Chapter 8: Understanding Substantive Testing Flashcards
Substantive Procedures
audit procedures that are designed to detect material misstatements at the assertion level.
Risk Assessments
required to be performed at assertion level and the financial statement level.
- Risk assessment affects degree of focus on certain assertions.
- Example is Warranty Provision: risk that some claims are omitted is higher than risk of incorrect measurement of identified claims.
What are the three types of substantive audit procedures?
1) Tests of Details
2) Analytical Procedures
3) Using Technology for Substantive Testing
Tests of Details
designed to verify a balance or transaction back to supporting documentation.
What are the two types of details?
- Vouching: taking a balance or transaction from the underlying accounting records and verifying it by agreeing the details to supporting evidence outside of the accounting records of the company.
- Tracing: tracking a source document to the accounting records.
What can analytical procedures be used for?
- Primary (persuasive) tests of a balance.
- Corroborative tests in combination with other procedures.
- To provide at least some minimal level of support for the conclusion.
What is the analytical procedures approach?
-Compare estimated amount with calculation; assess if any difference is significant.
- Determine appropriate procedures for investigating reasons for the difference.
- Perform procedures.
Draw conclusions.
What are three types of analytical procedures?
- Absolute data comparisons (prior year, budgets, etc.).
- Ratio analysis (profitability, liquidity, and solvency).
- Trend analysis (over several accounting periods).
How can you improve reliability of analytical procedures?
- Mitigate risk of accepting account as not misstated when it is materially misstated.
- Consider relevance of analytical procedures.
- Consider the reliability of analytical procedures.
