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Chapter 9

MGAD10H3 Chapter Notes - Chapter 9: Regression Analysis, Trend Analysis, Multivac

6 pages99 viewsWinter 2013

Financial Accounting
Course Code
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
- 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
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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
- 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
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
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