Chapter 9 Flashcards
What are the three considerations for substantive procedures
Nature
Timing
Extent
What is the nature of a substantive procedure
What evidence you need to provide assurance of no material misstatement. When detection risk is high less convincing evidence is needed because a lower assessed level of RMM, when there is a low level of detection risk you need more effective evidence
What is the relationship between RMM (risk of material misstatement) and Detection risk
Inverse. When risk of material misstatement is high detection risk is low
What is the timing of a substantive procedure
When to collect evidence. High detection risk (low RMM) should be collected at Interim. High RMM low detection risk should be collected at year end
What is the extent of a substantive procedure
How much evidence you need. Higher RMM low detection risk should have a larger sample size. High detection risk low RMM means smaller sample size
What is a test of details
Refers to the substantive procedures’ auditors use to test the details of account balances, transactions, and disclosures
When are auditors required to perform substantive procedures
For all relevant assertions that have been identified during the risk assessment phase
What is a dual purpose test
A test of controls and a substantive test of details to be performed at the same time on the same transaction
What are analytical procedures
Analytical procedures are evaluations of financial information
through analysis of plausible relationships among financial and
nonfinancial data. The use of analytical procedures is required during risk assessment and the completion phase of the audit.
What are initial procedures you would apply to AR
Initial procedures are procedures applied before substantial.
- Trace beginning balance of the account to PY work paper
- Verify mathematical accuracy of the sub-ledger
- Agree ending balance per sub ledger to trial balance
- Scan transactions for unusual items
What factors impact the effectiveness and efficiency of a substantive test
Nature
Plausibility and predictability of the relationship
Availability and reliability of data used to develop the expectation
Precision of the expectation
When may interim testing be more efficient than end of year testing
When there is a lower risk of material misstatement
What is roll-forward procedures
When auditors roll-forward their findings from interim testing through to year-end
When are auditors more likely to use audit sampling over substantive procedures when
When professional standards call for it
Evidence to support the test is not available in electronic form
Audit population is small and can be tested using traditional tests
Relevant data is not reliable and internal controls over the reliability of data are weak
Relevant data is in different formats and not easy to use
What is an accounting estimate
An approximation of a monetary amount when a precise means of measurement is not available
