Substantive Procedures
Summary
TLDRThe video lecture discusses the importance of documentation in audits, focusing on evaluating internal control systems. Auditors must document their understanding of controls, assess control risks, and substantiate their findings if risks are low. It also explains substantive procedures, which are used to detect material misstatements in financial statements. These include analytical procedures and tests of details for transactions, balances, and disclosures. The lecture emphasizes the need for auditors to adjust their procedures based on control risk assessments and the effectiveness of internal controls, ensuring accuracy and compliance throughout the audit process.
Takeaways
- π The auditor should document their understanding of the entity's internal control using flowcharts or narrative memoranda.
- π The assessment of control risk, whether high or less than high, must be documented along with the evidence supporting it.
- π If control risk is assessed as low, the auditor must substantiate their reliance on internal controls, as it poses a higher audit risk.
- π The level of control risk affects the need for further documentation, especially when the control risk is less than high.
- βοΈ Substantive procedures are applied to detect material misstatements at the assertion level and ensure account balances are correct.
- π Substantive analytical procedures are used to identify unusual fluctuations for further investigation, especially in large volumes of transactions.
- β Tests of details can verify transaction accuracy and completeness, involving individual transactions, balances, and disclosures.
- π‘ Auditors may use substantive analytical procedures or test of details based on the efficiency and effectiveness of procedures in a given context.
- π If internal controls are ineffective, auditors rely more on tests of details rather than substantive analytical procedures.
- β³ Performing substantive procedures at interim dates can increase risks if additional procedures are not taken later to ensure accurate detection of misstatements.
Q & A
What is the purpose of documenting the auditor's understanding of internal control?
-The purpose of documenting the auditor's understanding of internal control is to support the auditor's expression of opinion on the audit of financial statements. It serves as evidence for the auditor's assessment of control risk and helps substantiate the auditor's reliance on internal controls.
When is it necessary for the auditor to document the basis of control risk assessment?
-The auditor must document the basis of control risk assessment when the control risk is assessed at a level less than high. This is because the auditor will rely more on internal controls and must substantiate this reliance.
What is the difference between documenting control risk assessed at a high level versus a low level?
-When control risk is assessed at a high level, the auditor does not need to document the basis of the assessment because they do not rely on internal controls. However, if control risk is assessed at a low level, the auditor must document both the assessment and the basis for it to substantiate their reliance on internal controls.
What are substantive procedures, and what is their objective?
-Substantive procedures are audit procedures designed to detect material misstatements at the assertion level. Their objective is to provide evidence that supports the assertion that financial statements are complete, valid, and accurate.
When are substantive procedures always required?
-Substantive procedures are always required, regardless of whether the internal controls are weak or strong. This is different from tests of controls, which may not be required if internal controls are weak.
What are the two types of substantive procedures?
-The two types of substantive procedures are substantive analytical procedures and tests of details. Substantive analytical procedures involve analyzing financial data to identify unusual fluctuations, while tests of details involve examining specific transactions or balances for accuracy and completeness.
When might substantive analytical procedures alone be sufficient for an audit?
-Substantive analytical procedures alone may be sufficient if the audit evidence gathered is considered persuasive, meaning it convinces the auditor that the relevant financial statement assertions are accurate.
What is the difference between a test of transactions and a test of balances?
-A test of transactions focuses on the processing and documentation of individual transactions to ensure they are properly recorded and measured. A test of balances focuses on the amounts in general ledger accounts to verify that they are correct.
What is the primary advantage of analytical procedures compared to tests of details?
-Analytical procedures are generally less expensive and time-consuming than tests of details, making them more efficient for large volumes of predictable transactions. However, they may not be as thorough in detecting misstatements.
How does the timing of substantive procedures affect the audit process?
-The timing of substantive procedures can affect the audit risk. Performing procedures at an interim date may increase the risk of missing misstatements unless additional procedures are performed at the period-end. The auditor may need to modify the nature, timing, and extent of procedures based on the results of interim testing.
