Risk Response: Performing Substantive Procedures Flashcards
What does substantive mean?
It means when auditors gather evidence to support the transactions, account balances, and disclosures provide by management in the F/S.
What are substantive procedures (substantive testing)?
Audit procedures designed to detect material misstatements at the assertion level and to gather evidence to support management assertions.
Diagram of impact of RMM on level of substantive testing
Explain the relationship between the RMM and detection risk.
The RMM and detection risk have an inverse relationship. When RMM is high, then detection risk will be low.
Why are management assertions important in the determination of detection risk?
Auditing standards require that auditors assess the RMM at the assertion level. Assertions are important because they impact the assessment of inherent and control risks which is the driving force in deterring detection risk.
What factors affect the auditor’s risk response at the financial statement level?
It is affected by the auditor’s understanding of the entity’s control environment and the assess risk of material misstatement (RMM) due to fraud.
How could auditors modify their audit procedures if there is increased risk of fraud?
If there is an increased risk of fraud by including elements of unpredictability in their audit plan such as performing audit procedures on a surprise basis, varying locations tested or performing procedures related to accounts, assertions, or disclosures that they would normally not test.
How could auditors modify their audit procedures if a client has a poor control environment?
By altering the nature, timing, or extent of audit procedures and expanding the scope of the audit to include more of the client’s locations.
What is the nature of an audit procedure?
It refers to its purpose (test of control or substantive procedure) and its type. Inspection, Observation, Inquiry, Confirmation, Recalculations Reperformance, Analytical Procedures, Scanning, and ADA.
What are relevant assertions?
Assertions that have a reasonable possibility of containing a material misstatement (MM) that would cause the F/S to be materially misstated and have a meaningful impact on whether the account is fairly stated.
What are analytical procedures?
They are evaluations of financial information through analysis of plausible relationship among financial and non financial data. They are required during risk assessment.
What factors impact the effectiveness and efficiency of substantive procedures?
- The nature of the assertion
- The plausibility and predictability of the relationship
- The availability and reliability of the data used to develop the expectation
- The precision of the expectation
What is confirmation bias?
It is the tendency to seek or interpret evidence in ways that support pre existing beliefs or expectations.
What is a dual-purpose test?
It is a substantive test of a transaction and a test of control relevant to that transaction that are performed concurrently.
Example: when auditors inspect a sample of vendor invoices to determine if they were properly authorized to be paid. On the same sample of invoices, the auditors would then inspect and recompute the cost of inventory items purchased to test the valuation assertion for inventory.
What are roll-forward procedures?
Procedures performed at year end on transaction occurring between an interim date and year end (the roll forward period) to provide sufficient appropriate audit evidence on which to base conclusions at year end when substantive procedures are performed at an interim date.
When would auditors test 100% of a population?
- When the population is very small
- When they population is large, the data is reliable and in electronic form and the auditor can use ADA software
What techniques can an auditor use to select specific items from a population to test?
Include selecting high dollar value items, key items, suspicious items, unusual, or items with a history of error. Auditors may also select items that are over a certain dollar amount when testing for overstatement or use statistical audit sampling when deciding which items to test.
What is an advantage of using statistical sampling?
Is the ability for auditors to draw conclusions about an entire population based on the results of sample testing.
What is an accounting estimate?
IS an approximation of a monetary amount when a precise means a measurement is not available.
What are the two types of accounting estimates?
- Forecasting the outcome of a transactions or event as required by a financial reporting framework.
- Determining fair value of a transaction or financial statement item for inclusion in the F/S and disclosure in the notes as required by a financial reporting framework.
What is estimation uncertainty?
It is the susceptibility of an accounting estimate and related discourses to an inherent lack of precision in its measurement.
What is management bias?
It is a lack of neutrality by management in the preparation and fair presentation of information.
What is misstatement?
It is the difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with GAAP.
What are the three types of misstatements?
- Factual: there is no doubt it is a misstatement because there is no element of judgement involved.
- Judgmental: these differences are caused by management judgement regarding accounting estimates the auditors feel are unreasonable or the selection of accounting polices the auditors feel are inappropriate.
- Projected: these are the auditor’s best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population.
