Class 4 - Substantive Testing and Procedures

Question 1

Substantive Testing

Answer 1

Irrespective of the assessed risks of material misstatement the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure.

This requirement reflect:

1. the auditor’s assessmemt of risk is judgemental and also may not identify all risks of material misstatemts
2. there are inherent limitations to internal control including management override

Question 2

Substantive Procedure

Answer 2

An audit procedure designed to detect material misstatements at the assertion level - provides evidence

2 types:

1. substantive analytical procedures (SAP)
2. Test of Details (ToD)

Question 3

Substantive Analytical Procedures

Answer 3

Usually more applicable to large volume of transactions that tend to be predictable over time

1. Determine the suitability
2. Evaluated the reliability of the data
3. Develop an expectation
4. Determine the amount of any difference

Question 4

Determine the Suitability (SAP)

Answer 4

Expectation that relationships among data exist and continue in the absence of known conditions to the contrary.

If controls are deficient the auditor may play more reliance of ToD

ex: estimate personal costs based on fixed rates from previous periods. give a audit evidence for a significant item in the financial statemtns and reduce the need to perform tests of details in payroll

Question 5

Evaluate reliability of the data (SAP)

Answer 5

It is influenced by the source and natire and is dependent on the circumstancesunder which was obtained.

auditor should consider the source of the information, comparability of the information available, nature and relevance of the information, controls over the preparation of the information that are designed to ensure its completness, accuracy and validity

Question 6

Develop an Expectation (SAP)

Answer 6

Develop an expectation of recorded amounts or ratios and evaluate if the expectation is sufficiently precise to identify if misstataments, individually or in agreggate with others, are material

Question 7

Determine the amount of any difference (SAP)

Answer 7

Determine the amount of any differnece of recorded amountfrom expected values that is acceptable without investigation

As the assessed risk increases, the amlunt of difference considered acceptable without investigation decreases in order to achieve the desired level of persuasive evidence

Question 8

Test of Details (ToD)

Answer 8

The extent of testing is ordinarily thought of in terms of the sample size.
In selecting items for testing, the auditor is required to determine the relevance and reliability of information to be used as audit evidence consideration as well as effectiveness (sufficiency)

• entire population
• specific items
  -substantive sampling

Question 9

entire population (ToD)

Answer 9

for small value populations, significant risk and other means fo not provide sufficient appropriate audit evidence

Question 10

specific items (ToD)

Answer 10

the judgemental selection of specific items is subject to non-sampling risk.

items selected: all items over a certain amount, items to be examine its entity nature or the nature of transactions, or items of high value

the results of the audit procedures selected in this way cannot be projected to the entire population

Question 11

audit sampling

Answer 11

audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor a reasobale basis on which to draw conclusions about the entire population

can be physical items or monetary units

Question 12

sampling risk

Answer 12

the risk that the auditor’s concluion based on a sample may be dfferent from the concluion if the entire population were subject to the same audit procedure

the auditor shall determine a sample size sufficnet to reduce sampling risk to an acceptably low level

Question 13

Tolerable misstament

Answer 13

address the risk that the agreggate of individual immaterial misstatements may cause the financial statements to be materially misstated and provide a margin for possible undetected misstatements

it is the application of performance materiality (which may be lower than that) to a particular sampling procedure

Question 14

statistical sampling

Answer 14

1.random selection of the sample tests
2.use of probability theory to evaluate sample results inclusing measurement of sampling risk