Outlines
π Overview of Documentation in Audit Working Papers
The first paragraph discusses the importance of documenting the auditor's understanding of internal controls in the audit working papers. This includes using flowcharts or narrative memorandums to support the auditorβs opinion on financial statements. The auditor should also document the assessment of control risk, particularly if it is assessed as low, and provide evidence to substantiate this assessment. The basis for control risk needs to be documented when assessed as less than high, especially when relying on internal controls to reduce audit risk.
π Substantive Procedures in Auditing
This paragraph introduces substantive procedures, which are designed to detect material misstatements at the assertion level. These procedures aim to verify whether financial statement assertions like completeness, validity, and accuracy are accurate. Substantive procedures are essential for testing material classes of transactions, balances, and disclosures. Unlike tests of controls, substantive procedures are required regardless of the strength of internal controls.
π Types of Substantive Procedures: Analytical Procedures and Test of Details
This paragraph describes two types of substantive procedures: analytical procedures and tests of details. Analytical procedures help identify unusual fluctuations and are generally used for large volumes of transactions. Test of details focuses on examining specific transactions and balances to ensure they are properly recorded. It also explains how tests of transactions ensure the occurrence and completeness assertions, while tests of balances verify the accuracy of account amounts. The use of these procedures depends on the auditor's professional judgment.
β° Timing and Extent of Substantive Procedures
This paragraph covers the timing of substantive procedures, which may be performed at interim dates if internal controls are effective. The auditor compares interim information with year-end balances to identify deviations. If misstatements are found, the auditor adjusts the timing and extent of substantive procedures. Additionally, this section highlights the need to perform procedures at year-end to reduce the risk of missing material misstatements. The extent of substantive procedures may increase if internal controls are deemed ineffective.
π’ Extent and Design of Substantive Procedures
This final paragraph focuses on the extent of substantive procedures, particularly how sample size plays a role in testing details. The extent of testing increases when internal controls are unsatisfactory. The auditor must consider other selective testing methods in addition to substantive procedures. The paragraph emphasizes that the appropriateness of testing depends on its relevance to the audit objectives.
Mindmap
Keywords
π‘Documentation
π‘Internal Control
π‘Control Risk
π‘Substantive Procedures
π‘Test of Details
π‘Substantive Analytical Procedures
π‘Audit Risk
π‘Materiality
π‘Assertion Level
π‘Timing of Substantive Procedures
Highlights
Auditors must document their understanding of internal control using a flowchart or narrative memorandum.
Documenting control risk assessment, whether assessed as high or less than high, is crucial for supporting the auditor's opinion.
If the control risk is assessed as low, the auditor must substantiate this with evidence and document it thoroughly.
Control risk documentation is required only if the risk is assessed as less than high.
Substantive procedures are designed to detect material misstatements in financial statements at the assertion level.
Substantive analytical procedures are more appropriate for large volumes of transactions that tend to be predictable over time.
Test of details involves testing specific transactions or account balances for accuracy and completeness.
Auditors should rely more on substantive procedures for material balances, especially if control risk is high.
Auditors decide between substantive analytical procedures and test of details based on professional judgment regarding the effectiveness and efficiency of these methods.
Performing substantive procedures at an interim date without additional checks at a later period increases the risk of undetected misstatements.
The auditor must perform substantive procedures both during the interim period and at the period end to ensure all misstatements are detected.
If unexpected misstatements are found, auditors must modify the nature, timing, and extent of substantive procedures to cover the full period.
Increasing the extent of substantive procedures is necessary when internal controls are ineffective, but only if the procedure itself is relevant.
Test of details is considered costly and time-consuming compared to other types of procedures, but it is essential for obtaining reliable audit evidence.
Analytical procedures are the least expensive type of substantive procedures and are often used when internal controls are strong.
