Overview of Substantive Procedures

Question 1

What does substantive mean?

Answer 1

Ensure the accuracy by the weight over evidence to verify

Verify and search for material misstatements in the financial statements

Have to perform for EVERY MATERIAL ELEMENT OF THE FINANCIAL STATEMENTS

Question 2

What are the main pieces of an audit process?

Answer 2

1) Audit planning
2) Review & Preliminary evaluation
3) Test of controls (re-eval)
- Private: Not required
- Public: Required

SUBSTANTIVE PROCEDURES:

4) Analytical procedures (Substantive tests)
5) Test of details (Substantive tests)

REPORT:
6) Audit report

Question 3

What are the two categories of substantive tests?

Answer 3

1) Test of details
- Tests of ending b balances
- Tests of transactions

2) Substantive analytical procedures

Question 4

What are the two categories for test of details?

Answer 4

• Test of ending balances- Testing account balances at a particular point in time
• Test of transactions:

Question 5

What is the definition of analytical procedures?

Answer 5

Evaluation of financial information through analysis of plausible relationships among both financial and nonfinancial data

Question 6

What are the three purposes analytical procedures serve?

Answer 6

1) Required in planning
2) Useful for substantive audit evidence
3) Required in final review

Question 7

The effectiveness of analytical procedures depends on the four key considerations:

Answer 7

1) Nature of assertion- May be effective in testing for omissions of transactions that would be hard to detect with procedures that focus on recorded amounts. In other words, the skillful use of analytical procedures may be more effective than tests of details in addressing COMPLETENESS ASSERTION!

2) Predictability of the relationship- Developing a meaningful expectation to compare to the client’s recorded balance is critical to the skillful use of analytical procedures.
- Relationships in a stable environment are usually more predicable than those in a dynamic environment
- Relationships involving income statement accounts tend to be more predicable than those involving balance sheet accounts
- Relationships involving transactions subject to management discretion tend to be less predictable

3) Reliability of data- If we are dealing with bad data, you won’t get meaningful results
4) Precision of the expectation- the more precise you can make your expectation, the better insights you’ll be able to gain.