Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 12 – Audit Procedures in Response to Assessed

Risks: Substantive Tests
Chapter Overview
Steps for Assessing the Risk of
Material Misstatement
 Determining Detection Risk
• Detection Risk Model

• If, AR = IR x CR x DR, and

• DR = AP x TD so,

• DR = AR / (IR x CR)
 Preliminary Audit Strategy, Planned
Detection Risk, and Planned Emphasis on
Audit Tests
 Study Break
1. Which of the following is the
correct representation of
detection risk?
A. DR = AP x CR
B. DR = AP x IR
C. DR = TD x AP
D. DR = TD x AR

C. DR = TD x AP
 Study Break
2. Which of the following is not a step for
assessing the risk of a material
misstatement?
A. Evaluate the magnitude of potential
misstatement
B. Evaluate the likelihood of potential
misstatement
C. Evaluate who identified the potential
misstatement
D. Evaluate the type of potential misstatement

C. Evaluate who identified the potential

misstatement
Tests of Controls and
Substantive Tests
 Using IT to Support Substantive
Tests
• Generalized Audit Software

• Reconcile Detail Audit Data with the General

Ledger

• Selecting and Printing Audit Samples

• Testing Calculations and Making Computations

• Testing the Entire Population

• Summarizing Data and Performing Analyses

 Audit Choices in the Design of
Substantive Tests
• Nature

• Timing

• Extent

• Staffing
Nature of Substantive Tests
 Timing of Substantive Tests
• Prior to Balance Sheet Date
– Interim Date Risks
– Importance of Internal Controls

• At the Balance Sheet Date

– Comparison of Account Balances
– Investigate Unusual Amounts
– Other Analytical Procedures
Extent of Substantive Tests
Summary of Relationships
 Special Considerations
• Balance Sheet and Income
Statement Accounts

• Related Party Transactions

General Framework for Developing an
Audit Program for Substantive Tests
• Nature of Procedures to be
Performed
– Outline of the work to be done
– Basis for coordinating, supervising,
and controlling the audit
– A record of the work performed

• Addressing All Assertions

Audit Program Example
Audit Objectives Example
 Study Break
3. This type of test determines the
fairness of significant financial
statement assertions.
A. Tests of Controls
B. Substantive Tests
C. Inherent Tests
D. None of the above

B. Substantive Tests
 Study Break
4. This type of substantive test
involves comparing plausible
relationships among both financial
and nonfinancial data.
A. Initial Procedures
B. Substantive Analytical Procedures
C. Tests of Details of Transactions
D. Tests of Details of Balances

B. Substantive Analytical Procedures

 Study Break
5. This choice in designing a substantive
test specifically identifies the size of a
sample that is needed to meet the
acceptable level of detection risk.
A. Nature
B. Timing
C. Extent
D. Staffing

C. Extent