Transcripts
okay so in this next video lecture so we
will be discussing about documentation
in the audit breaking papers
of the evaluation
of the system of internal control
okay so here
um
the auditor should document his
understanding of the entity's internal
control
using flowchart
or narrative memorandum
okay
so this is very important because this
will serve as a support on the auditor's
expression of opinion on the odd uh the
audit of the financial statements
so the auditor should also document his
assessment of the control risk
whether it is assessed at high or
less than high and
his um
evidence okay to i mean as a serve as a
proof
for his assessment
furthermore the basis for the control
risk should also be documented
documented
but only if the control risk is assessed
at
level which is less than high
okay if meaning
um
if the auditor assessed the control risk
to be low
meaning
it
uh he found he or based on his
assessment the internal control is
effective so
in this case he would rely more on the
control so he should substantiate
that
reliance and that assessment of lower
control risk because later on if for
example he committed
audit risk meaning
he
stated that the financial statements are
com in compliance with the standards
when in fact it is materialistic so
there is a greater responsibility on his
part so that's why he should
substantiate
this assessment okay
so we have here the table for the
assessed level of control risk
and
if the auditor will document
uh
the evidence or not okay so if the
control risk is assessed at high level
so
assessment of cont there should be an
assessment of control risk this should
be documented as
what about the basis
so no need because in this case case
um the control risk is assessed to be
high meaning there is
uh the auditor will
not rely on the internal controls okay
so meaning he he is not responsible to
substantiate that
assessment what about if that less than
high
control risk is low
so in this case he will document the
assessment of the
control risk as well as his basis
against this for the purpose of
substantiating
his reliance on the internal control
okay
so those are for the internal control or
test of control
so this next part is about
so substantive
is another audit procedure
okay so substantive procedures are audit
procedures designed to detect material
misstatement also at the assertion level
so this is applied when the auditor's
objective is to determine
whether the peso amount or in terms of
unit of an account was properly stated
in the face of the financial statement
so substantive procedures are intended
to produce evidence to support the
assertion that there are no material
statements with regard to the
completeness validity and accuracy of
the fs
okay so thus our substantive procedures
are performed by an auditor to detect
whether there are any material
statements in accounting transactions
and
records okay so this is the focus of
substantive procedures
so another is
this is done
for material classes of transactions
account balances and disclosures
okay these are always required for the
auditor to obtain sufficient appropriate
audit evidence if you could still
remember in our previous um slider video
lecture where
either or regardless of the status of
the internal control if it is weak or
strong the auditor is required to
perform still the audit or the
substantive procedures unlike in the
case of the test of controls if the
internal control is weak then no test of
controls is needed
okay so another topic is
the nature
of the substantive procedure so here
um substantive procedures has two types
so first we have the substantive
analytical procedures
these are applied to obtain audit
evidence
on
the particular assertion which is
related to account balances or
classes of
transaction
substantive analytical procedure so
this will also identify unusual
fluctuations
okay for further investigation
this procedure alone may achieve
specific audit objectives if the audit
evidence
that is gathered is considered to be
persuasive
meaning um the the the
quality of the object evidence obtained
is
um
sufficient
or it can
convince the auditor okay that
a particular transaction
[Music]
exists or
um
account balances are correct
okay
so this
procedure also is generally more
applicable for large volumes of
transactions dot that tend to be
predictable over
time
okay
another type of substantive procedures
is the test of details
so here this are performed to determine
the actual details that makes up an
account balance or
transaction okay so
the test of details may be the test of
transactions so these are the tests of
processing individual transactions by
inspecting the documents as well as the
accounting records
involved in the processing if they are
indeed
recorded properly
and
measured correctly
so
the test of
balances is the next
type
so these are applied
to the details of balances in general
ledger accounts
so here
um
another type of test of details
aside from
uh the test of transactions test
imbalances
by the way test of transactions uh will
satisfy the assertion of
occurrence and completeness
test of balances is
in terms of the amount
okay of a particular account
what about test of disclosure so these
are procedures to evaluate whether
the overall presentation of fs including
the disclosures
are in accordance with the applicable
financial reporting framework so in
designing the test of details the nature
of the risk and assertion is fairly
relevant
okay to be considered for instance
