two types of substantive procedures

In an audit, auditors have the responsibility to design and perform substantive audit procedures to properly respond to the assessed risk of material misstatement. In other words, the nature, timing, and extent of substantive audit procedure are directly influenced by the level of risk of material misstatement. … Substantive analytical procedures are usually performed when the risk of material misstatement is low and there are adequate control procedures in place. An auditor obtains audit evidence by performing audit procedures to draw reasonable conclusions upon which to base the audit opinion. There are three major types of audit procedures, namely risk assessment, tests of control, and substantive procedures. Do you understand how auditors verify account balances and transactions? This knowledge can minimize disruptions when the audit team visits your facilities and maximize the effectiveness of your audit.

Vouching (憑單核對証明) – establishing the existence or occurrence of recorded transactions by following a transaction back to supporting documents from a subsequent processing step (also referred to as “tracing back”). For example, comparing recorded purchase transactions in the purchases journal to supporting evidence such as invoices, paid cheques, and receiving reports. Tracing (追蹤) – establishing the completeness of transaction processing by following a transaction of forward through the accounting records.

T Or Fanalytical Procedures May Be Performed As Test Of Control

Sales are made to individuals, with income being in the form of cash and debit cards. All items purchased are delivered to the customer using Zak’s own delivery vans; most sheds are too big for individuals to transport in their own motor vehicles. The directors of Zak indicate that the company has had a difficult year, but are pleased to present some acceptable results to the members. Predict the values of individual items and compare them with actual amounts on management account and investigate the causes of any variances. 3.1.1 Analytical procedure means the analysis of significant ratios or trends including the investigation of fluctuations or inconsistent relationships with other relevant information or deviation from the expected amount. If there are exceptions, the auditor should determine whether they are isolated cases. If the test of control reveals that no exceptions have occurred, then the auditor is entitled to rely on the working of that control.

two types of substantive procedures

The values obtained from an AP are dependent on, and are derived from, the values of the underlying data that are used to form the auditor’s expectation, and on the resulting expectation . The emphasis in an AP is on identifying the unusual deviation. Whereas the observation of significant deviations may signal material misstatement, the absence of such deviations cannot be taken to indicate that there is no material misstatement. With an internal controls audit you want to make sure that you have different people performing separate functions in the company so that there is not a conflict of interest, or possibility for fraud and abuse. Substantive analytics, by contrast, look at numbers from a broader perspective.

What Are The Different Types Of Substantive Procedures?

To seek to provide audit evidence as to completeness, accuracy and validity of the information contained in the books of accounts or in financial statements. Obtain an understanding of the entity and its environment to assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels .

Evaluation of the results in light of other audit evidence obtained. Anticipated results such as budgets, forecasts and expectation of auditors.

two types of substantive procedures

Substantive testing provide evidence about the EXISTENCE OF A MISSTATEMENT in an account balance. Test of controls provide evidence that indicates a misstatement is LIKELY TO OCCUR. Income statement accounts are more predictable than balance sheet accounts.

How To Audit Business Accounts

For example, the auditor might compute the current ratio or compare this year’s debt level with prior years. I provided examples of substantive analytics in a recent article. Auditors may verify in-house schedules and records by re-creating them. If the auditor’s work matches the client’s work, it confirms that the underlying accounts appear reasonable. Auditors often rely on this procedure for such items as bank reconciliations and schedules of payroll-related expenses . If there is a contract that the client has made with accounts receivable parties, auditors can also confirm the balance from there. An audit firm looking to perform tests of details on the sales transactions of a company, ABC Co., must use the following procedures.

  • In this case, the goal of the auditor isn’t to confirm these documents exist but rather to confirm that they match with each other and with the related financial information.
  • If detection risk is high, the test may be performed several months before the end of the year.
  • He told me that he goes to different companies and conducts audits on their internal controls.
  • To test for that, the auditor would look at the A/R ledger and select a customer account.
  • Counting the funds received is an example of a substantive procedure in auditing.
  • Compliance procedure means test designed by the auditor to know how much we may rely upon the internal control system of the organisation.

Once you assess your risks of material misstatement you determine your responses. These further audit procedures include the two substantive procedures listed above as well as test of controls. The test of details is different from analytical procedures due to various reasons.

