Module 6 acc 372 UPDATE!!!!!

what are the elements of scope?

nature, extent, timing (net)

how is the scope changed when risks of MM are high

nature: want procedures that give high quality evidence
extent: more evidence = larger sample size
timing: balance sheet date

steps of substantive procedures recap

plan scope based on assessed risk, perform substantive procedures to detect misstatements, evaluate test results, and evidence forms basis of opinion on whether f/s are icw gaap and free from MM.

can an auditor skip performing substantive procedures in an audit?

NO, NEVER! substantive test results are basis for opinion on f/s

risks of MM assessed are…

i/r and c/r

planning and performing substantive procedures

1.. identify f/s assertions at account level about which evidence is sought
2.. design substantive tests, choose audit procedures, timing, extent of evidence
3.. perform substantive tests
4.. evaluate test results if fairly stated or detected misstatement

Why do auditors identify F/S assertions about which evidence is sought prior to designing substantive tests?

different procedures provide evidence for different assertions

short version of basic pcaob assertions: existence and occurrence

Assets, liabilities & equity EXIST. Transactions OCCURRED

short version of basic pcaob assertions: RIGHTS & OBLIGATIONS

Assets are owned (RIGHTS) & liabilities are owed (OBLIGATIONS)

short version of basic pcaob assertions: ACCURACY and VALUATION

ACCURACY = Items included at correct amounts. VALUATION = Valued i/c/w GAAP.

short version of basic pcaob assertions: COMPLETENESS

Accounts & transactions that SHOULD BE RECORDED ARE RECORDED.

short version of basic pcaob assertions: PRESENTATION & DISCLOSURE (P&D)

ALL in F/S are properly PRESENTED (classified & described) & DISCLOSED (footnotes i/c/w GAAP).

examples of valuation adjustments

a4da, acc dep, inventory that’s obsolete or not selling

completeness goes from

evidence to recorded
liability or expense
understatement

existence and occurrence goes from

recorded to evidence
asset or revenue
overstated

How do auditors determine whether misstatements identified via substantive tests for an account are material?

compare dollar amount misstatements to performance materiality
pm= om - “haircut”

PURPOSE of planning and performing sub tests

Obtain evidence to detect MM

outcomes of planning and performing sub tests

1.. balance is fairly stated and misstatement is reasonably unlikely
2.. balance is misstated and we either have a factual or judgmental misstatement

factual

misstatement exists

judgmental

misstatement possibly exists

audit procedures:

confirmation, inspection, recalculation, reperformance
substantive analytical procedures
inquiry

test of details in audit procedures

learn about factual misstatements, know dollar amount of misstatements with certainty

substantive analytical procedures in audit procedures

evaluating reasonableness, identifying judgmental misstatements, don’t know specific dollar amount

What audit procedure will provide the most persuasive evidence regarding the Existence of Cash in Bank?

confirmation

Would you choose the same audit procedure for evidence re: the Existence of Cash on Hand?

Count cash on hand (inspection)

In addition to the nature of the procedure to obtain evidence re: the Existence of Cash in Bank, what other ways would the auditor respond to the high risk of MM via the scope of this substantive test?

extent: confirm all cash accounts
timing: balance sheet date at year end