Audit Procedures: Substantive Tests & Balances

• Audit procedures primarily gather evidence for management assertions on financial statements.
• Substantive tests include checks on transactions, direct checks on balances, and analytical reviews.
• Tests of details of balances focus on balance sheet accounts.
• Substantive tests check for monetary misstatements affecting financial statement validity.
• Tests of details of balances are usually more exhaustive.
• Balance sheet audits verify cutoffs more than income statement audits.
• Substantive tests of transactions and tests of controls often occur together.
• Physical examination and confirmation as audit evidence can only be obtained using tests of details of balances
• Substantive tests encompass tests of transactions, analytical procedures, and tests of details of balances.
• Tests of controls are efficiently done alongside substantive tests of transactions.
• Tests of details of balances emphasize ending balances in the client's trial balance.
• Tests of details of balances focus on the auditor's understanding of internal controls
• Substantive tests can include tests of transactions, direct financial balance tests, or analytical tests.
• Tests of details of balances target balance sheet accounts primarily.
• Balance sheet account evidence tends to be more persuasive when obtained close to the balance sheet date.
• Analytical procedures involve comparisons and relationships to assess the reasonableness of account balances.
• Auditors primarily use analytical procedures during the planning phase for cost savings.
• Auditors must investigate further if significant differences are not expected, but do exist. This also true if significant differences are expected, but do not exist.
• Auditors must perform analytical procedures during planning and completion. Test of Control is not applicable here.
• Analytical procedures are often chosen over tests of details due to their lower cost.
• Analytical procedures identify accounts or transactions needing further investigation.
• Analytical procedures study relationships between financial and nonfinancial data.
• Analytical review may be omitted entirely for some financial statement audits.
• Customer confirmations and clearing material exceptions is not an analytical procedure.
• Comparing current year revenue against budgeted revenue is most useful.
• Comparing actual revenues and expenses with previous year figures indicates significant differences.
• Income statement relationships tend to be more predictable for substantive tests.
• Interest expense account transactions likely yield the highest level of evidence.
• An unexplained decrease in the ratio of gross profit to sales may suggest unrecorded sales.
• A decrease in the inventory turnover rate suggests obsolete merchandise.
• Increased fictitious sales in 2019 is possible if accounts receivable turnover decreased.
• Reconciling fixed asset dispositions with the fixed asset ledger is not an analytical procedure.
• Auditors must reconcile fixed asset dispositions against the fixed asset ledger.

Audit Procedures

• Analytical procedures use comparisons to assess whether account balances are reasonable.
• Auditors compare prior year's data with the current year and investigate discrepancies.
• Auditors are most likely to learn if the client changed its capitalization policy by comparing revenues.
• Auditors should investigate errors in the cost of goods sold computation if gross profit margin declines.
• Confirmations are typically used for bank balances and accounts receivable.
• Tracing vendor invoices to recorded amounts is the most reliable procedure for testing accounts payable.
• Spreading audit work throughout the year to reduce peak period load is called interim work.
• Substantive tests are eliminated if controls are not considered effective, or control deviations are uncovered by the auditor
• Tests of details of balances are usually done last.
• Tests of Details of Balances are the most costly audit test.
• If analytical procedures reveal no material differences, other substantive tests may be reduced.
• After assessing misstatements are not likely, substantive tests may be lessened.
• Detailing detection of material misstatements in the account balances of the financial statements refers to testing transactions as substantive tests
• Analytical procedures assess the overall reasonableness of transactions and balances.
• Tests of details of balances detect monetary errors in financial statement balances.
• Primary purpose during testing is to help direct attention to possible misstatements during testing.