C They Are Employees Whose Work May Affect The Nature, Timing And Extent Of Audit Procedures

Examine documents, records, and reports for evidence of control procedures. Audit evidence must be relevant to the audit objective that the auditor is testing before it can be reliable.

Below are three common examples of substantive procedures auditors routinely perform. The auditor is required, however, to determine the substance of the related party transactions and their effects on the financial statements. More evidence is needed to achieve a low acceptable level of detection risk than a high detection risk. The auditor can vary the amount of evidence obtained by changing the extent of substantive tests performed. They are used by auditors to help determine the nature, timing, and extent of their substantive procedures. Banks use substantiative procedures in auditing to verify the amount of money in customers’ accounts.

  • There are two categories of substantive tests – analytical procedures and tests of detail.
  • For example, sales are affected by prices, volume and product mix.
  • Tracing – trace from the source documents to the ledger and financial statements to ensure the completeness, validity and accuracy of the balance.
  • Auditors can verify an account balance or record by vouching it to third-party documentation.
  • The time and efforts required for audit planning are directly proportional to the size and complexity of the business.
  • Making inquiries of management about the collectibility of customers’ accounts as evidence that trade debtors are accurate as to its valuation.

Recalculation procedures can be used as a test of control and a substantive test, and like reperformance, it results in audit evidence obtained directly by the auditor so it’s considered to be highly reliable evidence. Sufficiency (充分性) and appropriateness (適當性) are interrelated and apply to both tests of controls and substantive procedures. The answer depends on the reliability of the accounting system. Interim work is more easily done when you audit reliable systems. Consider waiting until period-end to audit unreliable systems. If your interim work yields significant problems, you may not feel comfortable with roll-forward procedures. In other words, you may have to re-perform your interim work at period end.

Analytical Procedures Used As Substantive Tests

This specification risk is not measurable with available techniques. A two types of substantive procedures summary of nature, timing and extent as they relate tests of details.

  • The auditor has decided to use an expert’s services regarding the fair value of the investment properties.
  • The transaction is recorded at the correct amount, and the only those expenses and revenues are recorded that pertain to that period.
  • Auditors may also use a combination of both, according to the standard.
  • Wait at least three or four weeks from period end before you perform these types of procedures.

Physically inspecting the short-term and long-term assets, which include inventory and machines. Related party refers to persons/entities that may have dealings with one another in which one party has the ability to exercise significant influence or control over the other party in making financial and operating decisions. Such retention period, however, should NOT BE SHORTER THAN FIVE YEARS from the report release date. Statutes, regulations, or the audit firm’s quality control policies may specify a longer retention period. It should be retained for a period of time sufficient to meet the needs of the auditor and to satisfy any pertinent legal requirements of record retention.

Substantive procedures are designed to obtain audit evidence as to completeness, accuracy, and validity of data produced by the accounting system. Another example is that when performing audit of cash at banks, auditors usually perform direct bank confirmation to ensure the existence of cash balances at banks. It involves testing the transactions which give rise to the ending balance of an account. It is usually used when the account balances are composed of smaller volume of relatively material amounts. Evaluating the sufficiency and appropriateness of audit evidence obtained in forming an opinion on the financial statements.

Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand. An audit is meant to reduce the likelihood of material mis-statements. Substantive testing allows the auditor to carefully review various organisational documents and controls, making sure that financial records are as accurate as possible before publishing an official report. Monthly amounts will generally be more effective than annual amounts and comparisons by location or line of business usually will be more effective than company-wide comparisons. The level of detail that is appropriate will be influenced by the nature of the client, its size and its complexity. Generally, the risk that material misstatement could be obscured by offsetting factors increases as a client’s operations become more complex and more diversified.

As a result of planning and the knowledge gained through audit procedures the auditor would not normally expect to find any major unexpected variations. It is mainly of two types – substantive and analytical procedures. Although the nature, extent, and timing of substantive tests is a matter of professional judgment, effective client internal control is a positive influence. Accordingly, the auditor may decide to decrease the amount of substantive testing, omit certain procedures, and/or schedule interim testing.