Summary
Summary SUBSTANTIVE PROCEDURES SUMMARIES
- Course
- Auditing (AUDIT388)
- Institution
- Stellenbosch University (SUN)
SUBSTANTIVE PROCEDURES summaries with the procedures for audit 288/388
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Substantive procedures: Underlying conceptsNB!!
70 – 80 marks in Test 2
25 – 30 marks in Test 3
25 marks in Exam 1
Concepts
Lecture questions
Assignments
Prescribed readings: Auditing notes
Chapters 5, 10 to 14 (NB!!) & 17
Substantive procedures:
Procedure is an action- something you need to perform
Substantiate:
o Statements must be substantiated
o Assertions about amounts in financial statements (audit evidence)
o Formulate procedures to substantiate assertions
Example:
Stationary expense
January – December = R50 per month
General ledger:
Stationary
X
X
600
Trial balance:
Acc no. R
Stationary 1 800 600
Is it a balance or transaction?
SOCI It is a transaction (SOCI is a bunch of
transactions)
5 assertions for transactions
‘Formulate the SP’s for the assertions
occurrence and accuracy for stationary expense’
Only when the stationary expense forms part of the retained earnings in the SFP at year end,
does it become a balance.
Select a few transactions from the stationary account in the general ledger and follow it
through to the invoice.
[Books to source]
,Occurrence: transactions and events that have been recorded (Books), have occurred, and
pertain to the entity
Accuracy: amounts and other data relating to recorded transactions that have been recorded
appropriately
1.) Confirm that the invoice is made out to the company.
2.) Agree the amount in the general ledger to the amount in the invoice.
3.) Re-calculate the amounts on the invoice to confirm accuracy.
Why perform substantive procedures?
The auditors objective is to be in a position to express an opinion on whether the
financial statements are fairly presented
o Financial statements consist of balances (SFP) and transactions (SOCI)
Tests of controls on their own cannot provide the auditor with sufficient and
appropriate audit evidence (due to the fact that inherent limitations exist in all
systems) and it is therefore necessary to perform substantive procedures
Substantive procedures may be broadly distinguished as tests of detail (balances and
totals) or analytical procedures (individual transactions)
Substantive procedures seek to provide evidence to support the financial statement
assertions
o ISA 315 par A111
Underlying principles:
Purpose of substantive procedures
o Link with audit risk formula
o Link with the assertion
o Link with audit objectives and formulation thereof
o Test of controls vs. substantive procedures
Nature, extent and timing
Use of T accounts and calculations:
o Sub ledgers
o General ledger
o Fixed asset register
o Trial balance
o Financial statements
Formulation of procedures
o Objective- derived from assertions via audit objectives
o Tool- documentation in the cycle use for any SP’s
o Action- verb
Learning outcomes:
Explain the relationship between audit risk and substantive procedures
Explain the impact of the risk assessment process on substantive procedures
Discuss the nature, extent and timing of substantive procedures
Discuss the relationship between assertions- audit objectives and substantive
procedures
Formulate substantive procedures relating to basic applications
, Background: Audit process:
Pre-engagement activities:
o Client investigation
o Requirements for skills and competence
o Establish terms of engagement
Planning:
o Knowledge and understanding of business
o Understanding the accounting system & Internal control system
o Inherent risk
o Planning materiality
o Formulate audit strategy
o Develop the audit plan
[Risk assessment process is performed during the planning process- it is very
important because the results of this assessment determine which audit procedures are
performed]
Audit procedures:
o Test of controls
o Substantive procedures
Evaluate, conclude and report:
o Overall review- audit differences
o Conclusion 4th term
o Reporting
Background:
Test of controls (TOC)
o For evidence that the accounting system and internal controls are:
Operating effectively
As designed
For the whole period under consideration
o Objective: support CR assessment
o Motive: characteristics
Substantive procedures:
o To obtain evidence of material misstatement in the financial statements
o Audit evidence has a direct relationship with each assertion per account in the
financial statement therefore:
Correct amount
Disclosure on the financial statement
o Objective: to reduce DR to an acceptable level
o Motive: assertions
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