Substantive Procedures

Summary

The 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

• 📋 The auditor should document their understanding of the entity's internal control using flowcharts or narrative memoranda.
• 📝 The assessment of control risk, whether high or less than high, must be documented along with the evidence supporting it.
• 📊 If control risk is assessed as low, the auditor must substantiate their reliance on internal controls, as it poses a higher audit risk.
• 📂 The level of control risk affects the need for further documentation, especially when the control risk is less than high.
• ⚖️ Substantive procedures are applied to detect material misstatements at the assertion level and ensure account balances are correct.
• 🔍 Substantive analytical procedures are used to identify unusual fluctuations for further investigation, especially in large volumes of transactions.
• ✅ Tests of details can verify transaction accuracy and completeness, involving individual transactions, balances, and disclosures.
• 💡 Auditors may use substantive analytical procedures or test of details based on the efficiency and effectiveness of procedures in a given context.
• 🔒 If internal controls are ineffective, auditors rely more on tests of details rather than substantive analytical procedures.
• ⏳ 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.