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Endunamoo BCTA Support Course (BCTA2018) AUE3702: Substantive Procedures Te concepts Khanyisile Mthethwa
Endunamoo BCTA Support Course (BCTA2018)
AUE3702: Substantive Procedures Te conceptsKhanyisile Mthethwa
Introduction
The Audit Process
Preliminary engagement activities
Planning
Establish overall audit strategy
Develop an audit plan
Obtain audit evidence (the auditor’s response to
assessed risk)
Perform tests of control
Perform substantive procedures
Evaluation, concluding and reporting
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Substantive Procedures
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Substantive procedures
Which stage are we in the audit process
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Principles of Formulating Substantive procedures
What are substantive procedures
• Include tests of detail and substantive analytical procedures
Nature (TYPE)
• Substantive analytical procedures are more applicable to largevolumes of transactions/amounts that tend to be predictable overtime (e.g. sales of products might have a consistent GP margin)
• Tests of detail are ordinarily more appropriate to audit specificassertions (e.g. existence and valuation of account balances)
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Principles of Formulating Substantive procedures
Timing (WHEN)
• Interim testing increases the risk that material misstatements atperiod end will not be detected, thus should be supplemented byadditional procedures for the roll forward period
• Items with significant risks may rather be tested at year end due tothe increased risks of interim testing
Extent (QUANTITY)
• The greater the risk, the greater should be the extent of substantiveprocedures
• The extent may also increase if tests of controls found that operatingeffectiveness of controls was worse than expected
• For tests of detail, the extent of testing will often refer to the samplesize
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Substantive procedures: Direction of Testing
• Understand whether the risks under consideration relate to anoverstatement or understatement
• If there is a risk of overstatement, the assertions to be tested areoccurrence and existence, e.g. there could be a risk that debtorshave been overstated because fictitious invoices were processed (i.e.occurrence of sales and existence of debtors will be underconsideration). In such a case, the direction would be fromaccounting records to source documents
• If there is a risk of understatement, the assertions to be tested iscompleteness, e.g. the risk that invoices received were not processedin the accounting records. In such a case, the direction would befrom the source documents through to the accounting records
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Principles of Formulating Substantive procedures
An audit procedure should address the following:
• How: Applicable verb
• What: Source of evidence (Document)
• Why: Reason for the audit procedure which should address anassertion
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Principles of Formulating Substantive procedures
Applicable Verbs
• Inspections
• Observation
• Enquiry and External Confirmations
• Re-calculation
• Analytical procedures
• Re-performance
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Principles of Formulating Substantive procedures
Documentation
Any physical evidence either obtained from the client or 3rd party
Examples of documents or source of evidence
• Invoices
• Inventory count sheets
• Reconciliations
• Journals
• Management reports
• Minutes of meetings
• Client working papers
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Principles of Formulating Substantive procedures
Assertions
Assertions relating to account balances are as follows:
• Existence
• Valuation
• Rights and Obligations
• Completeness
• Presentation and disclosure
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Principles of Formulating Substantive procedures
Assertions
Assertions relating to classes of transactions are as follows:
• Completeness
• Occurrence
• Classification
• Cut off
• Accuracy
• Presentation and disclosure
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Substantive procedure with assistance of CAAT’s
We have learned to formulate a proper substantive procedure
We will now have to identify where CAATS fits in with our source ofevidence and verbs
For example, we will place “Using CAATS” at the beginning of all ourproper substantive procedures
Its very easy, but please make sure that your substantive procedure stilladdress the 3 key things
Please refer to pg. 53 in your study guides for further examples
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Substantive procedure: Analytical Procedure
Analytical procedures deals with the auditor’s use of analyticalprocedures as substantive procedures
This means that if we require you to formulate substantive procedures,you should include analytical procedures in your answer.
Analytical procedures are a form of substantive procedures. Therefore,
when you are required to describe substantive procedures, remember to
include the analytical procedures that you will perform with your other
substantive procedures.
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Substantive procedure: Analytical Procedure
Analytical procedures can include the following:
• Comparisons of the entity’s financial information to, for example
➢ prior periods
➢ Anticipated results of the entity, such as budgets and forecasts orexpectations of the auditor
➢ Similar industry information
• Consideration of relationships, for example
➢ In the entity’s financial information, such as the gross profitpercentage (ratios)
➢ Between financial information and non-financial information, suchas payroll costs to the number of employees
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End of the lecture
Any questions?
Thank you
Presenter’s detailsKhanyisile Mthethwa
Email: [email protected]
Cellphone number: 076 245 3559
BCTA2018 Administration
Rejoyce Mutengera
+2711 056 6359
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