Describe substantive audit procedures.
- Substantive audit procedures are procedures designed to obtain direct evidence as to the completeness, accuracy and validity of data, and the reasonableness of the estimates and other information contained in the financial report.
- Substantive procedures include inspection, observation, enquiry, confirmation, recalculation, re-performance, analyses of many types and analytical reviews.
Explain the link between the audit risk model and the nature, timing and extent of substantive procedures.
- The combination of inherent risk and control risk determines the level of detection risk the auditor is
- willing to accept and to still be able to conclude that the financial report is materially correct.
- Detection risk is reduced or increased in direct proportion to the amount of substantive testing performed.
- There are several factors that influence how much substantive testing is performed including the nature of the test, the level of assurance necessary, the type of evidence required and the complexity of the client’s data capturing systems.
- The timing of substantive procedures is most flexible when controls have been tested and assessed as effective, and can be performed up to six months before year-end.
- When controls are not tested or are not assessed as effective, the timing of substantive procedures is at or near year-end.
Produce examples of different substantive audit procedures.
- The different types of substantive procedures are
- key items testing,
- representative sampling,
- other tests of transactions/underlying data and
- analytical procedures.
- Different analytical procedures include:
- absolute data comparisons,
- ratio analysis,
- trend analysis,
- common-size financial reports,
- break-even analysis and
- pattern and regression analysis.
- Substantive analytical procedures are different
- to those analytical procedures used during the planning phase of the audit.
Discriminate between the various levels of audit evidence obtained when performing substantive procedures.
- The different levels of audit evidence obtained when performing substantive procedures include
- Minimal and
- General audit evidence
Explain the documentation of the conclusions reached as a result of performing substantive procedures.
- Conclusion statements are documented for each significant account, including the execution of the relevant audit program steps and the results and any significant findings including any misstatements.
- The auditor also documents that the financial report reconciles to the underlying accounting
- Overall conclusion statements are usually prepared for each audit program step completed
- as well as for each significant account and significant assertion.