Sie sind auf Seite 1von 51

CHAPTER

CHAPTER 11
11
DETECTION
DETECTION RISK
RISK AND
AND THE
THE DESIGN
DESIGN OF
OF
SUBSTANTIVE
SUBSTANTIVE TESTS
TESTS

CHAPTER
CHAPTER 11
11
DETECTION
DETECTION RISK
RISK AND
AND THE
THE DESIGN
DESIGN OF
OF
SUBSTANTIVE
SUBSTANTIVE TESTS
TESTS

Determining Detection Risk


Designing Substantive Tests
Developing Audit Programs for
Substantive Tests
Special Consideration in Designing
Substantive Tests

Determining
Determining Detection
Detection Risk
Risk
Detection risk is the risk that the auditor will not find a material
misstatement that exists in an assertion. Chapter 8 outlines that planned
acceptable level of detection risk is determined for each significant
financial statement assertions. Furthermore, regardless of whether the
auditor chooses to use the quantitative level of risk or non-quantitative,
planned detection risk is determined by the relationship expressed in
the following models:

The model shows that for a given level of audit risk as determined by
the auditor, detection risk is inversely proportional to the level of
inherent risk and control risk are taken into account. Planned detection
risk is the planned level of substantive test.

Preliminary
Preliminary Audit
Audit Strategy,
Strategy,
Planned
Planned Detection
Detection Risk,
Risk, and
and
Planned
Planned Emphasis
Emphasis on
on Audit
Audit Tests
Tests
Figure
Figure 11-1
11-1

Evaluating
Evaluating the
the Planned
Planned Level
Level
of
of Substantive
Substantive Tests
Tests
When evaluating the planned level of substantive tests for each significant
financial statement assertion, the auditor will consider the evidence obtained
from:
1. The assessment of inherent risk.
2. Procedures to understand the business and industry and related analytical
procedures that have been completed.
3. Tests of controls including:
a. Evidence about the effectiveness of internal controls gained while
obtaining an understanding of internal controls.
b. Evidence about the effectiveness of internal controls supporting a lower
assessed level of control risk. (Such as tests of controls related to the
management of Aseri-specific assertions, testing general computer control,
computer application control testing, and follow-up testing of the manual)
The auditor should compare the actual or final level of beliefs obtained
from the procedure with inherent risk level assessment planned, the risk of
analytical procedures and risk control. If the end of the assessed level of risk is
equal to the planned level of risk assessment, meaning the auditor succeeded
in designing a specific substantive testing based on preliminary audit strategy.

Revise
Revise Planned
Planned Detection
Detection Risk
Risk
If necessary, the level of detection risk revised or
final revised acceptable level of detection risk are
determined for each assertion in the same way
with the determination of the planned detection
risk, except that it is based on actual or final
assessment over control risk, not the level of
control risk assessment is planned for these
assertions.

Specification
Specification Substantive
Substantive Risk
Risk Detection
Detection Test
Test
For
For Different
Different On
On The
The Same
Same Assertions.
Assertions.
The term detection risk used in the previous section to the
risk that the entire substantive testing is used to find
evidence of the assertion apparently failed to detect
material misstatements. In designing substantive tests, the
auditor may wish to specify different levels of risk of
detection used in different substantive testing over the
same assertions.
Figure 8-2 on page 340 illustrates an expanded matrix
of risk components that can be used to determine the level
of risk of detection for all the detailed substantive testing
that is applied to an assertion, assuming that the level of
risk the implementation of preliminary analytical
procedures can not detect a material misstatement.

DESIGNING
DESIGNING THE
THE SUBSTANTIVE
SUBSTANTIVE
TESTING
TESTING
Designing substantive tests include
determining the nature, timing,
extensive testing, and audit staffing
levels required to meet the
acceptable detection risk for each
assertion.

Nature
Nature
The nature of substantive tests refers to the
type and effectiveness of the auditing
procedures to be performed.When the
acceptable level of detection risk is low,
the auditor must use more effective, and
usually more costly, procedures.
When the acceptable level of detection risk
is high, less effective and less costly
procedures can be used.

