Topic 8 - Substantive Testing Flashcards
What are substantive tests?
Tests performed to obtain audit evidence to detect material misstatement in the financial report.
which type of risk does substantive testing reduce?
Substantive tests are used to reduce detection risk
What are the three categories of substantive tests?
■ Substantive Tests of Transactions (Tests to substantiate transactions)
■ Substantive Tests of Details of Balances
(Tests to substantiate account balances)
■ Substantive Analytical Procedures (Use of analytical procedures to
substantiate account balances)
What is the Difference Between Substantive Tests of Transactions and Tests of Controls?
Substantive Test of Transactions- substantiate transactions
Test of Controls - tests effectiveness of controls over processing transactions
List four Evidence Sources?
￭Accounting records
￭Corroborating information (documents)
￭Board, management and staff, physical resources
￭Third parties, market data, other information
List five Procedures of substantive testing?
￭Inspection ￭External Confirmation ￭Enquiry ￭Recomputation ￭Analytical Procedure
what are three forms of
Evidence Gathering for Substantive Testing?
￭Sampling
￭Selecting specific items
￭100% examination
What five aspects influence the selection of audit procedures?
￭Nature of the item ￭Size and volume of transactions ￭Location ￭Custody of the asset ￭Availability of particular evidence
What are the 6 Transactions assertions?
￭completeness ￭cut-off ￭classification ￭occurrence ￭accuracy ￭presentation
What are the 5 Balance assertions?
￭rights and obligations ￭existence ￭accuracy valuation and allocation ￭presentation ￭completeness
For the balance of Cash at Bank, which assertions is the emphasis on?
existence and completeness
For transactions that increase or decrease Cash at bank what assertions is the emphasis on?
Occurrence and completeness
with Bank Reconciliation, what items must be added/deducted from Cash at bank Balance (Accting Record) so as to match Bank Statement?
- Deposits in transit
- Unrecorded bank fees
+ Outstanding cheques
+/- Other reconciling amounts.
How would you test existence of cash balance?
Confirm client’s balances with bank. Perform a bank reconciliation (vouching)
How would you test Completeness of Cash Balance?
Cash Balance in Balance Sheet includes all cash items, Perform a bank reconciliation (tracing)
How would you test Occurrence of Cash Receipts?
Vouch a sample of entries in the Cash
Receipts Journal to supporting documentation.
How would you test Completeness of Cash Receipts?
Trace from source document to Cash
Receipts Journal
How would you test Occurrence of Cash Payments?
Vouch a sample of entries in the Cash
Receipts Journal to supporting documentation.
How would you test Completeness of Cash Payments?
Trace from source document to Cash
Receipts Journal
Which assertions are emphasised for Sales and AR?
Sales/Cash receipts- occurrence,
accuracy and cut-off
AR - existence
and valuation of accounts receivable
Auditor undertakes a STOT to find out if all
transactions are bona fide, and that no fictitious
sales transactions have been recorded, what is the assertion, and test?
Occurrence
Test: Vouch a sample of entries in the sales
journal to shipping order/ sales order
Auditor undertakes STOT to find out whether
all sales that were made were actually recorded, what is the assertion, and test?
Completeness
Test: Trace a sample of shipping orders/ sales orders and to the sales journal
STOT to gather evidence that transactions
were recorded in the correct period, what is the assertion, and test?
Cut Off
Test: Inspect the last sales invoice before balance date and the first sales invoice after balance date for cut off. Compare with shipping orders
When are Analytical Procedures for
Sales and Collections performed? why?
￭Performed after balance date
￭Close relationship between accounts
what three things are used in Analytical Procedures for
Sales and Collections for comparisons?
￭Prior year
￭budget
￭industry
list three examples for Analytical Procedures for
Sales and Collections?
- 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
list three types of Tests of Details of the Accounts Receivable Balance?
￭External confirmation
￭Alternatives to external confirmation
￭Aged trial balance
what is Confirmation of Accounts Receivable? what does it show?
- External confirmation from a third party
- Tests whether or not Accounts Receivable balance exists and the client has the right to the asset
what are the two types of AR confirmation that an auditor may receive?
￭Positive
￭Negative
What must an auditor do in regards to AR confirmation process?
￭Follow-up non-responses
￭Analysis of differences
￭Alternative procedures
what are four assertions and two procedure when preforming Substantive Testing of Acquisitions and Payments Cycle?
