Module 7
Substantive
Audit
Procedures
The Relationship of Evidential
Matter to the Audit Report
Financial Audit
Statements Report
Management
Assertions
Audit
Objectives
Audit Evidence
Procedures
PSA 500, Audit Evidence states that…
The auditor shall design and perform audit procedures
that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit
evidence.
When designing and performing audit procedures, the
auditor shall consider the relevance and reliability of
the information to be used as audit evidence.
AUDIT EVIDENCE
Audit evidence is all the information used by
the auditor in arriving at the conclusions on
which the audit opinion is based, and
includes the information contained in the
accounting records underlying the financial
statements and other information.
AUDIT EVIDENCE
Official Receipt
Sales invoice
AUDIT EVIDENCE
BASIC CONCEPTS OF
AUDIT EVIDENCE
The nature of audit evidence
The sufficiency of audit evidence
The appropriateness of audit
evidence
The evaluation of audit evidence
THE NATURE OF
AUDIT EVIDENCE
Accounting data that can be used to test audit objectives
include the books of original entry, and records such as
worksheets and spreadsheets that support amounts in the
financial statements. Many times these data are in
electronic form.
Corroborating audit evidence includes both written and
electronic information such as cheques, records of
electronic transfers, invoices, vouchers, receipts, contracts,
minutes, confirmations, and written representations.
MEANING of SUFFICIENT,
APPROPRIATE EVIDENCE
Sufficient: quantity of evidence necessary
to test management’s assertions
Appropriate: relevant, valid, and reliable
kinds of evidence necessary to test
management’s assertions
SUFFICIENCY OF
AUDIT EVIDENCE
Sufficiency is the measure of the quantity of
audit evidence.
The quantity of audit evidence needed is
affected by the risk of misstatement (the
greater the risk, the more audit evidence is
likely to be required) and also by the quality of
such audit evidence (the higher the quality, the
less may be required).
APPROPRIATENESS
OF AUDIT EVIDENCE
Evidence is considered appropriate when it is both
relevant and reliable
Relevance - The evidence must be relevant to
the audit objective being tested.
Reliability - Reliability refers to whether the
type of evidence can be relied upon to signal
the true state of an assertion or audit objective.
Other Concepts Relating to Evidence
Persuasiveness of Evidence
- Evidence is persuasive rather than conclusive due to
inherent limitations
Cost – Benefit consideration
- Consider the cost of obtaining the evidence and the
usefulness of information obtained
- The difficulty or expense involved is not in itself a valid
basis for omitting an audit procedure for which there is no
alternative
Generalization About the
Reliability of Evidence
Audit evidence is more reliable when it is obtained from
knowledgeable independent sources outside the entity.
Audit evidence that is generated internally is more
reliable when the related controls imposed by the entity
are effective.
Audit evidence obtained directly by the auditor is more
reliable than audit evidence obtained indirectly.
Audit evidence is more reliable when it exists in
documentary form, whether paper, electronic.
Audit evidence provided by original documents is more
reliable than audit evidence provided by photocopies
or facsimiles.
FINANCIAL STATEMENT ASSERTIONS
ACCOUNT CLASSESS OF PRESENTATION
BALANCES TRANSACTIONS AND DISCLOSURE
Completeness Occurrence Occurrence
Existence Cut-off Completeness
Rights and Accuracy Accuracy
Obligations
Valuation Completeness Classification
Classification
ACERV TOCACC POCAC
FINANCIAL STATEMENT ASSERTIONS
ACCOUNT BALANCES
Completeness There are no omissions and assets, liabilities
and equity that should be recorded and
disclosed have been. In other words there
has been no understatement of assets or
liabilities.
Existence Assets, liabilities and equities really do exist
and there has been no overstatement
Rights and Obligations The entity has a legal title or controls the
rights to an asset or has an obligation to
repay a liability.
Valuation Amounts at which assets, liabilities and
equity interests are valued, recorded and
disclosed are all appropriate
FINANCIAL STATEMENT ASSERTIONS
CLASSESS OF TRANSACTIONS
Occurrence The transactions recorded or disclosed
actually happened and relate to the
entity
Cut-off Transactions have been recognized in
the correct accounting periods.
Accuracy there have been no errors while
preparing documents or in posting
transactions to ledgers. The figures and
explanations are not misstated.
Completeness All transactions that should have been
recorded and disclosed have not been
omitted.
Classification All transactions have been recorded
within the correct accounts
FINANCIAL STATEMENT ASSERTIONS
PRESENTATION
AND DISCLOSURE
Occurrence Transactions and events disclosed in the financial
statements have occurred and relate to the
entity.
