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Audit Procedures

Made by Raja Ghufran Arif

There are Three basic types of Audit Tests or Audit Procedures namely:

• Substantive Testing
• Tests of Control
• Test of Compliance

#1: Substantive Testing


1. Management implicitly assert that account balances and underlying classes of transaction do not
contain any material misstatements: in other words, that they are materially complete, authorized
and accurate. Auditors gather evidence about these assertions by undertaking activities referred to
as substantive procedures.

2. Remember that the auditor won't test every number - they will select a sample based on his analysis
of internal control, risk and professional judgement etc.
3. In substantive procedures, an auditor gathers evidence regarding the claims of management.
4. Substantive procedures are used by both:
• Internal Auditor (Perpetual) and;
• External Auditor (Usually at year’s end)
5. Substantive tests are to the details of items on the P&L or BS at assertion level.
6. Consequently, in substantive testing, you gather evidence to evaluate the integrity of data, a
transaction or other information, e.g., you trace a transaction to the accounting records to verify that
it was properly recorded.
Types of Substantive Testing
There are two types of substantive testing or substantive procedures:
1. Analytical Procedures
• Analytical procedures involve comparisons and ratios of different sets of financial and
operational information (non-financial), from different sources to determine if reported
information looks ‘odd’ or ‘wrong’. Unexpected differences or variations in the data indicate
a need for further review. to see if historical relationships are continuing forward into the
period under review. In most cases, these relationships should remain consistent over time.
If not, it can imply that the financial records are incorrect, possibly due to errors or fraudulent
reporting activity.
• When the results of these procedures are materially different from expectations, the auditor
should discuss them with management. A certain amount of skepticism is needed when
having this discussion, since management may not want to spend the time to delve into a
detailed explanation, or may be hiding fraudulent behavior. Management responses shou ld
be documented, and could be valuable as a baseline when conducting the same analysis in
the following year.
• Analytical procedures can be applied at the start, middle or end of the financial year.
• Analytical Procedures include comparison of financial information with:
Audit Procedures
Made by Raja Ghufran Arif

a) Prior Period Information


b) Budgets
c) Forecasts
d) Data from similar programs or organizational units
e) Related non-financial information

Example of Analytics Procedure

Review the current ratio over several reporting periods. This comparison of current assets to current
liabilities should be about the same over time, unless the entity has altered its policies related to
accounts receivable, inventory, or accounts payable. This is a form of ratio analysis.
2. Test of Details
• Tests of details include tracing figures to supporting documentation (e.g. tracing figures from
invoice to ledger) to determine if transactions are valid, properly classified, accurate and
complete. Tests also include recalculating and confirming recorded information.

• When carrying out a substantive test, the auditor is testing to ensure that the figures included in
the financial statements can be traced back to source documents and meet one or more of the
audit assertions.
Example
Consider the case where an auditor wants to use some substantive tests to the payroll activities of an
Entity. An example of a “Test of Details” would be: the auditor selecting a sample of employees paid in
the year, and agreeing amounts paid to the pay slips (source documents) and bank statements (source
documents also).
#2: Test of Controls
• TESTS OF CONTROLS consist of procedures directed toward the evaluation of the
effectiveness of the design and implementation of internal controls. When tests of controls look
at design issues, the auditors evaluate whether the control has been properly designed to
prevent or detect material misstatement.
Examples
Examples of tests of controls:

• Inquiries of appropriate management, supervisor, and staff personnel.


• Inspection of documents, reports, and electronic files.
• Observation of the application of specific controls.
• Re-performance of the application of the control by the auditors
#3: Test of Compliance
Audit Procedures
Made by Raja Ghufran Arif

In compliance testing, you gather evidence with the objective of testing an organization's compliance
with control procedures, laws and regulations whether local, national or international, e.g. when you
run a report to verify that certain controls had been applied over a database table.

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