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SubstantiveTestinginAuditing StudyGuide

The document outlines the concepts of substantive testing and audit evidence, emphasizing the importance of sufficiency and appropriateness in gathering evidence to detect material misstatements in financial statements. It details various audit procedures, the characteristics of reliable evidence, and the significance of documentation and professional judgment in the auditing process. Additionally, it covers specific considerations for auditing inventory, litigation, segment information, and the use of external confirmations.

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Quennie Ramos
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42 views6 pages

SubstantiveTestinginAuditing StudyGuide

The document outlines the concepts of substantive testing and audit evidence, emphasizing the importance of sufficiency and appropriateness in gathering evidence to detect material misstatements in financial statements. It details various audit procedures, the characteristics of reliable evidence, and the significance of documentation and professional judgment in the auditing process. Additionally, it covers specific considerations for auditing inventory, litigation, segment information, and the use of external confirmations.

Uploaded by

Quennie Ramos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Substantive Testing & Audit Evidence

General Concepts of Evidence


Substantive Testing: Procedures designed to detect material misstatements in the financial
statements.
Audit Evidence: Information used by the auditor to arrive at the conclusions on which the
audit opinion is based. It includes both information contained in the accounting records and
other information.

Sufficiency and Appropriateness


Sufficiency: Quantity of evidence. Influenced by the risk of material misstatement and the
quality of evidence.
Appropriateness: Quality of evidence. Includes relevance and reliability in supporting the
auditor's conclusions. They are interrelated.

Reliability of Audit Evidence

The reliability depends on the source and nature:

Independent external sources > Internal sources.


Internally generated evidence under effective controls is more reliable.
Documentary evidence > Oral representations.
Original documents > Photocopies or faxes.

Relevance of Audit Evidence

Evidence must directly relate to the assertion being tested:

Existence
Completeness
Accuracy
Valuation
Rights and obligations
Presentation and disclosure

The relevance of information to be used as audit evidence may be affected by the direction of
testing.

Audit Procedures for Gathering Evidence


Inspection (records, documents, tangible assets)
Observation (processes or procedures)
Inquiry and confirmation
Recalculation of figures
Reperformance of procedures
Analytical procedures (to identify trends or anomalies)

Timing of Evidence
Interim (before year-end)
Year-end
Timing affects reliability and extent of additional procedures needed.

Professional Judgment

Auditors use professional judgment to determine what evidence is needed, how much is enough,
and whether it is reliable.

Documentation

All evidence must be properly documented in the audit working papers to support the auditor’s
opinion.

Substantive Procedures
Designed to substantiate account balances or detect material misstatements.
Potential effectiveness is affected by:
Nature (more/less effective)
Timing (interim or year-end)
Extent (less/more extensive)

Types of Substantive Procedures


Tests of Details
Tests of transactions (small volume). Time-test transactions during the year.
Tests of balances (large volume). Time-test only the ending balance.
Analytical Procedures (ratio analysis, regression)

Directional Testing
Tracing: Source documents to accounting record (completeness). Identifies understatement
errors.
Vouching: Accounting records to source documentation (existence). Identifies overstatement
errors.

Audit Evidence Characteristics


Sufficient (quantity)
Appropriate (quality: relevance, reliability)
Persuasive rather than conclusive.

Types of Audit Evidence


FS Record/Accounting Data (direct effect on FS): GL, SL, GJ, Worksheets
Corroborating Information/Source Documents (indirect effects on FS): Bank statements,
purchase orders

Evidence is more reliable if:

Obtained from independent sources outside the entity.


Internal control is effective.
Obtained directly by the auditor.
Documentary/written > oral.
Original documents.

Financial Statement Assertions


Claims or representations by management embodied in the FS.