■ Completeness of acquisitions
■ Completeness of cash payments
■ Purchases cut-off
■ Occurrence of acquisitions
■ Analytical procedures for accounts payable
■ Tests of details of balance for accounts payable
Which assertion is being tested when an auditor - Vouches a sample of entries in the Purchases
Journal to the Receiving Note and PO (supporting documentation)?
Occurrence
Which assertion is being tested when an auditor - Traces a sample of Receiving Notes to the
Purchases Journal to ensure that each is recorded?
Completeness
Which assertion is being tested when an auditor preforms a STOT to gather evidence that transactions
were recorded in the correct period?
Cut Off
Test: Compare dates on receiving reports and
vendors’ invoices in the purchases journal
Which assertion is emphasis placed on for AP?
Emphasis is on the audit objectives of completeness of Accounts Payable.
Rights and obligations and purchases
cut-off are also important.
The auditor compared the closing balance of
Accounts Payable with those of previous years, which assertion are they testing?
Accounts Payable-Completeness
The auditor inspected the Cash Payments Journal after balance date and traced payments to the list of
Acc. Payable recorded by the client at balance date, which assertion are they testing?
Completeness of Acc.
Payable Balance
which assertions have emphasis on them for inventory matters?
Existence, Valuation and Allocation
Why is inventory a high priority for an auditor?
■ Significant account balances.
■ Significant volume of transactions.
■ Audit of account balances is often complex and time
consuming.
list five auditing tests for inventory?
■ Tests of cost accounting records
■ Substantive analytical procedures
■ Tests of physical inventory observation
(combination of observation of count;
inquiry and inspection)
■ Cut-off – clarity over shipping and receiving
■ Tests of valuation of inventory
if you think there is Obsolete inventory, which affects
Inventory and COGS or
Overstatement/ understatement
of inventory, how would you test this?
Compare inventory
turnover ratio with those
of previous years
if you think there is Overstatement/ understatement
of inventory and COGS, how would you test this?
Compare gross margin
percentage with those
of previous years
Audit Evidence –
Specific Considerations for Inventory what must an auditor do?
Establish existence and condition of inventory
■ Attend stocktake ■ Evaluate management’s instructions ■ Observe count ■ Inspect inventory ■ Perform test counts
The auditor attended the stocktake. He selected a sample of items in the Inventory Record and vouched them to the
actual items of inventory, which assertion is being tested?
Existence of Inventory
The auditor attended the stocktake. He inspected inventory
on hand and traced it to the inventory record, which assertion is being tested?
Completeness of Inventory
The auditor determined the sales price of inventory in the
market (by inspection and inquiry) and compared it to
the book value of the inventory, what is being tested?
Valuation of Inventory
Which assertions have emphasis placed on them for Property Plant & Equipment?
existence, rights and obligations, and
valuation and allocation
Inspect asset register and note additions or
Inspect vendor’s invoice for newly acquired
assets, which assertion is being test?
Existence of Acquisitions
Search for unrecorded disposals. Inquire whether a newly acquired asset replaced
an existing asset. Inspect miscellaneous income, which assertion is being tested?
Completeness of
Disposals of PP&E
Inspect asset register and verify by
physically examining the item, which assertion is being tested?
Existence: PP&E included in the B S actually exists
Inspect a sample of items in the asset register; vouch to contract of purchase/ valuation certificate/ insurance papers (depends on nature of the item), which assertion is being tested?
PP&E are appropriately valued (valuation and allocation assertion)
what are four key things that an auditor should do to test that PP&E are Appropriately Valued?
■ Evaluate data estimates are based. ■ Testing assumptions of management ■ Testing management’s calculations ■ Compare with prior period
what is Dollar Unit Sampling?
Sampling technique where the sampling
unit is an individual dollar rather than a
transaction or balance
why is Dollar Unit Sampling useful?
■ Method of identifying and selecting the
specific items for testing
■ Greater chance that the sample will include
the larger items in the population
how is the sample interval calculated?
Population/Sample Size
how do you Determine the projected error ($ misstatement) in population (book value of all additions to PP&E)? formula?
(difference between recorded value and value of corresponding invoices/ total value of invoices) x (total population of interest value)
then you compare this amount to the materiality amount set
what needs to be done if Projected Error > Allocated Materiality? 3
■ Ask management to investigate & make adjustments
■ Modify planned audit procedures, and
undertake more Substantive Testing;
■ Consider result with results of other STs and
their effect on the audit report.