Analytical
Analytical Procedures
Procedures

Analytical procedures can be used in the testing phase as substantive audit


testing to obtain evidence about the particular assertion. For some assertion,
the analytical procedure is considered less effective than testing details.
However in some cases the opposite effect.
In some cases where analytical procedures are effective, the audit efficiency can
be increased. In other cases, the relationship between the balance akunn
with others expected to be used.
AU 329.11, Analytical Procedures (SAS 56), indicates that the expected
effectiveness and efficiency of analytical procedures depends on the:
1. Nature of the assertion
2. Plausibility and predictability of the relationship
3. Availability and reliability of the data used to develop the expectation
4. Precision of the expectation
When the results of analytical procedures as expected, and the level of
detection risk is acceptable for high-assertion, not the details of testing
needs to be done.
Analytical testing procedures are the most inexpensive. Thus, attention
must be given to how analytical procedures can help achieve a
detection level of risk that is acceptable before selecting the test
details.

Testing
Testing Details
Details of
of the
the
Transaction
Transaction

Testing the details of the transaction involving the search and


examination. For example, detailed transaction can be traced from
source documents such as sales invoices and vouchers to entries
in the accounting records and registers like sales journal
vouchers. The focus of the auditor in conducting this testing is
the discovery of a monetary mistake, not a deviation from the
control. These tests generally use the documents available on the
archive client. The effectiveness of such testing depends on the
specific procedures and documents used.
Testing the details of the transaction can be effective in certain
cases if targeted at potential errors. Cost efficiency on the details
of the transaction testing can also be improved if done in
conjunction with tests of controls as a dual purpose of testing.

Testing
Testing Details
Details of
of Balances
Balances
Tests of details of balances focus on obtaining evidence directly about
an account balance rather than the individual debits and credits
comprising the balance.
The effectiveness of this test also depends on the specific procedure
performed and the type of evidence obtained.
Update on the balance testing often use external documents and / or
personal knowledge of the auditor directly. This test is very effective,
but time consuming and expensive to do.

Testing
Testing details
details of
of the
the Accoounting
Accoounting
Estimation
Estimation
Accounting estimate is an estimate of the financial statement element,
item, or account for the absence of precise measurements. Tests of
accounting estimates usually involve testing balances, but usually require
unique evidence
Accounting estimates include the significant prospective elements, such
as whether the receivables will be collectible in the future or whether the
warranty can be expected to be paid in the future. Consideration is needed
in making accounting estimates. Accounting estimates have a significant
impact on the financial statements of the company..
AU 342.07, Auditing Accounting Estimates (SAS 57), states that the
auditors objective in evaluating accounting estimates is to obtain sufficient
competent evidential matter to provide reasonable assurance that:
1. All accounting estimates that could be material to the financial
statements have been developed.
2. The accounting estimates are reasonable in the circumstances.
3. The accounting estimates are presented in conformity with applicable
accounting principles and are properly disclosed.

Testing
Testing details
details of
of the
the Accoounting
Accoounting
Estimation
Estimation
Company's internal control structure can reduce the likelihood of
material misstatements in the accounting estimates, and can
reduce the area of substantive tests. AU 342. 09 outlines that the
auditor should concentrate on the assumptions and factors used by
management as important
1. Significance to accounting estimates
2. Sensitive to variations
3. Deviations from the old pattern
4. Subjective and can affect the misstatements and Bllue ray
Evidence about the reasonableness of estimates can be obtained from
one or several auditors approach:
Perform procedures to review and test process management in
making estimates.
Creating an independent expectation of the estimation.
To review the transaction and the subsequent events that occurred
prior to completing the audit relating to those estimates.

Testing
Testing details
details of
of the
the Accoounting
Accoounting
Estimation
Estimation
The procedure is performed:
1. Consideration of relevance, reliability, and adequacy of the data
as well as other factors used by management
2. Evaluating the feasibility and consistency of assumptions
3. Conducting calculations have been performed over the
management.

