Substantive Audit Procedures: A Comprehensive Guide
Substantive Testing
Substantive testing is obtaining evidence on data’s completeness, accuracy, and estimates to lower detection risk.
Audit Program & Plan
An audit program & plan details the procedures, timing, and extent of tests based on risk assessment to spot potential errors.
Influences on Substantive Tests
Influences on substantive tests are dictated by inherent and control risks which determine detection risk and test timing.
Tests of Details
Tests of details differentiate between transaction verification and balance verification at ledger end.
Vouching
Vouching supports assertions of transaction existence, accuracy, and rights, but less so for completeness.
Analytical Procedures
Analytical procedures review relationships in data to identify risks or corroborate other evidence.
Persuasive Analytical Evidence
Needs reliable data and controls for reasonable balance estimation.
Data Quality
Data quality is crucial in analytics, with strong client control over data enhancing procedure reliability.
Risk Response with Estimates
Risk response with estimates involves gathering post-year evidence, independent point estimates, and estimate process testing.
Errors vs. Judgmental Misstatements
Errors vs. judgmental misstatements include misposted expenses or unrecorded theft, versus capitalization or useful life determinations.
Audit Data Analytics (ADA)
ADA involves inspecting large datasets using software for efficient, effective audit exception detection.
ADA Techniques
ADA techniques utilize visualization, matching, clustering, and statistics for data analysis and fraud detection.
ADA Documentation
ADA documentation covers objectives, risks, data sources and tools, items tested, and review details.
Five-Step ADA Process
The five-step ADA process involves planning, data preparation, evaluation, and documentation of conclusions.
ADA & Risk Assessment
ADA aids risk assessment by helping understand business and focus on high-risk areas.
Identifying many notable items via ADA requires test/population revision and further risk investigation.
ADA for journal entries searches for unbalanced entries, unauthorized postings, and other irregularities.
Regression Analysis
Regression analysis predicts account balances to test for transactional reasonableness.
ADA in Testing
ADA in testing enables complete population testing rapidly, improving assurance and efficiency.
Effective ADA visuals need the right detail level, scaling, and balanced color usage.
Inherent Risks in Sales and Receivables
Risks include overstatement pressures, liquidity concerns, and misappropriation of cash.
Completeness in Cash Receipts
Completeness in cash receipts is vital for controlling receivables and ensuring balance accuracy.
Combined Audit Approach
A combined audit approach for receivables pairs control tests with substantive procedures, focusing on transaction volume.
Receivable Confirmations
Receivable confirmations verify balance list accuracy, use stratified sampling, and require direct replies.
Alternative Confirmation Responses
Alternative confirmation responses involve post-confirmation payment verification and unpaid balance vouching.
Sales Adjustment Controls
Sales adjustment controls address necessary corrections and authorize returns and pricing changes.
Overstating or Understating Sales
Overstating or understating sales risks involve meeting targets or hiding issues.
Fraud Risks
Fraud risks escalate without proper control over sales adjustments and cash receipts.
Cut-off Procedures
Cut-off procedures ensure transactions align with the correct accounting period.
CAS 530 Application
CAS 530 application influences receivable confirmation sampling to cover significant values and risk.
Main Audit Objectives for Purchases and Payroll
For purchases and payroll, objectives cover occurrence, completeness, and accuracy.
Personnel Segregation
Personnel segregation from payroll is critical for preventing falsified records.
Programmed Controls
Programmed controls in payroll systems include exception reports and verification logs.
Testing Purchasing Controls
Testing purchasing controls uses audit software for purchase accuracy and year-end cut-off.
Control Risk Impact
Control risk impact from payment transactions affects the completeness of accounts payable.
Cut-Off Tests
Cut-off tests for purchases ensure accurate recording near the period-end.
Automated Cheque Controls
Automated cheque controls require pre-numbered checks and independent reconciliations.
Gross Profit Ratio Change
A gross profit ratio change might signal possible misstatements or cutoff issues.
Receiving Reports vs. Liabilities Cut-off
Receiving reports vs. liabilities cut-off ensure transaction completeness before year-end.
Financial Fairness Cut-off
Financial fairness cut-off ensures proper revenue and expense matching.
Inventory and PPE
Inventory assessment methods impact audit strategy, focusing on either physical count or ledger integration.
Inventory Counts
Inventory counts require clear procedures, tag controls, and test counts for accuracy.
Standard Cost Fairness
Standard cost fairness is evaluated by reviewing variances and manufacturing expenses.
Overhead Absorption
Evidence for overhead absorption includes production facility volume and past activity levels.
Cut-off Implications
Cut-off implications affect inventory accuracy and year-end balance determination.
Substantive PPE Strategies
Substantive PPE strategies are adopted due to the infrequency and materiality of PPE transactions.
PPE Disposals
PPE disposals are ensured through sales proceeds analysis and disposal record review.
Depreciation Rate Challenges
Depreciation rate challenges include ensuring consistency and accuracy.
Proper PPE Disposal Recording
To ensure proper PPE disposal recording, auditors check remittance advices and sales agreements.
Cash and Investments
Imprest Accounts
Imprest accounts are used for petty cash, audited through surprise counts and reconciliations.
Auditing Cash Balances
Auditing cash balances is crucial due to their impact on liquidity and the need for detailed verification.
Bank Account Transfer Tracing
Bank account transfer tracing prevents misstatements from timing issues.
Counting cash involves control, custodian inclusion, and receipt post-count.
Bank Reconciliation Verification
Bank reconciliation verification compares balances and checks for anomalies.
Lapping Detection
Lapping detection involves receivable confirmations and cash count comparisons.
Investment tests focus on yield analysis, security confirmations, and revenue recalculations.
Inspecting Securities
When inspecting securities, auditors note details ensuring record consistency.
Consolidated Statement Audits
Consolidated statement audits require verifying inclusion of all relevant entities and disclosure accuracy.
Group Entity Audits
Group entity audits by different auditors require reviewing financial statements and assessing auditor work.