Quiz & Worksheet Substantive Procedures in Auditing

After identifying the significant account and relevant assertion for the list of tasks, auditors gather evidence that supports and corroborates or contradicts management assertions . Auditors select the type of audit procedures capable of providing sufficient appropriate evidence that is both relevant and reliable, as required by auditing standards (AICPA 2012b; PCAOB 2010c). Sufficient refers to the amount of evidence, while appropriate refers to the ability of the evidence to support the related assertion. Much like the presentation of management assertions, the https://online-accounting.net/ PCAOB and AICPA each provide guidance on audit evidence that includes lists and definitions of the various types of audit procedures, as provided in Exhibit 2, Panels A and B, respectively. North Central CPAs’ audit planning approach requires that any inspection procedures be distinctly differentiated between Inspection of Documents/Records and Inspection of Assets. When a significant amount of audit evidence exists in electronic form, it may or may not practical or possible to reduce detection risk to an acceptable level by performing only substantive tests.

A test of internal controls is an evaluation of the existing controls, either as part of an official audit or in preparation for an audit, to see if the controls are in place and identify weaknesses. The three types of substantive tests are analytical procedures, a test of details of transactions, and tests of details of balances. The nature of substantive tests refers to the type and effectiveness of the auditing procedures. When the acceptable level of detection risk is low, the auditor must use more effective and usually more costly procedures. Tests of control are only performed when the auditor believes that the control risk is low, enabling them to verify this assessment.

Types of procedures

Furthermore, ISA 330 – The Auditor’s Response to Assessed Risks requires auditors to always carry out some substantive audit procedures on material items. According to the standard, auditors must carry out procedures to agree with the financial statements to the underlying account records and examine material journals and other adjustments used in the preparation of financial statements. This information indicates that the company has experienced remarkable sales growth in recent years, which is attributable to first time sales of vacuum trucks to new industrial and emergency services clients.

• The increase might be up to 100% based on auditors’ judgments.
• Internal controls are rules and procedures established by a company to ensure business continuity, prevent fraud, and preserve the integrity and accuracy of financial reporting.
• For integrated audits, the evidence regarding the effectiveness of the controls obtained during the audit of internal control.
• The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production.
• The collection supervisor’s sign-off is the evidence that the control was performed.
• On the other hand, if the controls are weak and not effective in preventing or detecting risks of material misstatements, the control risk will be high.
• The cutoff assertion addresses the proper recording of transactions in the period when they actually occurred, as well as the proper omission of transactions that did not take place during the current period.

The MVT mini case was completed by students individually as part of the end-of-course assessment, and was scored according to the rubric provided in the Teaching Notes. Together, these two parts of the assignment comprised 20 percent of the students’ final exam. Assessment results, student feedback, and the quality of discussion generated by these assignments provide support for their effectiveness in achieving the learning objectives. In addition, audit practitioners who reviewed these materials commented favorably on their relevance and value. Several auditing educators at institutions unaffiliated with the authors also provided reviews of the resource, and their comments and suggestions were incorporated into the current version. For each of the accounts and assertions identified in part , describe a specific substantive task employing an audit procedure that could be performed by the North Central CPAs audit team. You may wish to first select a type of audit procedure from those provided in the PCAOB guidance in Exhibit 2, Panel A, then elaborate on the nature of an audit task that would be appropriate.

Substantive tests of transactions

Analytical procedures are used in this phase to increase the auditor’s understanding of the client and identify specific audit risks by considering unusual or unexpected balances or relationships in aggregate data. A financial statement may depict a leasehold right as a freehold right. The auditor has to check to ensure test of control vs substantive test that these assertions are fairly represented in the financial statements. 9/ Substantive procedures consist of tests of details of accounts and disclosures and substantive analytical procedures. For integrated audits, the evidence regarding the effectiveness of the controls obtained during the audit of internal control.

Therefore, they need to perform audit procedures which include a test of controls and substantive audit procedures. Substantive audit procedures have a further two types, which include substantive analytical procedures and test of details. Both of these are different from each other, as explained above. Addressing Fraud Risks in the Audit of Financial Statements. In the audit of financial statements, the auditor should perform substantive procedures, including tests of details, that are specifically responsive to the assessed fraud risks.

Nature of Evidence

Computer-performed controls must be tested if the auditor considers them to be key controls for reducing the likelihood of material misstatements in the financial statements. Once auditors determine an automated control is functioning properly, they can focus subsequent tests on assessing whether any changes have occurred that will limit the effectiveness of the control. Leads to significant audit efficiencies when the auditor determines that automated controls tested in the prior year’s audit have not been changes and continue to b subject to effective general controls. Auditors consider the most likely cause of a potential misstatement when developing their audit approach for significant accounts.

The auditor can vary the evidence obtained by changing the extent of substantive tests performed. Auditors have a full set of tools at their disposal when performing an audit for a client. These include tests of control, which provide a way to take a closer look at the client’s internal control systems.

Extent of Evidence

Exceptions in test of control only indicates the likelihood of misstatements affecting the dollar value of the financial statements Substantive tests of transactions or a test of details of balances is a financial statement misstatement. When control test deviations considered significant deficiency or material weakness, this tells an auditor there is more likely a significant material misstatement.

Accounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period. Accounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services.

Revenue Audit Procedures

For example, you could agree total daily receipts to the bank statement for twenty-five days. As you do so, you review the daily sign-offs on the reconciliation sheets. The collection supervisor’s sign-off is the evidence that the control was performed. For example, suppose your billing and collections walkthrough reveals appropriate segregation of duties. You see that authorized personnel issue receipts for each payment received. Additionally, you determine that total daily cash inflows are reconciled by the collections supervisor to the online bank statement, and she signs off on a reconciliation sheet as evidence of this procedure. Lastly, you note that a person not involved in cash collections reconciles the monthly bank statement.

Designing substantive tests involves determining the nature, timing, and extent of the tests necessary to meet the acceptable level of detecting risk for each assertion. Auditors use them to help determine their substantive procedures’ nature, timing, and extent.