AVA ALEGADO REPORT

page 361-370 (before 3. Confirmation)

1st slide:
The auditor plans and performs substantive procedures to be responsive to the related
assessment of the risks of material misstatements. These procedures also include the results of
tests of controls.
The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit
opinion by performing audit procedures.
The decision as to what audit evidence, its timing and extent to obtain is determined by the
auditor's degree of reliance on the:
- auditor's degree of reliance on the accounting and internal control systems
maximum allowable level of detection risk
financial statement assertions
In the collection of audit evidence, audit testing will be performed. Audit testing include:
control testing and substantive testing.
The audit evidence obtained in substantive testing which include information as to whether a
particular account balance is complete, valid and accurate are discussed in this chapter. (9)
2nd slide:
Substantive procedures- audit procedures performed to detect material misstatements at the
assertion level. Also known as Tests of Assertions. It includes:
tests of details of classes of transactions, account balances and disclosures
substantive analytical procedures: process of obtaining audit evidence
MAIN OBJECTIVE: to detect any material errors that may have passed through the accounting
and internal control system filter or irregularities that may have been introduced through
override of internal controls by management.
3rd slide:
GENERAL APPROACHES to SUBSTANTIVE TESTING
Tests of balances- specifically tests for actual errors in the ending balance account
- most powerful of the procedures available to the auditor since it focuses on the
details and aggregations that comprise an account balance at the end of the year
Tests of transactions- actual errors indicate the likelihood that errors may have occurred in
other transactions not examined
- similarly powerful because they involve examination of the detail in support of individual
transactions
particularly important for large transactions that have a significant impact on the financial statements
4th slide:
PLEASE REFER TO THE Financial Statement Assertions and Level of Aggregation Table
p.364 of Auditing Theory for Students and Practice Guide for Auditors Book

5th slide:

Transaction Testing is an all encompassing term used by auditors that refer to evidence
gathering activities directed at classes of transactions underlying a particular account balance
assertion.
Applicable where the audit approach for a particular account balance assertion is in-depth.
-incomplete reported transactions = not valid (non-analytical in-depth approach)
The extent of transaction testing (in-depth approach) relating to a particular account balance
assertion depends on the quantity and quality of evidence required by the auditor to form an
opinion as to the extent of misstatements in the account balance.
- in-depth approach needed: high quantity of evidence required, allowable detection risk is low and
control risk is high
- in-depth approach not needed: allowable detection risk is moderate or high
6th slide:
The assessment of risks of material misstatement at the financial statement level is affected by
the auditor's understanding of the control environment.
e.g. effective control environment: auditor will have more confidence in the internally-generated audit
evidence
weak control environment: seek more extensive audit evidence from substantive audit procedures
GENERAL RULE: the higher the quantity and quality of evidence required in relation to an
account balance assertion, the greater the need for the testing of transactions.
-Note: when auditors gather evidence in relation to revenue and expense account balances, there is
often little evidence available at the account balance level. This means that the auditors will often adopt
an in-depth approach for those revenue and expense account balances.
7th slide:
PSA 330 indicates that the higher the auditor's assessment risk, the more reliable and relevant is
the audit evidence sought by auditor from substantive procedures.
In effect the level of detection risk related directly to the auditor's substantive procedures.
Detection Risk (DR) is a function of the effectiveness of an auditing procedure and of its
application by the auditor.
The decision about which procedures to use to achieve a particular audit objective is based on
the auditor's judgment about the expected effectiveness and efficiency of the available
procedures in reducing detection risk for specific financial statement assertions.
- LOW DR: extensive tests of specific financial assertions must be conducted
- HIGHER DR is acceptable: less substantive evidence

8th slide:

SUBSTANTIVE EVIDENCE: VALIDITY, COMPLETENESS, ACCURACY

Validity: the existence or occurrence assertion
- Top-down approach: the auditor VOUCHES from the accounting records to the documentary
evidence.
Completeness:
-Bottom up approach: TRACING rather than vouching; an auditor can decide whether all events were
recorded and complement the evidence obtained by vouching.
Accuracy: the auditor will usually vouch from the accounting records to the documentary
evidence, although with accuracy, the direction of the vouching is not as critical.
9th slide:
TYPES OF SUBSTANTIVE TESTS
Substantive Analytical Procedures: aka TEST OF REASONABLENESS
- are used to examine specific relationships among accounts and operating data in order to provide
indications of the accuracy of specific account balances.
Tests of details:
-tests of details of transactions: performed whether individual transactions have been correctly
recorded
-tests of details of account balances: are performed to directly test whether a specific account is
correctly stated in total.
The selection and mix of tests will vary across segments of the audit due to the different risks
identified in earlier stages of the audit, particularly in the tests of controls and risk assessments..
Generally, the more significant and risky an audit objective, the more evidence the auditor will
wish to obtain related to that objective.
10th slide:
SUBSTANTIVE TESTING PROCEDURES aka VALIDATION PROCEDURES
-depend upon both the maximum allowable level of detection risk as well as the assertions
being examined.
1. Observation and inquiry
2. Re-performance and recalculation
3. Confirmation
4. Physical examination
5. Examination of documentary evidence
6. Reconciliation
7. Cut-off tests

11th slide:

OBSERVATION and INQUIRY

Inquiry involves asking questions of the appropriate client personnel; often a starting point to
gather further evidence and is rarely adequate by itself for satisfying an audit objective.
-Evaluating responses to inquiries is an integral part of the inquiry process.
Observation is when the auditor witnesses the physical activities of the client.
REPERFORMANCE AND RECALCULATION
Reperformance involves reperformance of client procedures or computations, in part or in full.
The auditor repeats the activities of the client and compares the result to the client's result.
An auditor can verify the mathematical accuracy of underlying accounting data by repeating the
calculations performed originally by the management.