Illustration
Illustration nature
nature Substantive
Substantive
Tests
Tests
To simplify the illustration, only one indicated Accounts Receivable. To
determine that the ending balance of accounts receivable is presented
with reasonable, the auditor may consider evidence obtained from several
substantive tests following:
Analytical Testing. The possibilities are:
Comparing the absolute value of the year-end balances with prior year
balances, the amount budgeted, or other value that is estimated, based on
changes in sales activity and credit policy.
Using the final balance to determine the percentage of accounts
receivable to current assets in comparison with the previous year,
industry data, or other expected value.
Using the final balance to calculate accounts receivable turnover ratio for
the comparison with the previous year, industry data, or other expected
value, based on sales activity changes in credit policy dna.
Testing the details of the transaction . The possibilities are :
Checking the samples individually debiting and crediting the customer's
account for the transaction group is indicated to offset journal entry and
supporting documents .

Search transaction data from source documents and journal entries related to the
customer's account for the indicated transaction group .
Testing the details on the remaining balance . The possibilities are :
Determine that the final balance in the account each individual customer to control the
account balance .
Confirm the final balance on the customer account the sample directly to the customer
concerned .
Testing the details on the balance involving accounting estimates . The possibilities are :
Test the determination of the age of receivables with vouching amounts in the
determination of the age categories for accounts receivable sample to the supporting
documents .
For accounts that have passed , examine evidence collectability of evidence such as
correspondence with customers and outside collection agencies , credit reports , and
customer financial statements , as well as discuss the amounts that can be charged to
the appropriate management personnel .
Evaluate account management process in estimating the allowance for doubtful
accounts reconsideration .
Evaluate the adequacy of the allowance given information on industry trends , the
tendency of determination of the age of accounts receivable , and billing history for a
specific customer .

Illustration
Illustration nature
nature Substantive
Substantive
Tests
Tests
In the case of accounts receivable, the three types of substantive
testing can be applied on top of everything. As for the accounts other accounts, sometimes that can be applied to only one or two
types of course to obtain evidence sufficient to meet the level of
detection risk that can be accepted.
To determine that sales have been reported to account for a
reasonable amount, the auditor may obtain evidence through the
following:
Analysis procedures. Possibilities include:
Comparison between the absolute amount of the balance before
the end of the balance, the amount budgeted, or the value of other
estimates
comparing the final balance ending balance according to
independent estimates of the final balance

Timing
Timing of
of Substantive
Substantive Tests
Tests
The acceptable level of detection risk
may affect the timing of substantive
tests.
1. If detection isk is high, the tests
may be performed several months
before the end of the year.
2. When detection risk for an assertion
is low, the substantive tests will
normally be performed at or near the
balance sheet date.

substantive
substantive tests
tests prior
prior to
to the
the date
date of
of
the
the balance
balance sheet
sheet

The decision to perform substantive tests prior to balance sheet date


should be based on whether the auditor can
Control the added risk that material misstatements existing in the
account balance sheet date will not be detected by the auditor.This
risk becomes greater as the time period between audit tests and
balance sheet date increases.
Reduce the cost of performing substantive tests necessary at
balance sheet date to meet planned audit objectives, so testing
before the date of the balance sheet to be effective in terms of cost.
AU 313, Substantive Tests Prior to Balance Sheet Date. (SAS No. 45)
1. Internal control during the remaining period is effective.
2. There are no conditions or circumstances that might predispose
management to misstate the financial statements in the remaining
period.
3. The year-end balances of the accounts examined at the interim
date are reasonably predictable as to amount, relative significance,
and composition.

substantive
substantive tests
tests prior
prior to
to the
the date
date of
of
the
the balance
balance sheet
sheet
4. The clients accounting system will provide information
concerning unusual transactions and significant fluctuations that
may occur during the remaining period.
Substantive tests prior to the date of the balance sheet need not
restrict substantive testing on the balance sheet date. Some
testing for the remainder of the period usually covers
Comparison of account balances on two dates to identify the
number that seems unusual and investigate the amount.
Other analytical procedures or other substantive tests of details to
provide reasonable grounds for the extension of the interim audit
conclusions to the balance sheet date.

Extent
Extent of
of Substantive
Substantive Tests
Tests
More evidence is needed to achieve a low
acceptable level of detection risk than a high
detection risk.
Extent is used in practice to mean the
number of items or sample size to which a
particular test or procedure is applied.

