Chapter 9: Performing Substantive Procedures

Some risks impact at the ______ level and some risks impacts at the _____ level

financial statement level; assertion level

What is an example of a risk at the financial statement level?

Management's pressure to meet earnings target

How do auditors respond to the risks at the financial statement level?

1. Being unpredictable

2. Make changes to the NET as needed

3. More experienced staff on the audit team/ increasing supervision/skepticism

What are examples of assertion level risks?

The account level/class of transactions (sales,payroll)

How do auditors respond to risks at the assertion level?

FIVECAROTS

F: footing, recalculation

I: inquiry

V: vouching

E: examination/inspection

C: confirmation

A: analytical procedures

R: reperformance

O: obseration

T: tracing

S: scanning

The test of controls involves which responses?

reperformance and observation

Substantive procedures are required to be performed for all ?? assertions

relevant (increased RMM)

What are the two types of substantive procedures:

1.) Tests of details

2.) Substantive Analytical Procedures

What are the factors to consider when determining the type of substantive procedures?

1. Assessed level of risk for the assertion (RMM up, then more evidence quality needed)

2. Reason for the assessed level of risk (poor ICs?)

3. Suitability of the procedure for the assertion being tested (is the auditor using the "best" procedure)

What are the initial procedures for auditing an account balance?

1. Obtain trial balance or other detailed report - test for mathematical accuracy, agree to ledgers

2. AGREE BEG. BAL to PRIOR YEAR audit working papers

3. Scan for unusual items

For lower risk assertions, the auditor may determine that evidence from substantive analytical procedures is ????

sufficient

What is the test of details used for?

It's used for higher risk assertions

What does tests of details include?

Inspection, Observation, Inquiry, Confirmation, Recalculation, and Scanning

If testing for existence assertion, what would the appropriate procedure be?

Inspection of supporting documents and Inspection of actual assets with own eyes

If testing for accuracy, valuation, and allocation, what would be an appropriate procedure?

Recalculation, Inquiring about processes, Inspecting documentation

For the rights assertion, what would be the appropriate procedure?

Inspection of supporting docs

What should auditor beware of?

"Confirmation Bias"

What is confirmation bias?

Tendency of auditor to interpret evidence in ways that support pre-existing expectations

Substantive procedures can be done at ____ and _____

interim; year-end (most)

If there are an increased risk of material misstatement then procedures should be performed at ______; if there is less risk of RMM then the procedures can be performed at _____

year end; interim

What does "extent" of substantive procedures mean?

How much evidence needed to be "persuasive"; requires professional judgement

Extent also refers to ____ size

sample

What factors are considered when determining sample size?

quantitative ($) and qualitative (employee turnover, risk of fraud)

When is testing done at 100% of population?

If there's a small # of transaction, ADA can be used to test 100%

When sampling, auditors typically select specific items from the population such as:

high $ transaction and unusual transaction. these are based on auditor judgement

Can results from selecting specific items be projected across the whole population?

No

Is statistical sampling used often?

No as it needs a true random sample

What is an accounting estimate?

a monetary amount for which the measurement is subject to an inherent lack of precision

What are the two categories of accounting estimates?

1.) Forecasts

2) Determine FV

what is the auditors objective in regards to accounting estimates?

Obtain sufficient appropriate evidence that estimates and related disclosures are reasonable

What are the inherent risk factors related to estimates?

1. Estimation uncertainty

2. Complexity

3. Subjectivity

What does estimation uncertainty relate to?

Lack of precision

What does subjectivity mean?

GAAP may not specify a method, uncertainty about the future

What is possible management bias?

Lack of neutrality by management in the preparation and fair presentation of information

The risk assessment (planning) procedures for accounting estimates are:

1. Gain understanding of the entity and its environment

2. Gain understanding of IC related to estimates

What does it mean to gain an understanding of the entity?

What are the material estimates? Who prepares them? What is the outcome of the PY estimate?

What are the risk response procedures for accounting estimates?

1. Tests of controls (if taking a reliance on controls strategy)

2. Substantive procedures

What does substantive procedures entail in relation to accounting estimates?

1. Inspect events occuring after year-end and up to the date of the auditor's report

2. Test how management made the estimate. Recalculation, Inspecting MGMT assumptions

3. Develop an auditor's estimate or range

What is a misstatement?

A *difference* between a reported financial statement item (client-prepared) and what is required for the item to be in accordance with the financial reporting framework (GAAP)

Auditors document/accumulate ___ misstatements as they are discovered

ALL

What are the three types of misstatements:

1. Factual misstatements: No DOUBT it is a misstatement; no judgement involved

2. Judgmental misstatements: Poor selection of accounting policy. Unreasonable accounting estimates/FV amounts

3. Projected misstatements: from true statistical sampling

What should auditors do if they identify more misstatements than expected?

Re-evaluate audit strategy. Re-test controls, modify NET?