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MGAD10H3 (23)
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Chapter 9

MGTD60 - Chapter 9

6 Pages
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Department
Financial Accounting
Course Code
MGAD10H3
Professor
Kevin Ha

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MGTD60H3 Chapter 9 Execution of the Audit Performing Substantive Procedures
Audit Process in Focus
- Types of substantive tests:
o Analytical procedures
o Test of key items
o Representative sampling
o Tests of underlying transactions and data
o Use of computers to assist in performing these tests
9-1 Overview of Substantive Procedures
9-1-1 Substantive Procedures and Assertions
- The nature, timing, and extent of audit procedures are determined in response to the risk assessment for
each significant account and assertion using the audit risk formula
- Review: Inherent risk is a risk that tend to be driven by the nature of the significant account or business that
the client is in
- Risk assessments must be performed at the assertion level and the F/S level
- Review: Audit Assertions
o I/S Accounts
Occurrence, completeness, cut-off, accuracy, and classification
o B/S Accounts
Existence, rights and obligations, completeness, and valuation and allocation
o Disclosures
Occurrence, rights and obligations, completeness, accuracy and valuation, and
classification and understandability
- When determining substantive procedures to be performed, auditor will consider the nature of the account
and the key assertions at risk
9-1-2 Definition of Substantive Procedures
- SP Designed to obtain direct evidence of the completeness, accuracy, and validity of data, and the
reasonableness of the estimates and other information contained in the F/S
- Examples are inspection, observation, enquiry, confirmation, recalculation, re-performance, and analytical
reviews
- Concrete examples are sending bank confirmation, observing inventory counts, confirming receivables
balances, and examining material J/E
- Audit Program A detailed listing of the audit procedures to be performed, with enough detail to enable the
auditor to understand the nature, timing, and extent of testing required
- Factors that influence how much (extent) and when (timing) substantive procedures are performed:
o Nature of the test
o Level of assurance necessary (reasonable or moderate assurance)
o Type of evidence required (persuasive, corroborative, or minimal audit evidence)
o Complexity of the client’s data capturing system
MGTD60H3 Chapter 9 Execution of the Audit Performing Substantive Procedures
- More efficient to test and rely on controls than to carry out substantive procedures but it is not the case when
smaller business are being audited
9-2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
- Nature of SP varies from account to account and consists of one of the following techniques:
o Key item testing
o Rep. sampling
o Other tests of transactions/underlying data
o Analytical procedures
- Appropriate mix of SP depends on the nature of the account balance (F/S vs. I/S) and the risk assessment
9-2-1 Timing of Substantive Procedures
- Timing of SP is influenced by the level of control risk
- SP is usually performed at or near year end with controls testing performed during visits before year end
(interim)
- Accounts that accumulate transactions Perform before year end
- Other accounts Perform at interim date but it depends on the effectiveness of the control environment
and the overall controls in place
- When controls are ineffective, auditor decides whether or not to perform SP during interim
- When controls are assessed as effective but not tested, SP may still be performed at an interim date
- SP is most flexible when control environment is effective and tested
- When SP is performed before year end Perform roll-forward procedures to update their audit findings
from the time of the interim procedures through to year end
o Roll-forward procedures are performed during the period between an interim date and year end to
provide sufficient and appropriate audit evidence to based conclusions on as at year end when
substantive procedures are executed at an interim date
9-3 Substantive Audit Procedures
9-3-1 Tests of Details
- Test of details of transactions are designed to verify a balance or a transaction back to a supporting
documentation (also known as vouching or tracing)
o Vouching Taking a balance or transaction from the underlying accounting records and verifying it
by agreeing the details to supporting evidence outside the accounting records of the company
Primary purpose of the testing is to ensure that the balances or transactions are not
overstated
o Tracing Tracking a source document back to the underlying accounting records
Primary purpose is to ensure balances are not understated
o Dual Purpose Tests Procedures that provide evidence for both tests of controls and substantive
procedures