Staffing
Staffing Substantive
Substantive Tests
Tests
AU 230, due professional care in the performance of
work (SAS No.1),states that the auditor should assign
tasks and supervision commensurate with the level
of knowledge, skills, and abilities so that they can
evaluate the audit evidence they are testing.
SAS No, 82 consideration of fraud in a financial
statement audit (AU 316,27) The auditor may
respond to the risk of material misstatement by the
assignment of personnel. A task such as auditing an
accounting estimate (e.g., inventory obsolescence)
may require a greater level of industry expertise and
experience than performing a test of balances (e.g.,
observing inventory).

Summarize
Summarize Relationships
Relationships among
among Audit
Audit Risk
Risk
Components
Components and
and the
the Nature,
Nature, Timing,
Timing, and
and Extent
Extent of
of
Substantive
Substantive Tests
Tests Figure
Figure 11-2
11-2

Developing
Developing aa Substantive
Substantive Audit
Audit
Program
Program For
For Testing
Testing

Using
Using Information
Information Technology
Technology to
to
Support
Support Substantive
Substantive Tests
Tests
When the client using information technology for
application of significant accounting, auditors have the
opportunity to use audit software packages to make audits
more effective and more efficient.

General
General Audit
Audit Software
Software
Used by the auditor to the client computer archives generated in a
variety of data organization and processing methods, so it can be
connected from one client to another client.
Depending on the application, one or more of the following phases
included in the use of audit software packages:
Identifying goals and objectives of the auditor's tests performed.
Determining the feasibility of using the software package to the
client system.
Design applications, including logic, calculation, and output
forms.
Coding and testing of applications, including the manufacture of
standard forms and important information.
Processing of applications on the client and the actual archived
data to review the results

Selection and Printing Sample-Sample Audit


The computer can be programmed to select an audit
sample according to criteria specified by the auditor.
The auditor also may use audit software to sample
items that may contain some errors.
Test of Calculation and Preparation of calculation
Other common uses of computer is to test the
accuracy of the calculation in a machine that can read
the data archive.
Summarizing Data Analysis and Implementation
Auditors usually want the client data rearranged in a
way that will suit a particular purpose.
Benchmarking Audit Data with Computer Notes
Audit data generated from work performed by the
auditor can be compared with the information in the
computer records.

The
The relationship
relationship between
between assertions,
assertions, Special
Special
Purpose
Purpose Audit
Audit and
and Substantive
Substantive Tests
Tests

To develop a number of specific audit


objectives for each account based on the
five categories in the financial statement
assertions. In designing substantive tests,
the auditor should determine that the
appropriate testing has been identified to
achieve specific audit objectives that exist
in every assertion.

Illustration
Illustration of
of Assertions,
Assertions, Specific
Specific Audit
Audit Objectives,
Objectives,
and
and Substantive
Substantive Tests
Tests
Figure
Figure 11-3
11-3

Illustration
Illustration of
of Assertions,
Assertions, Specific
Specific Audit
Audit Objectives,
Objectives,
and
and Substantive
Substantive Tests
Tests
Figure
Figure 11-3
11-3

Illustrative
Illustrative Audit
Audit Programs
Programs For
For
Substantive
Substantive Testing
Testing
The auditors decisions regarding the design of substantive tests are
required to be documented in the working papers in the form of written
audit programs (AU 311.09). An audit program is a list of audit
procedures to be performed.
In addition to listing audit procedures, each audit program should have
columns for:
1. A cross-reference to other working papers containing the evidence
obtained from each procedure (when applicable),
2. the initials of the auditor who performed each procedure, and
3. the date the performance of the procedure was completed.
Audit programs should be sufficiently detailed to provide:
1. An outline of the work to bedone
2. A basis for coordinating, supervising, and controlling the audit
3. A record of the work performed

General
General Framework
Framework for
for Developing
Developing
Audit
Audit Programs
Programs for
for Substantive
Substantive Tests
Tests
We can construct a general framework for
developing audit programs for substantive tests.
Such an approach is described in Figure 11-5.
The steps listed in the upper portion of Figure
11-5 summarize the application of several
important concepts and procedures explained in
Chapters 5 through 10.