Completeness All transactions, balances, events and other
matters that should have been disclosed have
been disclosed in the financial statements.
Accuracy All information disclosed is in the correct amounts,
and which reflect their proper values.
Classification Disclosed events, transactions, balances and
other financial matters have been classified
appropriately and presented clearly in a manner
that promotes the understandability of information
contained in the financial statements.
ACQUISITION OF EVIDENCE
Audit evidence is necessary to support
the auditor’s opinion. The purpose of
gathering and evaluating audit evidence
is to acquire data and information to be
used as basis for concluding that the
entity’s financial statements are
presented fairly in accordance with
PFRS.
AUDIT PROCEDURES
Audit procedures are specific actions performed
by the auditor to gather evidence to determine if
specific audit objectives are being met.
A set of audit procedures prepared to test audit
objectives for a component of the financial
statements is referred to as an audit program.
Audit Procedures According to Purpose
Category Description/Purpose
Used for obtaining an understanding of the client
Risk assessment entity and its environment, including internal control.
procedures Risk assessment procedures are performed during the
audit planning and internal control phases of the audit
Used to test the operating effectiveness of controls in
Tests of controls preventing, or detecting and correcting, material
misstatements.
Used to detect material misstatements in account
Substantive tests balances, classes of transactions and disclosures.
Audit Procedures According to Purpose
SUBSTANTIVE TESTS
Tests of details
Transactions
Balances
Analytical tests
SUBSTANTIVE TESTS
TESTS OF DETAILS
- used to gather evidence that the actual
details of balances, disclosures and underlying
transactions associated with the FS are fairly
stated.
- Considered as the auditor’s primary response
to risk of material misstatement.
- 2 TYPES:
Test of Transactions
Test of Balances
SUBSTANTIVE TESTS
TESTS OF DETAILS
- 2 TYPES:
Test of Transactions
- Address whether particular types of
transactions (i.e. purchases) have been
properly accounted during the period
Test of Balances
- Address whether there are misstatements
in the ending balance of an account
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
- involves a study and comparison of
relationships among data (financial and non-
financial) to identify unusual fluctuations.
- As substantive test, provides evidence about
the reasonableness of an account balance
- Steps:
- 1. develop an expectation
- 2. determine acceptable difference
- 3. compare actual data with expectation
- 4. investigate significant fluctuations (beyond
acceptable difference)
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
Trend analysis
the analysis of changes in an account over time.
Ratio analysis
the comparison, across time or to a benchmark, of
relationships between financial statement accounts
and between an account and non-financial data
Activity ratios
Profitability ratios
Liquidity ratios
Solvency ratios
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
Examples
Analytical Procedure Potential Problem Area
Comparison of recorded sales Misstatements of sales and AR.
with budgeted amount Misstatements of CGS and inty
Comparison of depreciation Misstatements of Depreciation
expense for the current and expense, accum depreciation and
prior years carrying value of PPE
Study of payroll cost to number Misstatements of salaries expense
of employees and salaries payable
SUBSTANTIVE TESTS
SUBSTANTIVE ANALYTICAL PROCEDURE
Phase Objective Required
PLANNING >To obtain an understanding of the entity. Yes
>To help assess the risk of material
misstatement.
>To determine the nature, timing and extent
of audit procedures.
SUBSTANTIVE TESTING When analytical procedures can be more No
effective or efficient than tests of details in
reducing the risk of material misstatements at
the assertion level to an acceptably low
level.
OVERALL REVIEW >To assess whether the FS as a whole is Yes
consistent with the auditor’s understanding of
the entity.
> If irregularities are found, risk assessment
should be performed again to consider any
additional audit procedures are necessary.
PROCEDURES TO GATHER EVIDENCE
Observation
Inspection
Confirmation
Recalculation
Reperformance
Analytical procedures
Inquiries
PROCEDURES TO GATHER EVIDENCE
Observation
- Looking at a process being performed by others.
