CHAPTER 8 - PERFORMING SUBSTANTIVE TESTS

Substantive Tests - are audit procedures

designed to substantiate the account balances or
to detect material misstatements in the financial
statements.
Analytical Procedures
- enables the auditor to obtain corroborative
evidence about a particular account
- involves comparison of financial information with
auditors expectations to determine the
reasonableness of an account balance reported
in the financial statements

Factors affecting the effectiveness of analytical

procedures:
nature of the assertions
reliability
of
data
used
to
develop
expectations
precision of expectations
predictability of the accounts payable

Generalizations that are helpful in assessing

the predictability of the accounts:
Income statement accounts are more
predicable compared to balance sheet
accounts.
Accounts that are not subject to management
discretion are generally predicable.
Relationships in a stable environment are
more predictable than those in a dynamic or
unstable environment.

Audit Evidence - refers to the information

obtained by the auditor in arriving at the
conclusions on which the audit opinion is based.

Forms of test of details:

Test of details of balances - involves direct
testing of the ending balance of an account
Test of details of transactions - involves
testing the transact-tions which give rise to
the ending balance of an account

Substantive Test vs. Test of Control

Tests of Controls provide evidence that indicates
a misstatement is likely to occur. Substantive
Tests provide evidence about the existence of
misstatement in an account balance.

Quality of Evidence
Sufficiency - refers to the amount of evidence
that the auditor should accumulate.
Factors to be considered in evaluating the
sufficiency of evidence:
Competence of evidence - this varies
inversely with the amount of evidence that
is sufficient in a given situation. The more
competent the evidence, the less amount of
evidence is needed to support the auditors
opinion.
Materiality of item being examined - the
more material the fs amount being
examined, the more evidence will be
needed to support the validity.
Risk involved in a particular amount - as the
risk of mis-statement increases, the more
evidence will be needed.
Experience gained during previous audit
may indicate the amount of evidence taken
before and whether such evidence was
enough.

Test of Details
- involves examining the actual details making up
the various account balances

Factors affecting the effectiveness of substantive

tests:
Nature of substantive test - relates to the quality
of evidence
Timing of substantive test - interim date or at
year-end
Extent of substantive test - relates to the amount
of evidence needed to satisfy a particular
objective.

Underlying accounting data - refers to

accounting records
Corroborating information - supports UAD
obtained from clients and other resources

Appropriateness - measures the quality of

audit evidence and its relevance to a
particular assertions and its reliability.
- Relevance - relates the timeliness of
evidence and its ability to satisfy the audit
objective.

Reliability - relates to the objectivity of

evidence and is influenced by its source and
by its nature.

Generalizations that could help the auditor in

assessing the reliability of audit evidence:
Audit evidence obtained from independent
outside sources is more reliable than that
generated internally.
Audit evidence generated internally is more
reliable when the related accounting and
internal control systems are effective.
Audit evidence obtained directly by the
auditor is more reliable than that obtained
from the entity.
Audit evidence in the form of documents
and written representations is more reliable
than oral representations.

major contracts
engagement letter
organizational chart
analyses of long-term accounts
internal control analyses
Current file - contains evidence gathered and
conclusions reached relevant to the audit of a
particular year.
a copy of the financial statements
audit program
working trial balance
lead schedules
detailed schedules
correspondence with other parties

Techniques used by auditor when preparing

working papers:
Heading
Indexing - refers to the use of letter or
numbering system
Cross-indexing/Cross referencing - provides a
trail useful to supervisors in reviewing the
working papers
Tick marks - symbols that describe the audit
procedures performed

Accounting Estimates - means an approximation

of the amounts of an item in the absence of a
precise means of measurement.

Audit Documentation or Working Papers - are

records kept by the auditor that documents the
audit procedures applied, information obtained
and conclusions reached.

Related Party - refers to the persons or 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.

Primary functions of the working papers:

support the auditors opinion on the financial
statements
- support the auditors representation as to
compliance with PSA
- assist
the
auditor
in
the
planning,
performance, review and supervision of the
engagement
-

Secondary functions of the working papers:

planning future audits
providing information useful in rendering
other services
- providing adequate defense in case of
litigation
-

Classification of working papers

Permanent file - contains information of
continuing signify-cance to the auditor in
performing recurring audits
- copies of the articles of incorporation and
by-laws

Expert - it is a person or firm possessing special

skill, knowledge and expertise in a particular
field other than accounting and auditing.
Kinds of expert:
Auditors expert - an expert, whose work in
his/her field of specialization, is used by the
auditor to assist the auditor in obtaining
sufficient appropriate audit evidence.
Managements expert - an expert, whose
work is his/her field of expertise, is used by

the entity to assist the entity in preparing the

financial statement.
Evaluating the auditors expert:
1. Assess the competence and objectivity of the
expert.
2. Understand the field of the expertise of the
auditors expert.
3. Establish the terms of the agreement with
the expert.
4. Evaluate the results of the work of the
expert.
Internal auditing - is an appraisal activity
established within an entity as a service to the
entity.
Considering the work of internal auditor
involves two phases:
Making a preliminary assessment of internal
auditing

External auditors must consider the internal

auditors:
Competence - professional qualifications
and expertise
Objectivity - organizational level to which
the internal auditors report the results of
their work
Due professional care - proper planning,
supervision and documentation of internal
auditors work
Scope of function - nature and extent of the
internal auditors assignment

Evaluating and testing the work of internal

auditing
Routine/Mechanical audit procedures - is an
acceptable practice that provided that the
external auditor supervises and reviews
work perforrmed by the internal auditors.