lesson 12

What are substantive tests?

Tests of management’s assertions.

What are the two main types of substantive tests?

Tests of details and disclosures, and substantive analytical procedures.

What is the key objective of substantive tests?

To obtain evidence about whether accounts, transactions, and disclosures are free from material misstatements.

What assertions does management make when issuing financial statements?

Existence and occurrence, completeness, valuation/accuracy/allocation, rights and obligations, cutoff, and presentation and disclosure.

What is the existence and occurrence assertion?

Reported assets, liabilities, and equity exist, and reported transactions have occurred.

How does existence relate to account balances?

It means reported account balances, such as accounts receivable, actually exist.

How does occurrence relate to transactions and disclosures?

It means reported transactions occurred and disclosed events, such as lawsuit settlements, actually happened.

What is the completeness assertion?

The company reported everything in the financial statements that it should have reported.

What is the valuation, accuracy, and allocation assertion?

Financial statement items are reported at appropriate amounts, with proper valuation and allocation adjustments.

How does valuation, accuracy, and allocation apply to balances, transactions, and disclosures?

Balances must be valued properly, transactions must be recorded accurately, and disclosures must reflect appropriate and accurate information.

What is the rights and obligations assertion?

The company has rights to reported assets and is responsible for reported liabilities.

What does the “rights” part of rights and obligations relate to?

Assets, such as cash, receivables, and fixed assets.

What does the “obligations” part of rights and obligations relate to?

Liabilities, such as accounts payable or debt.

What is the cutoff assertion?

Transactions underlying reported financial statement items are recorded in the proper period.

What does cutoff primarily relate to?

Classes of transactions, such as sales.

What is the presentation and disclosure assertion?

Amounts and disclosures are clearly described and appropriately presented.

What does the presentation part of presentation and disclosure include?

Classification of amounts into appropriate accounts or transaction classes.

What is an example of proper classification?

A five-year loan should be classified as long-term debt, not short-term debt.

What does the disclosure part of presentation and disclosure include?

It includes all assertions related to disclosures and requires information to be understandable.

What are tests of detail?

Tests of assertions relevant to account balances and/or classes of transactions.

What are tests of disclosures?

Tests of assertions relevant to the contents of disclosures.

How does the AICPA define analytical procedures?

Evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data.

What are substantive analytical procedures?

Analytical procedures used as substantive tests to test management’s assertions.

Why may analytical procedures be effective and efficient?

They may detect misstatements not apparent from detailed evidence or when detailed evidence is not readily available.

What is the overall approach to analytical procedures?

Develop an expectation and examine fluctuations between the expectation and the actual outcome.

What is the key objective of general analytical procedures?

To identify areas with a high risk of material misstatement.

What is the key objective of substantive analytical procedures?

To identify material misstatements themselves.

During what audit stages can analytical procedures be performed?

Planning, substantive testing, and audit completion.

Are analytical procedures required during planning?

Yes.

Are analytical procedures allowed during substantive testing?

Yes, as substantive tests.

Are analytical procedures required at audit completion?

Yes.

What are dual-purpose tests?

Performing substantive tests and tests of controls at the same time.

What is the overall approach to performing analytical procedures?

Develop an expectation for the procedure and evaluate the fluctuation between the actual result and the expectation.

What is suitability in analytical procedures?

Determining whether a given analytical procedure is reliable for testing a specific assertion.

When is suitability considered?

Only for substantive analytical procedures.

What is reliability in substantive analytical procedures?

Evaluating the reliability of the data used to develop the expectation.

What are factors that affect data reliability?

Independence of the data source, effectiveness of controls over the data, and whether auditors have previously evaluated the data.

What is the expectation step in analytical procedures?

Developing an expected outcome precise enough to evaluate risk of material misstatement or possible material misstatement.

What is precision in analytical procedures?

The closeness of the expectation to the actual outcome.

Why is precision important?

A more precise expectation helps auditors better identify unusual or potentially misstated results.

What two factors affect precision?

The auditor’s consideration of drivers of the amount and the level of detail in the data used.

What is the identification step in analytical procedures?

Identifying the extent of fluctuation from the expectation.

What is the investigation step in analytical procedures?

Investigating possible causes of the fluctuation.

What is the evaluation step in analytical procedures?

Evaluating whether the fluctuation indicates risk of material misstatement or an actual material misstatement.

What are the five types of analytical procedures?

Trend analysis, ratio analysis, reasonableness testing, regression analysis, and audit data analytics.

What is trend analysis?

Evaluating changes in balances or relationships over time.

What is ratio analysis?

Comparing financial ratios over time, against expectations, or against industry benchmarks.

What is reasonableness testing?

Developing an expected amount using financial or nonfinancial data and comparing it to the recorded amount.

What is regression analysis?

A statistical method used to estimate expected relationships between variables.

What are audit data analytics?

Technology-enabled procedures that analyze large sets of audit data to identify patterns, anomalies, or risks.