- Limited to the point in time at which the observation takes
place
Inspection of records or documents
- Examining of records or documents, whether internal or
external, in paper form, electronic form or other media
VOUCHING – from ledger or journal to related document
(backwards)
- address: Existence assertion
TRACING – from source document to ledger or journal
(forward)
- address: Completeness assertion
PROCEDURES TO GATHER EVIDENCE
Inspection of Tangible assets
- Consists of physical examination of assets such as cash,
inventories, investments securities and tangible fixed
assets
- Address: existence assertion but not rights and
obligation nor valuation
Inquiries
- Seeking information from knowledgeable persons
- May be in oral form or written form
Dec 10, 2019
$225,000
Dec 5, 2019
$325,000
VOUCHING
Dec 10, 2019
$225,000
Dec 5, 2019
$325,000
TRACING
PROCEDURES TO GATHER EVIDENCE
External Confirmation
- requesting a third party to affirm the accuracy of
items per records of client
Positive Confirmation
- 3rd party is requested to respond directly to auditor
whether or not it agrees or disagrees with the information
contained in the letter
- appropriate when: amount is material
: internal controls are ineffective
- response: AGREES no further procedures needed
- response: DISAGREES do further procedures
- no response: 1)Follow up or send another letter
2) Perform alternative procedures
PROCEDURES TO GATHER EVIDENCE
External Confirmation
Negative Confirmation
- 3rd party is requested to respond directly to auditor if
it disagrees with the information contained in the
letter
- appropriate when: amount is small
: internal controls are effective
: no reason to believe that
recipient will disregard
- no response: balance is confirmed
- response: DISAGREES do further procedures
PROCEDURES TO GATHER EVIDENCE
Positive Confirmation Negative Confirmation
PROCEDURES TO GATHER EVIDENCE
Recalculation
- Checking the mathematical accuracy of documents
or records
- Includes footing and cross footing
Reperformance
- Auditor performs the same procedure that client
personnel did
PROCEDURES TO GATHER EVIDENCE
Specific Procedure RAP TOC ST
Inspection
Observation
Inquiry
Confirmation
Recalculation
Reperformance
Analytical procedure
SAMPLE PROCEDURES FOR ASSERTIONS
ACCOUNT BALANCES ASSERTION
ASSERTIONS RELEVANT PROCEDURES
COMPLETENESS Reconciliation of payables ledger balances to
suppliers’ statements is primarily designed to
confirm completeness although it also gives
assurance about existence.
EXISTENCE Physical verification of non–current assets
RIGHTS AND in the case of property, deeds of title can be
OBLIGATIONS reviewed. Current assets are often agreed to
purchase invoices although these are primarily
used to confirm cost. Long term liabilities such
as loans can be agreed to the relevant loan
agreement.
VALUATION Vouching the cost of assets to purchase
invoices and checking depreciation rates and
calculations.
SAMPLE PROCEDURES FOR ASSERTIONS
CLASSES OF TRANSACTIONS ASSERTION
ASSERTIONS RELEVANT PROCEDURES
OCCURRENCE Select a sample of entries from the sales
account in the general ledger and trace to the
appropriate sales invoice and supporting
goods dispatched notes and customer orders.
CUT-OFF Recording last goods received notes and
dispatch notes at the inventory count and
tracing to purchase and sales invoices to
ensure that goods received before the year
end are recorded in purchases at the year end
and that goods dispatched are recorded in
sales.
ACCURACY Reperformance of calculations on invoices,
payroll,
SAMPLE PROCEDURES FOR ASSERTIONS
CLASSES OF TRANSACTIONS ASSERTION
ASSERTIONS RELEVANT PROCEDURES
COMPLETENESS Select a sample of customer orders and check
to dispatch notes and sales invoices and the
posting to the sales account in the general
ledger.
CLASSIFICATION Check purchase invoices postings to general
ledger accounts.
NATURE, EXTENT AND TIMING OF AUDIT
PROCEDURES
Nature
- Type and effectiveness of audit procedures to be
performed
Extent
- Number of items or sample size
Timing
- Refers to when audit procedures are performed or the
period or date to which the audit evidence applies.
NATURE, EXTENT AND TIMING OF AUDIT
PROCEDURES
ACCEPTABLE LEVEL OF DETECTION RISK
HIGH LOW
Less effective and less More effective and more
NATURE costly costly
EXTENT Less evidence more evidence
Interim or months prior to
TIMING year end Near or at year end
RISK OF MATERIAL MISSTATEMENT (IR + CR)
HIGH LOW
More effective and
NATURE more costly Less effective and less costly
EXTENT more evidence Less evidence
Interim or months prior to
TIMING Near or at year end year end
EXAMPLES OF AUDIT PROCEDURES
RELATED TO ASSERTIONS
COMPLETENESS
- Bank reconciliation of cash
- Searching for unrecorded liabilities by examining
subsequent payments
EXISTENCE
- Observation of inventory count
- Confirmation of AR
- Bank reconciliation of cash
EXAMPLES OF AUDIT PROCEDURES
RELATED TO ASSERTIONS
RIGHTS AND OBLIGATIONS
- Examine bank statements
- Review contracts of loan agreements
VALUATION
- Testing for foreign currency translation
- Testing aging of AR
- Testing inventory pricing
FRAUD AND ERROR
Auditor should consider the risk of material
misstatements due to fraud or error
Subsequent discovery of material misstatement due to
fraud or error does not indicate:
o A failure to obtain reasonable assurance
o Inadequate planning, performance or judgment
o Absence of professional competence and due
care
o Failure to comply with PSA
FRAUD AND ERROR
RESPONSIBILITIES
- Primary: Management
- Auditor: not responsible for the prevention of fraud and
error
PROFESSIONAL SKEPTICISM AND RISK ASSESSMENT
- Recognize the possibility that a material misstatement
due to fraud could be present
- Consider how the FS might be materially misstated due
to fraud
- FRAUD RISK FACTORS: events or conditions that provide
an opportunity, a motive or a means to commit fraud.