Audit Evidence

• Auditors gather evidence to form an opinion on financial statements.
• Vendor's invoice is the best example of corroborating evidence.
• Evidence must be both reliable and relevant to be considered appropriate.
• Evidence is more persuasive when items from different sources are consistent.
• Internally generated audit evidence is more reliable when accounting and internal controls operate effectively.
• Audit evidence is more persuasive when items of evidence from different sources or of different nature are consistent.
• Evidence is more appropriate when relevant, objective, and free from bias.
• Evidence is generally sufficient when it provides a reasonable basis for an opinion.
• Auditor's judgement to have sufficient evidence depends on corroborrating data and pertinence to the evidence

More on Audit Evidence

• Sufficiency of audit evidence describes the quantity.
• Quality of audit evidence describes its relevance.
• The first of the overriding considerations is more important than the second: Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility.
• Whether or not the client reports to the Securities and Exchange Commission does not affect the amount of audit evidence gathered by the auditor.
• Sufficiency and appropriateness of evidence is based on the judgement of the auditor.
• An effective internal control system provides more reliable audit evidence.
• Bank statements are an example of an external document providing reliable information.
• Evidence obtained directly from the auditor is more reliable than information obtained indirectly
• Bank statements obtained directly from the client's financial institution provides the most reliable audit evidence.
• President responses regarding the investment account would be the least persuasive for forming an opinion about trading securities and other investments held by the company.
• Direct confirmation replies from customers is the most reliable step in determining validity of accounts receivable.
• Documentary evidence is not more reliable in terms of receiving evidence by the auditor indirectly.
• Education of auditor is NOT a characteristic of the appropriateness of evidence.
• General ledger balances is the most reliable audit evidence.
• The auditor needs the competence to evaluate evidence for obtained directly by the auditor
• Financial statement auditor is responsible for accounts receivable, and NOT a client employee.
• Given various constrains, the auditor will gather persuasive evidence for any audit.
• Audit efficiency attempts to gather/evaluate information at the lowest possible total cost.
• Auditors should have supporting documentation for the audit report.
• Auditor will use the lowest possible total cost to verify information.
• After determining is related party transactions, the auditor places emphasis on evaluating the disclosure of the related party transactions
• An expert should have special skill, knowledge and experience of what is outside accounting and auditing.
• The auditor should use their judgement in the disclosure notes for the financial statements, and NOT an expert
• An auditor's expert helps obtain sufficient appropriate evidence.
• During an evaluation about the possible misstatements, the auditor should consider the related materiality. The auditor should consider the possible errors that could be compounded, and review them with professional skepticism

Working Papers

• Documentation is the material prepared by or obtained and retained by the auditor in connection with the performance of the audit
• PSA helps document the records from working papers in accordance to auditing standards
• The audit team prepares the working papers.
• The auditor should prepare completed and detailed for an overall understanding of the audit.
• Use professional judgement in determining which audit documentation needs to be professionally skepticized
• Organized indexing is more efficient for audit documentation.
• Proper indexing helps organize working papers.
• Internal audit must maintain manual, programs, and working papers.
• The main advantage of properly indexed working papers is to better organize the working papers.
• During a working paper review, the auditor will provide a workpaper indexing system that shows the relationship between findings.
• The principal purpose for cross-indexing audit working papers is to provide a trail for the auditor and the reviewer.
• The principal purpose for cross-indexing audit working papers is to provide a trail for the auditor and the reviewer
• The material needs to be understood by an experienced auditor having no previoius contact from the engagement

Accounting and Auditing Estimates

• It is an approximation of the accounting estimate (Item absent of precise of measurement)
• Consistent with prior periods in the assumptions made by accoutants
• Deviations from historical patterns in accounting estimate indicates revisions.
• Reasonable in its circumstances for its accounting estimate
• If a related-party occurs, the auditor must review the business purpose with emphasis. .
• Auditors evaluate the disclosure of related party transactions.
• Major shareholders owns the office tower for the company.
• Lack of independence is common for inherent risk
• Accounting estimate statements requires auditors to pay attention to assumptions consistent with industry patterns, and are subjective.
• Get knowledge about the financial reporting standards relating to the financial statement
• Most important factor is the subjectivity susceptible in a material misstatement when evaluating the assumptions
• Auditors should obtain an understanding relating to what the accounting estimate is
• Understanding the business is key to obtaining related party transactions.