Substantive Procedures

Question 1

Types of substantive procedures

Answer 1

1) inspection (examining records, documents, physical assets)
2) observation (watch procedures be performed by another individual)
3) inquiry (asking questions of another knowledge party)
4) external confirmation (requesting information from third party)
5) recalculation (check accuracy of math)
6) reperformance (reperform activities)
7) analytical procedures (evaluate financial information)

Question 2

Designing procedures

Answer 2

1) risk (new transaction in CY total revenue)
2) account and assertion (grant revenue and occurrence)
3) Procedure (obtain agreement and review information and recalculate the amount of revenue that should be recorded to compare to GL)

Question 3

Cash substantive procedure

Answer 3

• cash and cash equivalents are highly susceptible to overstatement
• Risk: cash overstated
• Account and assertion: cash and existence
• Procedure: get balance conformation from bank and compare to balance of FS

Question 4

AR substantive procedure

Answer 4

• AR is susceptible to overstatement because its easy to manipulate and there is risk of bad debt expense recorded in AR
• Risk: AR overstated due to uncollectible account risk
• Account and assertion: AR and valuation
• Procedure: examine AR outstanding more than 90 days and compare balance to PY to examine the need for bad debt expense or write off

Question 5

Inventory substantive procedure

Answer 5

• inventory has risk of overstatement
• Risk: inventory overstated due to lack of fraud controls
• Account and assertion: Inventory and existence
• Procedure: attend inventory count and select a sample on inventory listing to count

Question 6

PPE substantive procedure

Answer 6

• PPE has risk of overstatement
• Risk: control issues around safeguarding of PPE
• Account and assertion: PPE and existence
• Procedure: select sample from PPE listing and examine that they exist

Question 7

AP substantive procedure

Answer 7

• AP has risk of overstatement
• Risk: AP has decreased from PY
• Account and assertion: AP and completeness
• Procedure: get confirmation from AP account owners with low balance and compare to AP sub-ledger balance

Question 8

Sales substantive procedures

Answer 8

• sales has risk of overstatement
• Risk: the client uses manual sales system
• Account and assertion: sales and accuracy
• Procedure: collect GL sales entry and trace them back to sales invoice amount

Question 9

COGS substantive procedures

Answer 9

• COGS has risk of understatement
• Risk: backlog on accounting side with a lot of sales to input
• Account and assertions: COGS and accuracy
• Procedure: collect COGS transaction samples frim GL and compare to inventory purchases

Question 10

Common expenses that are reviewed

Answer 10

• expenses have risk of understatement and common expenses reviewed are:
• R&M expense
• Property tax (prepaid expense in CY)
• Rent expenses
• Commissions