Chapter 8: Understanding Substantive Testing

Question 1

Substantive Procedures

Answer 1

audit procedures that are designed to detect material misstatements at the assertion level.

Question 2

Risk Assessments

Answer 2

required to be performed at assertion level and the financial statement level.

• Risk assessment affects degree of focus on certain assertions.
• Example is Warranty Provision: risk that some claims are omitted is higher than risk of incorrect measurement of identified claims.

Question 3

What are the three types of substantive audit procedures?

Answer 3

1) Tests of Details
2) Analytical Procedures
3) Using Technology for Substantive Testing

Question 4

Tests of Details

Answer 4

designed to verify a balance or transaction back to supporting documentation.

Question 5

What are the two types of details?

Answer 5

• Vouching: taking a balance or transaction from the underlying accounting records and verifying it by agreeing the details to supporting evidence outside of the accounting records of the company.
• Tracing: tracking a source document to the accounting records.

Question 6

What can analytical procedures be used for?

Answer 6

• Primary (persuasive) tests of a balance.
• Corroborative tests in combination with other procedures.
• To provide at least some minimal level of support for the conclusion.

Question 7

What is the analytical procedures approach?

Answer 7

-Compare estimated amount with calculation; assess if any difference is significant.
- Determine appropriate procedures for investigating reasons for the difference.
- Perform procedures.
Draw conclusions.

Question 8

What are three types of analytical procedures?

Answer 8

• Absolute data comparisons (prior year, budgets, etc.).
• Ratio analysis (profitability, liquidity, and solvency).
• Trend analysis (over several accounting periods).

Question 9

How can you improve reliability of analytical procedures?

Answer 9

• Mitigate risk of accepting account as not misstated when it is materially misstated.
• Consider relevance of analytical procedures.
• Consider the reliability of analytical procedures.