Substantive Procedures

Question 1

Substantive Procedures

Answer 1

Substantive procedures are used to control the risk of incorrect acceptance of a population which is materially in error.

The auditor faces two separate risks:

1. The first risk is that material misstatements may occur in the accounting process
2. The second risk is that material misstatements that have occurred will not be detected in the auditor’s examination.

The auditor relies on internal control to reduce the first risk and substantive tests to reduce the second risk.

Question 2

Planning a Sample for a Substantive Test of Details

Answer 2

The consideration of tolerable misstatement is related to preliminary judgments in a manner such that when the auditor’s preliminary judgments about tolerable misstatement levels for accounts or transaction types are combined for the entire audit plan, the preliminary judgments about materiality levels for the financial statements are not exceeded.

Question 3

Negative Confirmations

Answer 3

Negative confirmations may be used when:

• The combined assessed level of inherent and control risk is low,
• A large number of small balances is involved, and
• The auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration