Examining the transactions made with business partners like suppliers and customers. For example, the audit team obtains confirmations from customers, suppliers and the two types of substantive procedures bankers of these partners to check if the transactions have happened. Confirmation requires auditors to collect audit evidence from third-party or internal sources.

Each group of audit tests involves a specific set of tasks or activities meant to uncover improprieties. There are even more types of substantive tests of details that auditors may use. However, with all of them, the goal is common, to verify individual balances or transactions. Substantive test of details is the primary procedure used by auditors to check for the risk of material misstatements in the financial statements. Auditors need to obtain audit evidence related to the financial statements of a client that is sufficient and appropriate.

What are examples of substantive procedures in auditing?

With analytical procedures, auditors don’t look for details of individual transactions or purchases but rather the total figure. So, if they check supporting documents for a sample of transactions with a test of details, with analytical procedures, they test the total amount. Furthermore, ISA 330 – The Auditor’s Response to Assessed Risks requires auditors to always carry out some substantive audit procedures on material items. When it comes to audit evidence, auditing standards require auditors to obtain audit evidence that is sufficient and appropriate. While the sufficiency of audit evidence relates to its quantity, its appropriateness depends on its quality. The reason why auditors obtain the evidence is to form an opinion on whether the financial statements present a true and fair view and are free from material misstatement.

These methods come into two categories, including the test of controls and substantive procedures. Give TWO types of audit procedures, other than analytical procedures, that can enable auditors to obtain audit evidence. In addition to analytical procedures, auditors can obtain audit evidence using other types of audit procedures.

What are Audit Procedures?

For example, an auditor might verify the existence of a vehicle on your fixed asset list by reviewing the invoice from the seller. Vouching enables an auditor to evaluate the accuracy of the amount claimed by the company and whether the company recorded the transaction correctly in its accounting system. With this type of test of details, auditors send written documents to third-parties such as banks, receivables, and payables, asking them to confirm their balance with the client. Anytime an auditor performs a procedure that results in obtaining documentation to support a conclusion they’ve made, they are conducting a substantive procedure. Depending on the asset or account being audited, these procedures may be different. Below are three common examples of substantive procedures auditors routinely perform. Analytical procedures are used in this phase to increase the auditor’s understanding of the client and identify specific audit risks by considering unusual or unexpected balances or relationships in aggregate data.

• For example, if the company invests in marketable securities that it plans to sell within one year, an auditor could analyze the prevailing market price to confirm their book value.
• Using ratios and recalculations allows auditors to determine whether the company is operating close to other companies in the industry.
• Neal B. Hitzig, PhD, CPA, is a professor of accounting and information systems at Queens College and a member of the NYSSCPA’s Auditing Standards and Procedures Committee.
• Explain the difference between probabilistic and non-probabilistic sample selection.
• Auditing standards require auditors to perform audit procedures to help gather evidence.
• Suppose the invoice stated the crown molding installation cost $2,000 for one bedroom.

This judgement is important because cost of examining and evaluating all available evidence is too high. The auditor’s decisions on evidence accumulation involve the following aspects. 1.1.2 Audit evidence comprises source documents, accounting records and corroborating (確證) information from both internal and external sources. Audit evidence is accumulated from an appropriate mix of tests of control and substantive tests. Identify two types of substantive analytical procedures an auditor may perform in testing purchases.

Footnote (AS 2305 - Substantive Analytical Procedures):

If not, there may be material misstatement on the financial statements. If the substantive test reveals that there is no exception found, then the auditor can conclude that the balance on the financial statements is fairly stated.

Assess the level of assurance of information from analytical review. Appropriate sampling method – samples containing large value items, high likelihood of misstatements, and representative to the population are usually considered to be sufficient.

What are the 5 internal controls in auditing?

Therefore, auditors still need to use a test of details for items they consider material or where they believe only using analytical procedures does not suffice. When it comes to different substantive audit procedures that auditors can apply during the course of the audit, https://online-accounting.net/ they can use two types of substantive audit procedures. These are the substantive analytical procedures and tests of details. This consideration is influenced primarily by materiality and should be consistent with the level of assurance desired from the procedures.

• While both of these methods of obtaining audit evidence are important, auditors must always apply substantive audit procedures.
• When testing the sales of a client, auditors will use tests of details.
• Although characterized as an AP, this approach is actually a sampling procedure using a well-known statistical method , for which the requirements of SAS 39 apply.
• The liabilities reported must be the company’s obligations to pay on the given date.
• A lot of resources are allocated to set up a good internal control system for the collection of rental income.

For some assertions, analytical procedures are effective in providing the appropriate level of assurance. For other assertions, however, analytical procedures may not be as effective or efficient as tests of details in providing the desired level of assurance. When designing substantive analytical procedures, the auditor also should evaluate the risk of management override of controls. As part of this process, the auditor should evaluate whether such an override might have allowed adjustments outside of the normal period-end financial reporting process to have been made to the financial statements. Such adjustments might have resulted in artificial changes to the financial statement relationships being analyzed, causing the auditor to draw erroneous conclusions. For this reason, substantive analytical procedures alone are not well suited to detecting fraud.

What are the three categories of audit procedures?

They might report on their financial statements that they have $30,000 in inventory. To confirm that, the auditor would look at the inventory records and ensure that the value of each item was accurate and that the quantity and value of all the different products added up to $30,000.

Audit procedures might be different from client to client and period to period. This is because internal control over financial reporting is different from one client to another, and the control might change from time to time. APs may be the only source of assurance for tests of estimates (such as warranty or bad-debt allowances), which are the soft accounting numbers. For those tests, however, the auditor must have the ability to rely upon the underlying routine data that form the basis for the auditor’s expectation.

Well-run businesses have systems and controls in place to ensure accuracy in financial reporting. Increasing labor costs and complex business environments have encouraged organizations to implement automated internal controls to reduce and prevent financial fraud.

On the other hand, if the results of compliance testing indicate stronger internal control, then the substantive testing can be even waived off. 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. Substantive tests verify whether information is correct, whereas control tests determine whether the information is managed under a system that promotes correctness.

Test of details for income statement accounts

Confirmation that assets seen are recorded in accounting periods gives evidence of completeness. Identify five audit procedures normally done as part of the review for subsequent events. List one possible control for each of the six transaction-related audit objectives for acquisitions. Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of receivables. Compare gross margin percentage with the previous years -Overstatement or understatement of sales and accounts receivable 2. Compare sales by month over time-Overstatement or understatement of sales and accounts receivable.