during the fiscal year. Should have expectations occurred for the year.

Question 4

Provide the five common types of ratio analysis

Answer 4

1. A/R turnover - decreased A/R turnover indicates the risk that there could be uncollectible receivables or that the receivables have been inflated. Ex. Perform subsequent receipt testing
2. Inventory turnover - Decreased valuation of inventory can be an issue and maybe old. Observe fiscal inventory count, inspect inventory listing
3. D/E ratio - could be going concern issue. Analysis of cash flow projection from management, inspect the input used in preparation of cash flow forecast
4. Current ratio - A decrease could be a sign of a going concern issue. Not enough sufficient cash on hand to meet short-term obligation
   Cash flow projection
5. Gross profit margin - Increasing gross margin can indicate a cut-off issue. Both in COGS
   - Sample of sales entries and supporting document

Question 5

What are some key factor that affects the precision of analytical procedures

Answer 5

1. Data reliability
   The biggest issue in substantive analytical procedures is that data is not reliable
   - Must assess the integrity of underlying information that procedures are being applied to
2. Disaggregation - Data that has been broken down into components to provide more detail
3. Annualizing - The auditor must annualize the I/S account before comparing the results of the analytical
   Ex. Amount of revenue: $45000 * (12/9) = $60,000

Question 6

What are the 4 steps of completing analytical procedures

Answer 6

1. Developing independent expectation
   - Reliability of the data must also be assessed by the auditor
   - Developing an expectation auditor should consider any other information that has come to their attention: Main source - Management F/S, Prior year information with adjustment for current situation, Discussion with management.
2. Step 2 - Define a significant difference (threshold) for the difference the expectation and the actual outcome
   - Must decide a level of deviation
3. Step 3 - Calculate the difference between expectation and actual outcome
4. Step 4 - Investigate significant differences and draw a conclusion
   - The auditor must draw a conclusion

Question 7

What are the two main activities of the test of detail?

Answer 7

1. Vouchering - This is when a transaction or balance from the accounting record is certified by agreeing on the detail that comprises a test of detail
2. Tracing - when the source document is followed through to its record in the accounting record

Question 8

What are the common evidence techniques used when performing tests of detail

Answer 8

1. Confirmation
2. Inspection
3. Recalculation
4. Observation
5. Reperformance
6. Inquiry

Question 9

What are the external confirmation

Answer 9

• Consider, whether external confirmation will be used, usually relevant when test account balance can provide evidence
• Conformation is commonly obtained by -
  1. Bank balance and other bank relationship
  2. A/R balance and term
  3. Investment held by third party
  4. Inventory held by third party on consignment

Question 10

Explain what CAAT is and the advantages and disadvantages

Answer 10

CAAT - computerized assisted audit techniques, using the computer as an audit tool during audit procedures
Benefit: Allowing audit to sample 100% of population, unusual items/ trend
Data-oriented CAAT - Used software design for the auditor to test data when performing tests of control and substantive testing

Advantages - Ability to increase the scope of audit testing, Value added reporting for management, independent evidence, reduce audit cost
Disadvantages - High initial set-up cost, slow processing times if ADA and CAAT are working., client may be reluctant to permit access to sensitive data