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Description
MGTD60H3 – Chapter 9 – Execution of the Audit – Performing Substantive Procedures Audit Process in Focus - Types of substantive tests: o Analytical procedures o Test of key items o Representative sampling o Tests of underlying transactions and data o Use of computers to assist in performing these tests 9-1 – Overview of Substantive Procedures 9-1-1 – Substantive Procedures and Assertions - The nature, timing, and extent of audit procedures are determined in response to the risk assessment for each significant account and assertion using the audit risk formula - Review: Inherent risk is a risk that tend to be driven by the nature of the significant account or business that the client is in - Risk assessments must be performed at the assertion level and the F/S level - Review: Audit Assertions o I/S Accounts  Occurrence, completeness, cut-off, accuracy, and classification o B/S Accounts  Existence, rights and obligations, completeness, and valuation and allocation o Disclosures  Occurrence, rights and obligations, completeness, accuracy and valuation, and classification and understandability - When determining substantive procedures to be performed, auditor will consider the nature of the account and the key assertions at risk 9-1-2 – Definition of Substantive Procedures - SP – Designed to obtain direct evidence of the completeness, accuracy, and validity of data, and the reasonableness of the estimates and other information contained in the F/S - Examples are inspection, observation, enquiry, confirmation, recalculation, re-performance, and analytical reviews - Concrete examples are sending bank confirmation, observing inventory counts, confirming receivables balances, and examining material J/E - Audit Program – A detailed listing of the audit procedures to be performed, with enough detail to enable the auditor to understand the nature, timing, and extent of testing required - Factors that influence how much (extent) and when (timing) substantive procedures are performed: o Nature of the test o Level of assurance necessary (reasonable or moderate assurance) o Type of evidence required (persuasive, corroborative, or minimal audit evidence) o Complexity of the client’s data capturing system MGTD60H3 – Chapter 9 – Execution of the Audit – Performing Substantive Procedures - More efficient to test and rely on controls than to carry out substantive procedures but it is not the case when smaller business are being audited 9-2 – Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures - Nature of SP varies from account to account and consists of one of the following techniques: o Key item testing o Rep. sampling o Other tests of transactions/underlying data o Analytical procedures - Appropriate mix of SP depends on the nature of the account balance (F/S vs. I/S) and the risk assessment 9-2-1 – Timing of Substantive Procedures - Timing of SP is influenced by the level of control risk - SP is usually performed at or near year end with controls testing performed during visits before year end (interim) - Accounts that accumulate transactions  Perform before year end - Other accounts  Perform at interim date but it depends on the effectiveness of the control environment and the overall controls in place - When controls are ineffective, auditor decides whether or not to perform SP during interim - When controls are assessed as effective but not tested, SP may still be performed at an interim date - SP is most flexible when control environment is effective and tested - When SP is performed before year end  Perform roll-forward procedures to update their audit findings from the time of the interim procedures through to year end o Roll-forward procedures are performed during the period between an interim date and year end to provide sufficient and appropriate audit evidence to based conclusions on as at year end when substantive procedures are executed at an interim date 9-3 – Substantive Audit Procedures 9-3-1 – Tests of Details - Test of details of transactions are designed to verify a balance or a transaction back to a supporting documentation (also known as vouching or tracing) o Vouching – Taking a balance or transaction from the underlying accounting records and verifying it by agreeing the details to supporting evidence outside the accounting records of the company  Primary purpose of the testing is to ensure that the balances or transactions are not overstated o Tracing – Tracking a source document back to the underlying accounting records  Primary purpose is to ensure balances are not understated o Dual Purpose Tests – Procedures that provide evidence for both tests of controls and substantive procedures MGTD60H3 – Chapter 9 – Execution of the Audit – Performing Substantive Procedures  Example is when auditor tests the posting of the totals in the sales ledger to the general ledger and the sub-ledger - Tests of details of balances are tests that support the ending GL balance of an account o Example is when the auditor sends out AR confirmations o Auditors do not audit an entire balance or class of transactions  Audit Sampling - Key Item Testing o Auditor uses either a statistical basis or professional judgement to identify and test key items within a balance o By selecting the largest transactions to test, auditors are able to conclude over the entire balance based on the conclusions they reached by testing the largest transactions within a balance o Audit firms use a software to assist them in determining whether key items selected will provide enough basis to conclude that the audit assertions being tested has been met o The software takes into account materiality and the total population - Representative Sampling o Sampling from population statistically or non-statistically o Samples are expected to be representative of the remaining population o When this approach is appropriate, the sample should be large enou
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