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Module 7 - Substantive Test and Documentation (Autosaved)

This module discusses substantive audit procedures. It defines audit evidence as information used to conclude if financial statements are fairly presented. Audit evidence must be sufficient, appropriate, and evaluated. Substantive procedures test account balances and include tests of details, analytical procedures, and substantive tests. Working papers provide documentation that audit work was adequately performed and the appropriate audit opinion was issued.

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289 views

Module 7 - Substantive Test and Documentation (Autosaved)

This module discusses substantive audit procedures. It defines audit evidence as information used to conclude if financial statements are fairly presented. Audit evidence must be sufficient, appropriate, and evaluated. Substantive procedures test account balances and include tests of details, analytical procedures, and substantive tests. Working papers provide documentation that audit work was adequately performed and the appropriate audit opinion was issued.

Uploaded by

The Brain Dump PH
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Module 7

Substantive
Audit
Procedures
Learning Outcomes

After studying this module, the students are expected to:

▪ Define audit evidence.


▪ Identify the attributes of audit evidence.
▪ Enumerate the factors affecting the reliability of audit evidence.
▪ Distinguish the relationship between assertions, audit
objectives, and audit procedures.
▪ Define substantive test procedures.
▪ Classify the different substantive procedures performed in an
audit.
The Relationship of Evidential
Matter to the Audit Report
Financial Audit
Statements Report

Management
Assertions

Audit
Objectives

Audit Evidence
Procedures
PSA 500, Audit Evidence states
that…
The auditor shall design and perform audit procedures
that are appropriate in the circumstances for the
purpose of obtaining sufficient appropriate audit
evidence.

When designing and performing audit procedures, the


auditor shall consider the relevance and reliability of
the information to be used as audit evidence.
ACQUISITION OF EVIDENCE
Audit evidence is necessary to support the
auditor’s opinion. The purpose of
gathering and evaluating audit evidence
is to acquire data and information to be
used as basis for concluding that the
entity’s financial statements are
presented fairly in accordance with
PFRS.
AUDIT EVIDENCE
Audit evidence is all the information used by
the auditor in arriving at the conclusions on
which the audit opinion is based, and
includes the information contained in the
accounting records underlying the financial
statements and other information.
AUDIT PROCEDURES
▪ Audit procedures are specific actions performed
by the auditor to gather evidence to determine if
specific audit objectives are being met.

▪ A set of audit procedures prepared to test audit


objectives for a component of the financial
statements is referred to as an audit program.
Audit Procedures According to Purpose
Category Description/Purpose

Used for obtaining an understanding of the client


Risk assessment entity and its environment, including internal control.
procedures Risk assessment procedures are performed during the
audit planning and internal control phases of the audit

Used to test the operating effectiveness of controls in


Tests of controls preventing, or detecting and correcting, material
misstatements.

Used to detect material misstatements in account


Substantive tests
balances, classes of transactions and disclosures.
BASIC CONCEPTS OF
AUDIT EVIDENCE

The nature of audit evidence

The sufficiency of audit evidence

The appropriateness of audit evidence

The evaluation of audit evidence


MEANING of SUFFICIENT,
APPROPRIATE EVIDENCE
▪ Sufficient: quantity of evidence necessary
to test management’s assertions
▪ Appropriate: relevant, valid, and reliable
kinds of evidence necessary to test
management’s assertions
THE NATURE OF
AUDIT EVIDENCE
▪ Accounting data that can be used to test audit objectives
include the books of original entry, and records such as
worksheets and spreadsheets that support amounts in the
financial statements. Many times these data are in
electronic form.

