AUD 3 Substantive Tests & Analytical Procesure

Question 1

Applying substantive tests at an interim date, rather than at the balance sheet date, increases audit risk that a misstatement may occur between the interim and year-end dates and exist at the balance sheet date. This increase in risk is the incremental audit risk. Therefore, before auditing asset accounts at an interim date, an auditor should assess

Answer 1

the difficulty in controlling the incremental audit risk (i.e., extending the audit conclusion over the remaining period from the interim date to the balance sheet date).

Question 2

Analytical procedures evaluate

Answer 2

significant ratios, operating statistics, and trends in financial data.

Question 3

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristic is a use of

Answer 3

tests of details

Question 4

The reliability of data is influenced by its source and nature and is dependent on the circumstances under which it is obtained. Accordingly, the following are relevant when determining whether data is reliable for purposes of designing substantive analytical procedures:

Answer 4

The source of the information available. For example, information may be more reliable when it is obtained from independent sources outside the entity.
The comparability of the information available. For example, broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialized products.
The nature and relevance of the information available. For example, whether budgets have been established as results to be expected rather than as goals to be achieved.
Controls over the preparation of the information that are designed to ensure its completeness, accuracy, and validity. For example, controls over the preparation, review, and maintenance of budgets.

Question 5

Analytical procedures involve comparisons of recorded amounts (or ratios from recorded amounts) with expectations developed by the auditor from sources such as:

Answer 5

• prior periods,
  
  • anticipated results (forecasts or budgets),
  • relationships among financial statements elements in the current period,
  • industry information, or
  • relationships between financial and relevant non financial information.

Question 6

When making the decision of whether to apply analytical procedures or tests of details to a certain account balance or class of transactions, the auditor should consider the:

Answer 6

nature of the assertion,
plausibility and predictability of the relationship,
availability and reliability of data, and
precision of the expectation.

Question 7

The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine

Answer 7

the acceptable level of detection risk for financial statement assertions. The auditor uses the acceptable level of detection risk to determine the nature, timing, and extent of the auditing procedures to be applied to the account balance or class of transactions to detect material misstatements in the financial statement assertions. Auditing procedures designed to detect such misstatements are referred to as substantive tests.

Question 8

When an auditor performs substantive procedures at an interim date, the risk increases that misstatements may exist at the period end that may not be detected by the auditor. When deciding whether or not to perform interim testing, the auditor would consider such factors as:

Answer 8

-the control environment and other relevant controls,
the availability of information at a later date that is necessary for the auditor’s procedures,
-the purpose of the substantive procedure,
the assessed risk of material misstatement,
-the nature of the class of transactions or account balance and relevant assertions, and
-the ability of the auditor to perform appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period in order to reduce the risk that misstatements that may exist at the period-end will not be detected.

Question 9

When planning a particular sample for a substantive test of details, the auditor should consider the following:

Answer 9

• The auditor’s assessment of the risk of material misstatement
• The assurance obtained from other substantive procedures directed at the same assertion
• The auditor’s allowable risk of incorrect acceptance
• Tolerable misstatement
• Expected misstatement for the population
• Stratification of the population when performed
• For some sampling methods, the number of sampling units in each stratum