Audit & Assurance: Substantive Audit Procedures Flashcards
7 types of substantive procedures
Inspection Observation Inquiry External Confirmation Recalculation Reperformance Analytical
3 steps of an effectively written substantive procedure
- what risk, account & assertion, why risk
- design a procedure
- explain how to perform procedure
What is generally the highest risk assertion with cash and cash equivalents?
existence (overstatement)
There are issues with controls surrounding cash. Assertion, risk, and procedure?
Assertion: existence
Risk: stolen cash
Procedure: bank confirmation, count cash on hand
A company has pledged its cash on hand to obtain financing. Assertion, risk, and procedure?
Assertion: rights & obligations
Risk: loan covenants breached, cash actually belongs to bank now
Procedure: review bank confirmation, BOD meeting minutes, loan covenants; recalculate covenants
What is generally the highest risk assertion with accounts receviable
existence and valuation (overstatement)
There are issues with AR controls to prevent fraudulent reporting such as segregation of duties. Assertion, risk, and procedure?
Assertion: existence (overstatement)
Risk: AR balances overstated to cover up theft of cash
Procedure: positive AR confirmations to customers, inspect customer file for payments received after year end and agree receipt of funds to deposit in bank statement to determine if the amounts were likely receivable at year end
Increasing AR balance and decreasing AR turnover ratio suggest that credit granting policies have loosened year over year. Assertion, risk, and procedure?
Assertion: existence and valuation (overstatement)
Risk: Credit being granted to customers from whom collection is not likey
Procedure: review customer file for payments received after year end to determine if amounts were likely receivable at year end; examine AR >90 days and compare to receipts subsequent to year end
What is generally the highest risk assertion with inventory?
existence & valuation
Control issues surrounding inventory. Assertion, risk, and procedure?
Assertion: existence
Risk: inventory has been stolen
Procedure: obtain year end inventory count. select sample. perform “sheet-to-floor” test counts.
Indicators that NRV of inventory has decreased. Assertion, risk, and procedure?
Assertion: valuation
Risk: inventory may not be recorded at lower of cost & NRV
Procedure: select sample, compare sales invoice to purchase invoice; compare raw material NBV’s with quoted commodity prices; look for dusty, unused, discarded inventory that may need to be written down
Inventory is held for consignment. Assertion, risk, and procedure?
Assertion: rights & obligations
Risk: items belonging to a third party may have been included in inventory counts
Procedure: inquire about consignment, inspect listing, review board meeting minutes
The company has goods out on consignment. Assertion, risk, and procedure?
Assertion: completeness
Risk: items belonging to the company have not been included in inventory counts
Procedure: “floor to sheet” count, inquire about consignment
What is generally the highest risk assertion with PPE?
Existence and valuation
There were significant additions to PPE during the year relating to the refurbishment of existing assets. Assertion, risk, procedure?
Assertion: existence
Risk: the expenditures may not meet definition of asset and may have needed to be expensed as repair and maintenance instead of capitalized
Procedure: select sample, trace to supporting invoice, examine nature of expenditure; select sample, physically inspect that additions exist
Indications of impairment exist, such as change in use, damage or obsolete PPE, discontinued production. Assertion, risk, procedure?
Assertion: valuation
Risk: the equipment may be in need of a write down
Procedure: obtain management’s impairment tests and examine for reasonability; during inventory count, look for indications of damaged or out of use equipment, trace to PPE listing
There was a change to the depreciation policy during the year. Assertion, risk, procedure?
Assertion: valuation
Risk: over or under recorded depreciation expense
Procedure: select sample, recalculate deprec; examine evidence to support the change in policy and determine if it is reasonable
Repairs and maintenance on PPE increased significantly during the year. Assertion, risk, procedure?
Assertion: completeness
Risk: repairs and maintenance expense may actually be betterments that should have been capitalized
Procedure: select sample of R&M expense invoices and review their nature
What is generally the highest risk assertion with AP?
completeness (understatement)
AP balance is lower this year than it was at last year’s year end. Assertion, risk, procedure?
Assertion: completeness
Risk: supplier invoices received before year end may have been recorded after year end in error
Procedure: Request a cheque run, select a sample of cheques written since year end, vouch to related invoices, inspect when goods/services were provided
AP includes a number of suppliers that are paid in foreign currency. Assertion, risk, procedure?
Assertion: valuation
Risk: AP balances must be translated at spot rate at year end. AP balance could be misstated if wrong forex rate used
Procedure: Identify foreign currency AP & recalculate balance
What are generally the highest risk assertions with revenue?
occurrence, accuracy, cut-off
Sales have increased year over year and there are other indications that sales may have been recorded prematurely. Assertion, risk, procedure?
Assertion: Occurrence & cutoff (overstatement)
Risk: Client may be recording revenue prior to delivering goods to customer
Procedure: Select sample of sales entries, trace to invoices and shipping docs, examine dates
Client has a manual sales system. Assertion, risk, procedure?
Assertion: accuracy
Risk: sales under or overstated due to manual error
Procedure: select sample of sales entries, trace to invoices, determine if recorded at correct amounts by comparing to price list
What are generally the highest risk assertions with cost of sales?
Completeness, accuracy, cut-off (understatement)
What are generally the highest risk assertions with expenses?
Completeness and cut-off (understatement)
Which of the following tests provides the least compelling PPE audit evidence?
a) add & cross-add balances, recalculate deprec
b) compare this year’s balance to last year’s
c) examine repairs & maintenance account for items that should be PPE
d) physically inspect new capital additions
b) because additions, dispositions, and/or depreciation have likely occurred during the year, meaning that comparisons to prior years are not as meaningful.