FRAUD AND ERROR
EXAMPLES OF FRAUD RISK FACTORS
Large amounts of cash or other valuable inventory items
on hand, without adequate security measures in place,
Heavy dependence on a few key employees, who have
too much power and too few checks and balances,
Employees with conflicts of interest, such as relationships
with other employees and financial interests in vendors or
customers,
Unrealistic goals and performance-based compensation
that tempt workers to artificially boost revenue and profits,
Failure to conduct background checks and other pre-
employment screening, and
Weak internal controls.
FRAUD AND ERROR
EXAMPLE AUDIT PROCEDURES FOR FRAUDULENT
FINANCIAL REPORTING OF REVENUE
Comparing revenue reported by month and by product
line or business segment during the current reporting
period with comparable prior periods
Confirming with customers certain relevant contract
terms and the absence of side agreements
Inquiring of the entity's sales and marketing personnel or
in-house legal counsel regarding sales or shipments near
the end of the period
FRAUD AND ERROR
EXAMPLE AUDIT PROCEDURES FOR FRAUDULENT
FINANCIAL REPORTING OF INVENTORY QUANTITIES
Inventory counts to be conducted at or near the end of
the reporting period
Examining the contents of boxed items
Sorting by tag number to test tag controls or by item
serial number to test the possibility of item omission or
duplication
FRAUD AND ERROR
OTHER EXAMPLES OF AUDIT PROCEDURES
Test appropriateness of journal entries and adjustments
Reviewing of accounting estimates for biases
Checking for significant unusual transactions
FRAUD AND ERROR
COMMUNICATIONS
MISSTATEMENTS FROM ERROR
material misstatements
aggregate of uncorrected misstatements
deemed immaterial by management
MISSTATEMENTS FROM FRAUD
material or immaterial
Fraud involving senior management and fraud
that causes a material misstatement of the
financial statements should be reported directly
to the audit committee in a timely manner and
prior to the issuance of the auditor's report.
AUDIT DOCUMENTATION
- Also “working papers”
- A record of audit procedures applied, evidence obtained
and conclusions reached
- May be in form of paper, electronic files or other media
- Link between client’s records, FS and auditor’s report
- Examples: Memos, Confirmations, Management Letter,
Schedules
ROLE OF WORKING PAPERS
Support on the type of audit opinion issued
Provide proof of compliance with PSA and
regulatory requirements
Aid in the conduct and supervision of audit
Retain a record of matters of continuing
significance to future audits
Analytical Procedure Working Papers
Test of Detail Working Papers
CLASSIFICATION OF WORKING PAPERS
PERMANENT FILE
- Data of historical or continuing nature pertinent to the current audit and is
of continuing interest from year to year
- PURPOSES:
Refresh auditors’ memories on items applicable over many periods
Provides new staff members with a quick summary of client’s policies
Preserve working papers on items that show relatively few or no changes
- EXAMPLES:
Articles of Incorporation, By-laws, Bond indentures
Accounts with continuing significance: SHE, PPE, Goodwill
Organizational charts, internal control questionnaire
Results of previous years analytical procedure
CLASSIFICATION OF WORKING PAPERS
CURRENT FILE
- Include all audit documentation applicable to the year under
audit
- INCLUDES:
Audit Program
General Information
Working Trial Balance
Adjusting Entries
Supporting Schedules
WORKING PAPER FILES
OWNERSHIP
- Documents prepared during audit, including schedules
prepared by client is the PROPERTY OF THE AUDITOR
CONFIDENTIALITY
- Do not disclose any confidential information except if
with consent of client or with legal or professional duty
to disclose
CUSTODY AND RETENTION
- Within premises of Auditor
- Completed w/in 60 days after auditor’s report date
- Retained at least 7 years from auditor’s report date or
date of group auditor’s date if later
