Module 7 Substantive procedures Flashcards
What is an Assertion?
Representations by those charged with governance that financial statements have been prepared in accordance with the applicable financial reporting framework
CRACE + P
What are the detailed assertions for balances?
- Completeness (C)
- Rights and obligations (R&O)
- Accuracy, validation and allocation (AVA)
- Classification (CL)
- Existence (E)
+
- Presentation (P)
What is Existence mostly associated with and what is its main risk?
Associated with Assets
Key risk: OVER statement of assets
What is the main risk associated with the assertion of Completeness?
Understatement of liabilities
(Some liabilities are missing)
OCCA + P
What are the (Transactions) Statement of profit or loss assertions?
OCCCA + P
- Occurrence
- Cut-off
- Completeness
- Classification
- Accuracy
+
- Presentation
2 things
What do assertions give the auditor?
1) A clear definition of specific audit objectives
2) A clearer demonstration of work done
Does the auditor test every balance and transaction?
NO
They will focus on those with a higher risk of material misstatement
What does appropriateness mean in relation to evidence?
Appropriateness is a measure of the quality of the audit evidence
What does relevance mean in relation to evidence?
Relevance relates to whether the evidence obtained addresses (is relevant to) the assertion being tested
What are the three sources of evidence?
1) Auditor generated
2) Client generated
3) Third party/externally generated
What is one of the key reasons auditors cannot give absolute assurance?
Is due to the use of sampling
What are sampling units?
Are the individual items making up a population
When deciding on testing, the decision regarding the selection of approach will be determined by:
1) The characteristics of the population (e.g handful of large items or large number of smaller items)
2) The risk of material misstatement (RoMM)
3) The audit efficiency of the approach
What are the methods available to auditors when using sampling?
- Random selection
- Monetary unit sampling (MUS)
- Haphazard selection
According to ISA (UK) 500, what are the techniques auditors can use to collect evidence?
- Inspection of records and documents or tangible assets
- Confirmation from a third party
- Analytical procedures
- Recalculation by the auditor to check mathematical accuracy
- Inquiry of client staff
- Observation of a process or procedure
- Reperformance of a process or procedure
What is the purpose of data analytics?
Seen as a means of improving audit quality
Substantive analytical procedures can generally provide the auditor with evidence over the following Balance assertions?
- Completeness
- Existence
- Accuracy, valuation and allocation
- Classification
Substantive analytical procedures can generally provide the auditor with evidence over the following Transaction assertions?
- Completeness
- Occurrence
- Cut off
- Accuracy
- Classification
What are the 5 analytical procedure techniques?
1) Comparison
2) Ratio Analysis
3) Reasonable tests
4) Trend analysis
5) Large and unusual items review
AEIOU
What are the evidence collection techniques?
- Analytical Procedures
- Enquiries
- Inspection
- Observation
- RecalcUlation
What is Benford’s Law?
A probability distribution for the likelihood of the first digit in a set of numbers.
(i.e the number 1 at the start of 10,345)
What is regression analysis?
A statistical method for estimating the relationship among variables based on past relationships
What is the dependent variable in regression analysis?
The variable that you are trying to understand or predict. This will be the account that is being audited
What is the independent variable in regression analysis?
A variable that may have an impact on your dependent variable
What is statistical sampling?
An approach to audit sampling that has the following characteristics:
i) Random selection of the sample items: and
ii) The use of probability theory to evaluate sample results, including the measurement of sampling risk
What are some advantages of statistical sampling?
- It can allow the auditor to select a more targeted and efficient sample
- It allows a measure of the sufficiency of the audit evidence obtained
- The use of statistics can reduce the risk that differences in audit judgement result in significant differences in sample sizes selected by different auditors
- It allows for errors identified in the sample to be quantified and extrapolated to the full population
What are some disadvantages of statistical sampling?
- Where data is not available in electronic format, it may not be efficient
- Statistical sampling requires additional expertise within the audit team
What is random seed?
The starting point when generating a random sample
If it goes from source to FS, what assertion is it?
Completeness
If it goes from FS to source, what assertion is it?
Existence / Occurrence
What is the exception to the San Fran rule? And what are they?
Decreasing items
Eg:
Credit notes
Fixed asset disposals
Payments for creditors
Receipt of debts
When writing a test what three elements should be included?
HOW
WHAT
WHY
What assertions does a bank recon satisfy?
CRACE
What assertions does a bank confirmation letter satisfy?
CRACE
What are the two key sub tests performed on bank statements?
-Testing the bank recon
- Testing the bank confirmation letter
