Module 7: Substantive Procedures Flashcards
What are assertions?
Assertions are representations by those charged with governance that financial statements have been prepared in accordance with applicable financial reporting framework
Why are assertions needed in external audit?
Give the auditor:
* A clearer definition of specific audit objectives – enabling the auditor to focus on key areas
* A clearer demonstration of work done
Account balances (balance sheet) assertions
- Existence
- Completeness
- Accuracy, valuation and allocation
- Classification
- Rights and obligations
- Presentation
Classes of transactions (statement of profit or loss) assertions
- Accuracy
- Cut-off
- Ocurrence
- Completeness
- Classification
- Presentation
What does sufficient, appropriate evidence mean?
Quantity and qaulity
What factors affect the appropriateness of evidence?
Relevnece and reliability
* Try to obtain 3rd party info
What factors affect the sufficiency of evidence?
- RoMM
- Materiality
- Source and relability
- Nature of the accounting and internal control systems
What is audit sampling?
and it is decided by…
designed to enable conclusions to be drawn about entire population by testing a sample
Decided by characteristics of population, RoMM, audit efficency
What are some examples of sampling methods?
- Random
- Monetary Unit Sampling (MUS)
- Haphazard sampling
What evidence collection techniques are available to the auditor?
- Risk assessment procedures
- Test of controls
- Substantive testing (test of details and subsantive analytical procedures)
- Inspection
- confirmation from 3rd party
- reclaulations
- reperformace
- observation
How is data prepared for use in data analytics at the substantive testing stage?
- Data aquisition
- Transformation
- Quality - Considering relevance and reliability of data
What are substantive analytical procedures?
Provide auditors with assurance over assertions
- finding material misstatements
How can audit data analytics be used for performing substantive analytical procedures?
manually, computer-based audit techniques or ADA
Substantive analytical procedure steps
- The auditor must form an expectation of balances tested and identify level of deviation
- Expected balance comapred to actual figure
- differences investigated and substantiated
- conclude if figure is free from material misstatement
What ADA are used during planning and substantive stage
- Reasonableness test
- Trend analysis
- Large and unusual items review
What areas of statistics may be relevant during the audit process?
- Mean, Median, Mode, Standard deviation, Outlier
- Benford’s law - probability distribution for the likelihood of the first digit in a set of numbers
- large data sets
- Regression analysis - relationship between a dependent variable and an independent variable
- Correlation
Statsitical sampling advantages
Advantages:
* targeted and efficent sample
* measure of sufficency
* reduce differences in audit judgement
* errors are quantified and extrapolated to population
How can statistics be used in the sample selection process?
Statistical sampling disadvantages
- Not efficient if data is not available electronically
- requires additional expertise
What are random seeds
Starting point when generating a random sample
* Relies on complex compuet code
* Can be reperfomed if random seed is generated based on specific criteria
What is substantive testing?
audit procedures designed to detect material misstatements over account balances, class of transactions and disclosures
* auditor must perform at least some substantive testing on every statutory audit.
* split into test of details and substantive analytical procedures
What is directional testing?
Source evidence -> Ledger = Completeness
Ledger -> Source Evidence = Existence/Occurance
Where we have decreasing items, we will have to reverse the directional testing rule.
What is the approach to writing substantive procedures?
Must include:
* Verb eg. recalculate, inspect, enquire. reperform
* Population e.g debtors over last 90 days
* Source evidence
* Activity (what is actually being looked for?)
Test of details stages
- Source document/ evidence
- Sub-ledger/ supporting schedules
- Nominal ledger/ trial balanced
- Financial statements
What are the key assertions and substantive procedures for cash at bank?
Assertions;
* Existence
* Rights and Obligations
* Accuracy, Valuation and Allocation
* Completeness
* Classification
Substantive procedures:
* Bank reconcilliation (all assertions but presentation)
* Bank Confirmation Letter
What are the key assertions and substantive procedures for fixed assets?
Substantive procedures:
* Additions
* Disposals
* Depreciation
* Revaluation
What are the key assertions and substantive procedures for trade recievables?
Substantive Procedures:
* receivables circularisation (Existence, classification, rights and obligations)
* subsequent cash testing (Existence, rights and allocations, AVA)
* Testing allowance for doubtful debts.
AVA = accuracy, valuation and allocation.
What are the key assertions and substantive procedures for inventory?
Quantity (completeness and existence)
1. Following up tests performed at the inventory count
2. Cut-off testing
Value:
3. Cost vs NRV testing
What are the key assertions and substantive procedures for trade payables?
- creditors’ circularisations;
- Supplier statement reconciliations;
- Search for unrecorded liabilities.
How can substantive analytical procedures be used to test transactions in the statement of profit or loss?
What are the key assertions and substantive procedures for
Sales and other income?
What are the key assertions and substantive procedures for purchases and other expenses?
What are the key assertions and substantive procedures for payroll expense?
How are disclosures related to account balances and classes of transactions tested?
