Chapter 9 - Execution of the audit - performing substantive procedures.docx

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University of Toronto Scarborough
Financial Accounting
Kevin Ha

Chapter 9 – Execution of the Audit – Performing Substantive Procedures Substantive procedures - Designed to obtain direct evidence of completeness, accuracy and validity of data and the reasonableness of the estimates and other info contained in F/S - Common substantive procedures: sending bank confirm, observing inventory count, confirming receivables balances, examine material journal entries and other adjustments of audit importance Relationship between Risk Assessment and Nature, Timing, Extent of Substantive Procedures - Timing of Substantive Procedures o Accounts accumulate transactions – perform before year end o Others – perform at interim date depends on existence of an effective control environment and effectiveness of controls o Most flexible substantive procedures is when control environment is effective and tested o When substantive procedures performed prior to YE  perform roll-forward procedures  Update findings from time of interim procedures through to YE Substantive Audit Procedures - Tests of Details o Not analytical procedures o Tests of details of transactions – verify balance/transaction back to supporting documentation (vouching)  Balance is taken from records and verified by agreeing to evidence  Ensures transactions not overstated o Tracing – source document traced to records  Ensure balance not understated (i.e. completeness) o Dual purpose tests – evidence of effectiveness of controls and item recorded properly o Tests of Details of Balances  Support ending general ledger balances of an account o 3 main types of tests of details  Key Item Testing  Statistical basis/professional judgement to identify and test key items in balance  Test the largest balanced item  The more persuasive evidence from other procedures, less coverage key items needed  Representative Sampling  Ensure each item has same chance of being selected  Representative Sampling using Audit Risk Tables o When do not expect errors or expect low number of errors o Riskof material misstatement is low, concern is overstatement  Variables estimation sampling o Expect more than a few errors o Used when concern is both under and overstatement o Detect mm of book value s o Select carrying value and compare to audited value, difference projected to estimate error in population  Attribute sampling
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