Section 8 Substantive Procedures ASJ Stages of an Audit Types of - PowerPoint PPT Presentation

ASJ Section 8 Substantive Procedures

ASJ Stages of an Audit

Types of Auditors’ Testing - Revision ASJ Test of Controls (ToCs) Test of Controls are designed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatements. Substantive Procedures (SPs) Substantive Procedures are designed to detect material misstatement at the assertion level.

ASJ How auditor extract evidence? Sources of audit evidence: Sources of Evidence Test of Substantive Controls Procedures Test of Analytical Details Procedures

ASJ Means of Getting Audit Evidence Analytical Procedure Enquiry & RepErformance Inspection (records as well as assets) Observation & COnfirmation RecalcUlation

ASJ Means of Getting Audit Evidence - Explained • Inspection . Obtain evidence about an item by going to look at it. • Observation . The auditor can obtain evidence by watching a procedure. • Inquiry . Evidence can be obtained by asking questions. • Confirmation. This is a specific type of enquiry where the auditor seeks confirmation from a party outside the entity, for example, from a bank or a customer. • Re-calculation. The auditor checks the arithmetical accuracy of documents or records. • Reperformance. The auditor re-performs a check or control originally carried out by the client. • Analytical procedures . These are ratios, trends, comparisons and other indirect approaches to analyzed data.

ASJ Analytical Procedures Analytical procedures consist of “evaluations (assessment - judgement) of financial information through analysis of plausible (logical – believable) relationships among both financial and non-financial data”. They also encompass “such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount" (ISA 520). A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of conditions to the contrary.

ASJ Purpose of Analytical Procedures Analytical procedures are used throughout the audit process and are conducted for three primary purposes: Preliminary analytical review – risk assessment procedures (required by ISA 315) Preliminary analytical reviews are performed to obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry, to help assess the risk of material misstatement. Substantive analytical procedures Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details. Final analytical review (required by ISA 520) Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity. Final analytical procedures are not conducted to obtain additional substantive assurance.

ASJ Types of Analytical Procedures Type of analytical procedures There are several types of analytical procedures commonly used as substantive procedures. The auditor chooses among these procedures based on his objectives for the procedures (i.e. purpose of the test, desired level of assurance). Trend analysis – the analysis of changes in an account over time. Ratio analysis – the comparison, across time or to a benchmark, of relationships between financial statement items and between any financial figure and non-financial data. Reasonableness testing – the analysis of accounts, or changes in accounts between accounting periods, that involves the development of a model to form an expectation based on financial data, non-financial data, or both.

ASJ Types of Ratios  Profitability Ratios  Efficiency Ratios  Liquidity Ratios  Debt ratios  Investors ratios

ASJ Effectiveness of Analytical Procedures Effectiveness depends on the following factors: • Data reliability - The more reliable the data is, the more precise the expectation. • Reduced burden - Properly designed and executed AP can allow the auditor to achieve audit objectives more efficiently by reducing or replacing test of details. • Performed by seniors - The effectiveness of analytical procedures depends on the auditor’s understanding of the entity and its environment including its internal control and the use of professional judgment; therefore, AP should be performed or reviewed by senior members of the engagement team. • Documenting It is vital that the analytical procedures be sufficiently documented to enable an experienced auditor, having no previous connection with the audit, to understand the work done.  Predictability - There is a direct correlation between the predictability of the data and the quality of the expectation derived from the data.

Audit Assertions – 4 Key Questions - Revision ASJ SN Questions Related to Elements Confirmation of Audit Assertions Related of Financial Statements. to Account Transactions Disclosures & Balances & Events Presentation 1 Existence Occurrence Should it be in the financial Right & Cut off statements at all? Obligation 2 Completeness Completeness Is there any more? 3 Allocation & Accuracy Is it taken at the right value? Valuation Classification 4 Understandability Is it properly presented or Completeness disclosed? Classification Accuracy & Valuation

ASJ Audit Assertions - Revision 1. Accounts Balance  Existence  Right & Obligations  Completeness  Valuation and allocation 2. Event and transactions  Occurrence  Completeness  Accuracy  Cut-off  Classification 3. Disclosure and Presentation.  Occurrence  Completeness  Classification and understandability  Accuracy and valuation

ASJ Substantive Procedures for different items of Financial Statements - FS  Non-current Assets  Tangible assets  Principal risk of misstatements  Substantive procedures  Intangible assets  Substantive procedures  Current Assets  Inventory  Valuation Physical Count – ISA 501   Trade receivables External confirmation – ISA 505   Other procedures  Cash and bank balances  Bank confirmation  Physical cash count  Others  Trade payables  Accruals, provisions and contingencies  Non-current liabilities  Equity  Income statement figures

ASJ Computer Assisted Audit Techniques - CAATs CAAT Audit Test Data Software Live Dead Calculating Filtering Sorting

C A A T s ASJ Test data Audit software Test data is data generated by Software the auditor which specially designed is then processed for audit purposes. using the client’s computer systems. It is used for: Selecting samples. Checking It is used for: computations and Reasonableness checks. calculations by Confirming reperformance. exception reporting Comparing two or (therefore test data more different files. should include Performing detailed incorrect items). analytical review.

Tangible Assets – Principal Risks - RMM ASJ Principal Risks • Completeness assertion . There is a risk that assets owned by the reporting entity have not been included in the FS. • Existence assertion . There is a risk that assets reported in the FS do not actually exist (for example, they may have been sold or scrapped). • Accuracy, valuation and allocation assertion . There is a risk that the assets have been incorrectly recorded in FS at inappropriate amounts • Rights and obligations assertion . There is a risk that the reporting entity does not actually own assets that are included in the FS. • Classification assertion. There is a risk that assets have been recorded in the improper accounts. • Presentation assertion . There is also a risk that the assets have not been correctly presented and disclosed in the FS.

Tangible Assets – SP Examples ASJ ASJ Substantive Procedures Examples Existence • Select a sample of assets from the non-current asset register and physically inspect them. Completeness • Obtain or prepare a schedule of tangible non-current assets, showing cost or valuation, depreciation and carrying amount. Right & Obligations • Ensure that documents are in the name of the entity (the client company). Presentation • Review the disclosures in the financial statements and ensure they are correct and clear

Intangible Assets – SP Examples ASJ Substantive Procedures Examples • The auditor should confirm the existence, the cost and the client entity’s legal rights to the acquired assets, by looking at the purchase documentation. • Check the amortisation calculations for accuracy, using the entity’s stated policy. • Consider the possibility that the assets are suffering impairment. This matter may have to be discussed with the directors of the client company. • Ensure that any impairment has been correctly dealt with in the ledger.