Types Of Audit Procedure

Question 1

Types of Audit Procedure

Answer 1

ISA 500 identifies two main types of procedures for gathering audit evidence: tests of controls and substantive procedures. Here’s a detailed look at each:

Purpose:
- Designed to evaluate the operating effectiveness of controls in preventing, detecting, and correcting material misstatements at the assertion level.

When Used:
- To assess the system under audit. If controls are effective, fewer substantive procedures are needed. If controls are weak, more substantive procedures are required.

Examples:
- Observation: Watching the process of inventory counts to ensure controls are followed.
- Inspection: Reviewing authorization signatures on purchase orders.
- Reperformance: Reperforming a bank reconciliation to check for accuracy.

Purpose:
- Designed to detect material misstatements at the assertion level.

Types:
1. Tests of Detail:
- Explanation: Involves verifying individual transactions and balances.
- Examples: Confirming accounts receivable balances with customers, inspecting invoices for purchases.

2. Analytical Procedures:
   
   • Explanation: Involves evaluating financial information through analysis of plausible relationships among both financial and non-financial data.
   • Examples: Comparing current year’s sales to prior years, analyzing gross profit margins.

When Used:
- Always performed to some extent, regardless of the effectiveness of controls. The extent of substantive procedures depends on the results of tests of controls.

Scenario: An auditor is auditing a company’s sales revenue.

Audit Procedures:
1. Tests of Controls:
- Observation: Observing the sales process to ensure proper authorization and recording.
- Inspection: Checking that sales invoices are properly authorized and recorded.
- Reperformance: Reperforming the calculation of sales discounts to ensure accuracy.

2. Substantive Procedures:
   
   • Tests of Detail: Confirming a sample of sales transactions with customers.
   • Analytical Procedures: Comparing monthly sales trends to identify any unusual fluctuations.

By selecting the appropriate procedures based on the specific circumstances, auditors can gather sufficient and appropriate audit evidence to support their conclusions. If you have any further questions or need more detailed examples, feel free to ask!