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Substantive

Testing
Substantive Testing
• Defined as the process of obtaining
evidence/s in support of transactions
and balances.
• In deciding the nature, timing and
extent of audit procedures to be applied, the
Auditor shall consider materiality, results of
the assessment of audit risks, internal control
evaluation and the cost effectiveness of audit
procedures to be applied.
Types of Substantive Tests

Four types of substantive testing the Auditor


can perform; namely:
• Analytical review
• Test of details of transactions
• Test of details of balances
• Test of accounting estimates
Analytical Review

Evaluation of financial information made


by the study of plausible relationships
among both financial and non-financial
data.
Analytical Review is used to:
a) Obtain direct, positive audit assurance;
b) Reduce the extent of test of details.
5-Step Approach
Analytical Review
• Develop an expectation
• Define a significant difference
• Compare expectations with ecorded
amounts
• Investigate significant differences
• Documentation & Conclusion
Develop Expectations

Expectations may be sourced from


historical and future oriented internal or
external data; such as:
• Comparable prior periods;
• Budgets and forecasts;
• Relationship among elements
of the financial statements
within the period;
• Industry data.
Define Significant Difference/s
• Deviations should be stated in quantifiable terms;
• Investigate only significant deviations;
• May be calculated as percentage
of planned precision;
• It may be the difference between
materiality level and most likely
amount of errors;
• Percentage progressively reduced with
increased desegregation of data.
Compare Expectations with
Recorded Data

• Compare computed expectations with


recorded data;
• Compare expectations with
actual relationships such as
historical data, relations with
other accounts in the financial
statement
Investigate Significant Differences

• Look into causes/reasons for the deviation/s


• As a guide, explanations should be
obtained to reduce unexplained
differences to less than half of
significant difference/s
Documentation & Conclusion
• Ensure that the first four steps are properly
documented;
• Errors found from this process should
be summarized together with other
errors from other procedures
(control testing/direct substantive testing, etc.);
• Document the conclusion
drawn from the Analytical Review as a whole.
Tests of Details of Transactions
• Bottom –up Approach

The details of transactions may be


traced from source documents such
as disbursements vouchers and
invoices to entries in the cash
disbursement journal.
Tests of Details
of Transactions (con’t)

• Top-down Approach

Details of entries in the journal and


inventory records are vouched to
supporting documents such as
cancelled checks and invoices.
Test of Details of Balances

Focus is in obtaining evidence


about an account balance rather than
the individual debits and credits
comprising the balance.
For example you may request
confirmation of cash in bank or
confirmation of accounts receivable.
Test of Details of Balances (con’t)

• This often involves the use of external


documentation and may need
reconciliation of the accounts with the
documents from the external source.
Test of Details of Accounting Estimates
Accounting estimate – an approximation of
a financial statement element, item, or
account in the absence of exact
measurement. Examples: depreciation
and allowance for bad debts. Test
involves testing balances. Estimates are
prospective in nature, example, will
receivables will be collected in the
future, hence judgment is required in
making such estimates.
Test of Details of Accounting
Estimates (con’t.)
• You may do the following:
1. Consider the relevance, reliability and
sufficiency of the data and other factors used
by management.
2. Evaluate the reasonableness and
consistency of the assumptions.
3. Re-perform the calculations made by
management.
Comparison Involving Single Component

This method has two types:


1. Involves comparison of the recorded value
of a component with the budgeted
value of the component; and,
2. Trend analysis, involves comparing the
current value of a component with its value
in prior years.

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