test of details related to the existence
or occurrence assertion
this may involve selecting items
contained in fs
amount and obtaining relevant audit
evidence which relates to that
transaction
okay so this is how it is done
on the other hand test of details
related to the completeness assertion
may involve selecting also items
that are expected to be included in the
relevant fs amount and investigating
where they whether they are
included
okay so
um this is how it is done under the test
of details for completeness assertion
more types of evidence are obtained by
using the test of balances also than
by any other type of death however
the auditor generally uses other types
of procedures along with the test of
balances because these tests are
considered to be the most costly and
time consuming
okay conversely analytical procedures
are considered
to be
the least
expensive to perform among all the
substantive procedures
so in detecting material statement in
the fs the auditor may choose to perform
either
a substantive analytical procedure
test of control details or a combination
of this
tool
so the decision about whether to use
substantive analytical procedure or test
of details will be based also on the
auditor's judgment or professional
judgment about
his expected effectiveness and
efficiency of the procedures
in the given circumstances meaning it
will depend on the circumstances and
based on the professional judgment of
the auditor
so in addition the auditor should
consider also the following
first of course is materiality okay
when balances are material then the
auditor does not often rely on
analytical
procedures so you will perform test of
details
okay another is the other procedures
directed toward the same audit
objectives other procedures performed by
the auditor interviewing
the collectibility for example of
accounts receivable so such as the
review of subsequent cash receipts
so you might confirm or dispel questions
related to the application of the
analytical procedures
to the aging of
customers
uh
accounts so in this case aside from the
analytical
procedures
he should do the test of details and
balances as well another is the accuracy
in which expected results of analytical
procedure can be predicted
so in this case he will ordinarily
expect greater consistency with
comparing gross profit margins
from one period to another than
comparing
discretionary expenses
okay so in this case
um
the auditor will not only do the
substantive analytical procedure but he
will also
more likely
perform the
test of details and balances
okay another is assessment of control
risk
so if the internal control is assessed
to be ineffective
meaning the control risk will is
assessed as high
so
more reliance on test of details than
the substantive analytical procedures
okay so the next is about the timing of
substantial procedures
so here the auditor may determine
that it is effective to perform
substantive procedures at the interim
date if the internal controls are
effective
okay
so
in this case
um
you will compare and reconcile
information concerning the balance at
the period with the comparable
information also at the inter period
they do
identify
if there are amounts that appear unusual
or deviations exists
another is
or
in connection to that
if the auditor have identified such
deviation so he will investigate such
amounts
okay and he will perform substantive
analytical procedures or tests of
details uh
to test the intervening period
okay whether they are consistent okay
from one period to another
so performing substantive procedures at
an interim date without
taking additional procedures at later
date will increase the risk
that the auditor will not detect
misstatements
okay because in this case
um he should also do the
substantive procedures
at the period and to to
make sure okay that misstatements will
be detected if they are existing at that
period end so this risk increases also
the remaining period as it is lengthened
because there are more time
when that entity can
still
process
okay and do whatever they are doing so
dear
um the auditor will
or should
test okay if it's still
um in accordance with the internal
control or with the standards
so when unexpected misstatements are
detected at interim date so in this case
the auditor will modify his plan nature
timing and extent of substantive
procedures meaning he will add more
substantive procedures because he
expects that there are more
misstatements
okay
and also to cover the remaining period
um so such modification may also include
extending or repeating procedures that
is performed at the interim date
okay it should be
repeated in the period end
okay so lastly is
the extent of substantive procedures so
how much substantive procedure should be
performed
here the auditor may increase
at the extent of substantive procedures
when the results from the test controls
are
unsatisfactory or if internal controls
are ineffective however increasing the
extent of the procedure is appropriate
only if the audit procedure itself is
relevant so that is an important
consideration as well
uh lastly in designing tests of details
so the extent of testing is ordinarily
thought of in terms of its sample size
okay if the sample will represent the
holy
however on other matters
or other matters are also relevant
including
it is more effective to use other
selective means of testing aside from
substantive procedures
okay so those are for
the substantive procedures
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