Documentation/Working Papers
Support auditor's conclusions on FS.
Auditor's representation of compliance with PSA.
Assist in planning, performance, review, and supervision.
Assist in planning future audits, other services, and litigation.
Ownership: Auditor
Confidentiality: Requires client permission, except:
Subpoena by court
Auditor defends self in court
Retention: Generally, 5 years
Content:
Audit Objectives
Substantive Procedures (nature, timing, extent)
Audit Conclusion & Significant matters arising during the audit
Signatures
Estimated Hours
Referencing
Classification:
Permanent File: Continuing significance (articles of incorporation, bylaws, organizational
chart, long-term accounts, major contracts)
Current File: Relevant to a particular audit

Auditing Accounting Estimates


Risk of material misstatement is greater.
Auditor responsible for obtaining sufficient appropriate evidence as to whether estimate is
properly accounted for, disclosed, and reasonable.

Auditing Related Party Transactions


Persons or entities that may have dealings with one another where one party has the ability to
exercise significant influence or control.
Auditor's awareness:
Requirement of disclosure in FS
May be motivated by profit sharing or fraud
May give rise to higher risks of material misstatement
Management Responsibility:
Identification and disclosure
Implement adequate accounting and internal control systems
Auditor's Responsibility:
Obtain information about related party relationships and transactions.
Obtain sufficient evidence that transactions are properly accounted for and disclosed.
If auditor identifies significant transactions outside normal course of business:
Obtain understanding of business and ensure proper accounting and disclosure.
Obtain evidence that transactions have been appropriately authorized and approved.
Obtain Written Representation Letter.

Major & Specific Audit Procedures


Major Audit Procedures
1. Risk Assessment Procedure (RAP)
2. Test of Control (TOC)
3. Substantive Procedures (ST)

Specific Audit Procedures


1. Inspection of records.
2. Inspection of tangible assets.
3. Observation.
4. Inquiry.
5. Confirmation.
6. Reperformance.
7. Analytical procedures
8. Recalculation.Specific ProceduresRAPFurther Audit Procedures (TOC/ST)Inspection//
Observation//Inquiry//Confirmation/Recalculation/Reperformance/Analytical Procedure//

Test of Control vs. Substantive Test: Test of control provides evidence that indicates a
misstatement is likely to occur, while substantive test provides evidence about the existence
of a misstatement.
Dual purpose test: Test of control performed concurrently with the test of details on the same
transaction.

Specific Considerations
Inventory

If inventory is material, the auditor shall obtain sufficient appropriate audit evidence regarding
existence and condition by:

Attendance at physical inventory counting (unless impracticable).


Evaluate management's instructions and procedures.
Observe performance of count procedures.
Inspect the inventory.
Perform test counts.
Performing audit procedures over final inventory records.

Litigation and Claims

Auditor shall design and perform procedures to identify litigation and claims including:

Inquiry of management and legal counsel.


Reviewing minutes of meetings and correspondence between entity and legal counsel.
Reviewing legal expense accounts.
Obtain written representations that all known actual or possible litigation and claims have
been disclosed.

Segment Information

Auditor shall obtain sufficient appropriate audit evidence regarding presentation and disclosure
by:

Obtaining an understanding of the methods used by management.


Evaluating whether such methods are likely to result in disclosure.
Testing the application of such methods.
Performing analytical procedures.
External Confirmation

Audit evidence obtained as a direct written response to the auditor from a third party.

Positive confirmation request: Confirming party responds indicating agreement/


disagreement or providing the requested information.
Negative confirmation request: Confirming party responds only if disagreeing with the
information provided.
Non-response: Failure of confirming party to respond.
Exception: Response indicating a difference.

When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests, including:

Determining the information to be confirmed or requested.


Selecting the appropriate confirming party.
Designing the confirmation requests.
Sending the requests.

Negative Confirmations: provide less persuasive audit evidence than positive confirmations.

Requirements to use negative confirmations:

The auditor has assessed the risk of material misstatement as low.


The population comprises a large number of small, homogeneous account balances.
A very low exception rate is expected.
The auditor is not aware of circumstances that would cause recipients to disregard such
requests.

Analytical Procedures

Evaluations of financial information through analysis of plausible relationships among both


financial and non-financial data.

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