General
General Framework
Framework for
for Developing
Developing Audit
Audit
Programs
Programs for
for Substantive
Substantive Tests
Tests
Figure
Figure 11-5
11-5
Complete Audit Planning
1. Identify the financial statement assertions to be covered by the audit
program.
2. Develop specific audit objectives for each category of assertions.
3. Obtain an understanding of the clients business and industry
including such items as the clients business cycle, managements goals
and objectives, organizational resources, the entitys products, services
market, customers, competition, the entitys core processes and
operating cycle, and the entitys investing and financing decisions.
4. Assess inherent risk for the assertion.
5. Assess control risk for the assertion based on:
Evidence of the effectiveness of controls gained while obtaining
an understanding of internal controls.
Evidence of the effectiveness of management controls or other
manual controls over computer output.

General
General Framework
Framework for
for Developing
Developing Audit
Audit
Programs
Programs for
for Substantive
Substantive Tests
Tests
Figure
Figure 11-5
11-5
Evidence of the effectiveness of computer control procedures
including manual follow-up.
6. Determine the final level of detection risk for each assertion
consistent with the overall level of audit risk and applicable materiality
level.
7. From knowledge acquired from procedures to obtain an
understanding of relevant internal controls, envision the accounting
records, supporting documents, accounting processes (including the
audit trail), and financial reporting process pertaining to the assertions.
8. Consider options regarding the design of substantive tests:
Alternatives for accommodating varying acceptable levels of
detection risk:
Nature Analytical procedures, Tests of details of
transactions, tests of details of balances,Tests of accounting estimates
Timing Interim versus year-end

General
General Framework
Framework for
for Developing
Developing Audit
Audit
Programs
Programs for
for Substantive
Substantive Tests
Tests
Figure
Figure 11-5
11-5

Extent Sample size


Staffing Skill and experience of audit staf
Consider how generalized audit software might make the audit
more effective or more efficient.
Possible types of corroborating evidence available: Analytical,
Electronic, Mathematical,Written Representation, Documentary,
Confirmations, Physical, and Oral
Possible types of audit procedures available:Analytical
procedures, Inquiring, Vouching,Computer-assisted audit techniques,
Inspecting,Counting, Observing, Confirming, Tracing, Reperforming

General
General Framework
Framework for
for Developing
Developing Audit
Audit
Programs
Programs for
for Substantive
Substantive Tests
Tests
Figure
Figure 11-5
11-5
Specify Substantive Tests to Be Included in Audit Program
1. Obtain an understanding of the business and industry and determine:
a. The significance of the transaction class and account balance to the
entity.
b. Key economic drivers that influence the transaction class and
account balance that are relevant to evaluating issues of existence,
completeness, valuation and allocation, rights and obligations, and
presentation and disclosure.
2. Specify initial procedures to:
a. Trace beginning balance to prior years working papers (if applicable).
b. Review activity in applicable general ledger accounts and investigate
unusual items.

General
General Framework
Framework for
for Developing
Developing Audit
Audit
Programs
Programs for
for Substantive
Substantive Tests
Tests
Figure
Figure 11-5
11-5
c. Verify totals of supporting records or schedules to be used in
subsequent tests and determine their agreement with general ledger
balances, when applicable, to establish a tie-in of detail with control
accounts.
3. Specify analytical procedures to be performed.
4. Specify tests of detail of transactions to be performed.
5. Specify tests of detail of balances to be performed.
6. Specify tests of detail of balances involving accounting estimates to
be performed.
7. Consider whether there are any special requirements or procedures
applicable to assertions being tested in the circumstances such as
procedures required by SASs or by regulatory agencies that have not
been included in (3) and (4) above.
8. Specify procedures to determine conformity of presentation and
disclosure with GAAP.

Audit
Audit Program
Program In
In initial
initial
engagement
engagement

In an initial engagement, the detailed specification of substantive


tests in audit programs is generally not completed until after the
auditor:
Obtains an understanding of the business and the industry it
operates in.
The study and evaluation of internal control has been completed,
and
The acceptable level of detection risk has been determined for
each significant assertion.
2 matters requiring special consideration in designing audit
programs for initial audits are:
1. Determining the propriety of the account balances at the
beginning of the period being audited, and
2. Ascertaining the accounting principles used in the preceding
period as a basis for determining the consistency of application of
such principles in the current period.

