Lecture 8: Substantive testing

Question 1

What is a substantive test?

Answer 1

Tests performed to obtain audit evidence to detect material misstatement in the financial report

Question 2

What risk do substantive tests reduce?

Answer 2

Detection risk

Question 3

What are the 3 types of substantive tests?

Answer 3

Substantive tests of transactions
Substantive tests of details of balances
Substantive analytical procedures

Question 4

How do substantive tests of transactions and tests of controls differ in relation to transactions?

Answer 4

Transactions
- tests to substantiate transactions

Controls
- tests effectiveness of controls over the processing of transactions

Question 5

List the sources of evidence. (6)

Answer 5

Accounting records
Corroborating information (documents)
Board, management and staff
Physical resources
Third parties
Market data

Question 6

List the relevant procedures. (5)

Answer 6

Inspection
External confirmation
Enquiry
Recomputation
Analytical procedures

Question 7

What are the specific terms for procedures of substantive testing? (10)

Answer 7

Bank confirmation
Bank reconciliation
Debtor's confirmation
Review of aged trial balance
Review of subsequent receipts
Review of subsequent payments
General procedures
Analytical procedures
Tracing
Vouching

Question 8

What are the factors that influence the selection of audit procedures? (5)

Answer 8

Nature of the item
Size and volume of transactions
Location
Custody of the asset
Availability of particular evidence

Question 9

What are the main assertions for Balance of Cash at bank? (2)

Answer 9

Existence and completeness

Question 10

What are the main assertions for Transactions affecting Cash at bank? (2)

Answer 10

Occurrence and completeness

Question 11

What are the main assertions for Foreign Currency transactions that affect Cash at bank? (2)

Answer 11

Accuracy and valuation

Question 12

What are the main assertions for Balance of Accounts receivable? (2)

Answer 12

Existence and valuation

Question 13

What are the main assertions for Transactions of sales and cash receipts affecting accounts receivable? (3)

Answer 13

Occurrence, accuracy and cut-off

Question 14

State 3 examples of analytical procedures for sales and collections.

Answer 14

Compare sales by month over time
Compare individual customer balances (over a certain amount) with previous years
Compare allowance for doubtful debts as a percentage of accounts receivable with prior years

Question 15

State 2 examples of analytical procedures for inventory.

Answer 15

Compare gross margin percentage with those of previous years

Compare inventory turnover ratio with those of previous years

Question 16

What is required by the auditor if inventory is material?

Answer 16

Attend stocktake (unless impracticable) to determine existence and condition of inventory
Evaluate management's instructions
Observe count
Inspect inventory
Perform test counts

Question 17

Key assertions for inventory? (2)

Answer 17

Existence

Valuation & allocation

Question 18

Key assertions for PPE? (3)

Answer 18

Existence
Rights & obligations
Valuation & allocation

Question 19

What is the key record for audit of PPE?

Answer 19

Asset register

Question 20

If Projected error > Allocated materiality, what is the auditor required to do? (3)

Answer 20

Ask management to investigate and make adjustments
Modify planned audit procedures and undertake more substantive testing
Consider result with results of other substantive tests and their effect on the audit report