Summary
SUBSTANTIVE PROCEDURES SUMMARY
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SUBSTANTIVE PROCEDURES SUMMARY FOR AUDIT 288/388
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SUBSTANTIVE PROCEDURES: Purpose of substantive procedures:
- Link with the audit risk formula
- Link with the assertion
- Link with audit objectives and formulation thereof
- Tests of controls vs substantive procedures
Nature, Extent and timing
Use of T accounts & calculations
Formulation of procedures
- Objective – derived from assertions via audit objectives
- Tool – documentation in the cycle
- Action – verb
,1. BACKGROUND
AUDIT PROCESS:
Pre-engagement activities:
- Client investigation
- Requirements for skills and competence
- Establish terms of engagement
Planning:
- Knowledge and understanding of the business
- Understanding of the accounting and internal control system
- Inherent risk
- Planning materiality
- Formulate audit strategy
- Develop audit plan
Audit procedures
- TOC
For evidence that the accounting system and internal controls are
Operating efficiently
As designed
For the whole period under consideration
Objective: support CR assessment
- SP
To obtain evidence of material misstatement in the FS
Audit evidence has a direct relationship with each assertion per account in the FS therefore
Correct amount
Disclosure on the FS
TOC SP
Tests operating effectiveness of a control activity (Must test the control Tests the correctness of the rand values (amounts) of balances or classes
activity) of transactions or disclosures
Results justify assessed levels of control risk Results justify levels of detection risk being achieved
The result will always be a yes/no answer. “Is the control operating The result will always provide a measure of the amount by which the
efficiently – yes/no?” Does not enable the auditor to conclude on the rand value is seen to be incorrect. (Look at the rand value)
rand value effect of misstatements.
The number of misstatements does matter when reaching a conclusion The number of misstatements does not matter – it is only the rand value
about operating effectiveness of a control activity. The rand value of effect of these misstatements that is important when reaching a
these misstatements is irrelevant. conclusion about a substantive procedure.
Results of TOC’s will always have an impact on the related substantive Results of substantive testing never have any impact on the amount of
procedures – if controls are operating effectively, less substantive control testing to be performed. TOC’s (if any) are always performed
evidence is required and if they are not operating effectively, more prior to SP so that the level of CR can be established, so that the level of
substantive evidence will be required. DR can be determined. This level of DR then derives the substantive
tests.
Incorporates only one type of procedure: TOC Incorporates 2 types of procedures (in addition to general substantive
procedures): substantive analytical procedures and substantive tests of
detail.
Evaluate, conclude and report
- Overall review – audit differences
- Conclusion
- Reporting
Audit risk and audit testing
Low CR High
High DR Low
A lot TOC A little
A little SP A lot
Audit evidence -> Audit opinion
, Accounting system and internal control
Transaction -> Source documentation (TOC) -> Accounting records -> General ledger/Trial balance _> FS (SP)
2. SP AND AUDIT RISK (AR = IR x CR x DR)
Have to determine SP for each material account balance & transaction
Audit strategy: Per account and CR=L, IR=L, DR=H DR=L DR=M
assertion
NATURE (what?) SP analytical (little detail testing) Detailed SP (les analytical SPs) Do some detail & some
TYPE: SP detail/ SP analytical analytical
Internal Confirmations
METHOD External Confirmations Internal & external
EXTEND (how much?) Sample size = smaller Sample size = larger Sample size = medium
TIMING (when?) Can do some before YE More tests on/ near YE Both before YE & on YE
DEF: DR is the risk that the auditor’s substantive procedures do not identify a material misstatement relating to a specific financial
statement assertion.
DR is determined for each significant FS assertion for each account balance
The level of IR & CR will impact on the nature, timing and extent of the SP, in order to reduce the DR to an acceptable level.
Has a direct relationship with the SP
- Test of detail and
- Substantive analytical procedures
3. SP: NATURE, TIMING AND EXTENT
NATURE (of the audit procedures) : Refers to the type and method used in performing SP.
Type:
(a) Substantive analytical procedures -> Compare with previous year’s figures and budgeted figures because you must
form an expectation about the current year to compare to the actual figures. If the actual figures are higher or lower
than your expectation = investigate. EG: You expected rent expense to be R120000 for the year (that is your
expectation)
(b) Test of detail: transactions (EG: from the SFP)
Mostly to substantiate transactions in SCI or on the transactions which make up the SFP balances
Presentation and disclosure.
(c) Test of detail: balances (EG: Debtors opening and closing balance)
Substantiating mainly of balances and where required, also the individual balances which make up the total balance
(Any test we can do to confirm the balance)
Presentation and Disclosure
Method: (Remember general procedures! Write them down first)
- Inspection (records, tangible assets)
- Enquiries (internal, external)
Internal must substantiate with additional evidence (need to get additional audit evidence when enquiring
within the business)
- Confirmation (written evidence)
- Recalculate (source document, accounting records, schedules, calculations)
- Reperform
- Analytical procedures (& Investigate significant fluctuations)
- Standard procedures (Inspect minutes of meetings, Enquire from attorneys, Management presentation letters, Compare
to FS, GB, TB and balance etc.)
DR – Impact of nature, timing and extent on SP
Willing to accept ___ DR
DR = High DR = Low
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