▪ Corroborating audit evidence includes both written and


electronic information such as cheques, records of
electronic transfers, invoices, vouchers, receipts, contracts,
minutes, confirmations, and written representations.
SUFFICIENCY OF
AUDIT EVIDENCE
▪ Sufficiency is the measure of the quantity of
audit evidence.
▪ The quantity of audit evidence needed is
affected by the risk of misstatement (the
greater the risk, the more audit evidence is
likely to be required) and also by the quality of
such audit evidence (the higher the quality, the
less may be required).
APPROPRIATENESS
OF AUDIT EVIDENCE
▪ Evidence is considered appropriate when it is both
relevant and reliable
▪ Relevance - The evidence must be relevant to
the audit objective being tested.
▪ Reliability - Reliability refers to whether the
type of evidence can be relied upon to signal
the true state of an assertion or audit objective.
Generalization About the
Reliability of Evidence
Independence of the source

Qualifications of the source

Internal control

Nature of evidence

Form of the evidence


Poll Question #1
FINANCIAL STATEMENT
ASSERTIONS
▪ Existence or occurrence
▪ Completeness
▪ Rights & obligations
▪ Valuation or allocation
▪ Presentation & disclosure
EXISTENCE or OCCURRENCE

▪ All assets, liabilities, equities exist


▪ All transactions occurred
COMPLETENESS ASSERTION

▪ All transactions that occurred during


period are recorded and reported for
the appropriate time period.

▪ All accounts are complete as to data.


RIGHTS & OBLIGATIONS
ASSERTION

▪ Entity entitled to assets (rights)


▪ Entity liable for obligations
VALUATION or ALLOCATION
ASSERTION

▪ Assets, liabilities, equities,


revenues, expenses recorded
at appropriate amounts.

▪ Revenues, costs, expenses


allocated to proper
accounting periods.
GBW 7th ed., Ch. 4
PRESENTATION & DISCLOSURE
ASSERTION

▪ Financial statement
components properly
classified, described &
relevant information
adequately disclosed.
AUDIT PROCEDURES
▪ Observation
▪ Inspection
▪ Confirmation
▪ Mechanical tests
▪ Analytical procedures
▪ Inquiries
SUBSTANTIVE TESTS

▪ Tests of details
▪ Transactions
▪ Balances

▪ Analytical tests
ANALYTICAL PROCEDURES

▪ Evaluations of financial
information made by a study of
plausible relationships among
both financial and nonfinancial
data
USING ANALYTICAL PROCEDURES
When Purpose

Planning (required) Directs attention to likely


misstatements
Substantive tests Supports or refutes
account balances
Overall review (required) Reviews reasonableness
account balances
TYPES ANALYTICAL PROCEDURES

▪ Trend analysis
▪ Ratio analysis
▪ Activity ratios
▪ Profitability ratios
▪ Liquidity ratios
▪ Solvency ratios
Poll Question #4
Audit Documentation
(Working Papers)

Audit documentation or working papers are the


record of audit procedures performed, relevant
audit evidence obtained, and conclusions the
auditor reached (terms such as “working papers”
or “workpapers” are also sometimes used).
WORKING PAPER FILES
▪ Correspondence (administrative) file
▪ Permanent file - Information of continuing
interest & relevance
▪ Current file
▪ Tax file
▪ Past, present, future income & business tax
obligations
ROLE OF WORKING PAPERS
▪ Work was adequately planned,
supervised, and reviewed.

▪ Sufficient appropriate evidential matter


was obtained.

▪ Support on the type of audit opinion


issued.
Retention of WORKING PAPERS
▪ PSQC No. 1 requires firms to establish policies
and procedures for the retention of engagement
documentation.
▪ PSQC No. 1 indicates, the retention period for
audit engagements ordinarily is no shorter than
seven years from the date of the auditor’s report,
or, if later, the date of the group auditor’s report.
Learning Outcomes

After studying this module, the students are expected to:

▪ Define audit evidence.


▪ Identify the attributes of audit evidence.
▪ Enumerate the factors affecting the reliability of audit evidence.
▪ Distinguish the relationship between assertions, audit
objectives, and audit procedures.
▪ Define substantive test procedures.
▪ Classify the different substantive procedures performed in an
audit.

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