Audit
Audit Programs
Programs In
In Recurring
Recurring
Engagement
Engagement
In a recurring engagement, the auditor has access to
audit programs used in the preceding period(s) and
the working papers pertaining to those programs.
In such cases, the auditors preliminary audit
strategies are often based on a presumption that the
risk levels and audit programs for substantive tests
used in the previous period will be appropriate for
the current period.

Special
Special Considerations
Considerations in
in
Designing
Designing Substantive
Substantive Tests
Tests
This section outlines concluded that
there is a difference between control
and test substantive testing.

The
The accounts
accounts of
of the
the Income
Income
Statement
Statement

Each account income statement related to one or


more of the balance sheet accounts. When compared with
the substantive tests of account balance, testing the profit
and loss account are more inclined slightly to the
analytical procedure and testing details.

Analytical
Analytical Procedures
Procedures for
for accounts
accounts
Income
Income Statement
Statement
Analytical procedures can be a powerful audit tool in obtaining audit
evidence about income statement balances. Types of substantive tests
can be used directly or indirectly. Direct testing occurs when the
account revenue or expense account compared with other relevant
data to determine the reasonableness of the balances. Testing occurs
when indirect evidence regarding the balance of the income
statement can be obtained from the analytical procedures used for
the related balance sheet accounts.

Testing
Testing Details
Details of
of the
the above
above
accounts
accounts Income
Income Statement
Statement
When the evidence obtained from analytical
procedures and from tests of details of related balance
sheet accounts do not reduce detection risk to an
acceptably low level, direct tests of details of
assertions pertaining to income statement accounts
are necessary. This may be the case when:
1. Inherent risk is high. This may occur in the case
of assertions affected by nonroutine transactions and
managements judgments and estimates.
2. Control risk is high. This situation may occur
when (1) related internal controls for nonroutine and
routine transactions are ineffective or (2) the auditor
elects not to test internal controls.

Testing
Testing Details
Details of
of the
the above
above
accounts
accounts Income
Income Statement
Statement

3. Analytical procedures reveal unusual relationships


and unexpected fluctuations. These circumstances are
explained in a preceding section.
4. The account requires analysis. Analysis is usually
required for accounts that (1) require special disclosure
in the income statement, (2) contain information
needed in preparing tax returns and reports for
regulatory agencies such as the SEC, and
(3) have
general account titles that suggest the
likelihood of
misclassifications and errors.
Accounts requiring separate analysis generally include:

Existing
Existing accounts
accounts Transactions
Transactions
Related
Related parties
parties
The auditor should identify related party transactions in audit
planning.
These types of transactions are a concern to the auditor because
they may not be executed on an arms-length basis.
The auditors objective in auditing related party transactions is to
obtain evidential matter as to the purpose, nature, and extent of
these transactions and their effect on the financial statements.
The evidence should extend beyond inquiry of management.
AU 334.09, Related Parties, indicates that substantive tests should
include the following:
1. Obtain an understanding of the business purpose of the
transaction.
2. Examine invoices, executed copies of agreements, contracts, and
other pertinent documents, such as
receiving reports and
shipping documents.
3. Determine whether the transactions has been approved by the
board of directors or other appropriate officials.

Existing
Existing accounts
accounts Transactions
Transactions
Related
Related parties
parties
4. Test for reasonableness the compilation of amounts to be disclosed,
or considered for disclosure, in the financial statements.
5. Arrange for the audits of intercompany account balances to be
performed as of concurrent dates, even if the fiscal years differ, and
for the examination of specified, important, and representative
related party transactions by the auditors for each of the parties, with
appropriate exchange of relevant information.
6. Inspect or confirm and obtain satisfaction concerning the
transferability and value of collateral.

Proportion
Proportion Test
Test Of
Of Controls
Controls and
and
Substantive
Substantive Test
Test

Summary
Summary of
of Audit
Audit Tests
Tests
Figure
Figure 11-6
11-6

CHAPTER
CHAPTER 11
11
DETECTION
DETECTION RISK
RISK AND
AND THE
THE DESIGN
DESIGN OF
OF
SUBSTANTIVE
SUBSTANTIVE TESTS
TESTS