Audit Procedures: Definition Types Example List Preparation

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two types of substantive procedures

In some cases, analytical procedures can be more effective or efficient than tests of details for achieving particular substantive testing objectives. Auditors usually perform substantive audit procedures after tests of controls to obtain evidence about various audit assertions. This can be done by various audit procedures such as inspection, confirmation, recalculation, and analytical procedures, etc. In a test of detail, the audit team makes use of financial statements, account balances, transactions and disclosures as pieces of evidence to show that the material misstatements don’t exist. The fourth phase in financial statement audit focuses on testing the controls to check if they are effective in preventing financial misstatements.

First, they obtain the final version of the balance sheet and look at the amount of cash the company reports. Second, they research the cash ledger and identify where that cash is located. The three types of substantive tests are analytical procedures, a test of details of transactions, and tests of details of balances.

How to design the audit procedure?

Review the remittance advice with the posting (if you’re lapping the remittance would be with the wrong receivable). If there is no change of a person working in that position for a long time. To ensure that there was no misstatement because if they return it then there wasn’t really a sale. The auditor might also examine the payment voucher against the authority that approves the payment vouchers.

Relevance should be considered in terms of specific audit objectives. 1.2.3 The auditor’s judgement as to what is sufficient appropriate audit evidence is influenced by a number of factors. 1.2.1 HKSA 500 states that the auditor should obtain “sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion”. After the sample size has been determined for an audit procedure, it is still necessary to decide which items in the population are to be tested. In deciding which audit procedures are to be used, it is common to put them down in sufficiently specific terms to be used as instructions during the audit. Modify their audit report to reflect the lack of available evidence .

Verifying payments

It is common practice to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable. No, because if the controller is aware which items were counted in the test, they two types of substantive procedures would be able to adjust the other uncounted items without the detection of the auditor. Identify five general ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits.

two types of substantive procedures

Still, the procedure is used to assess the unusual transactions or events as the principle or basic to perform other procedures. Auditors design audit procedures to detect all kinds of risks identified and ensure that the required audit evidence is obtained sufficiently and appropriately. The values obtained from an AP are dependent on, and are derived from, the values of the underlying data that are used to form the auditor’s expectation, and on the resulting expectation . Whereas the observation of significant deviations may signal material misstatement, the absence of such deviations cannot be taken to indicate that there is no material misstatement. The auditor should not conduct substantive test as the effectiveness of the control cannot be inferred from the absence of misstatements which cannot be detected by the substantive tests. In cases where compliance testing indicates weaker controls, then substantive testing can be more rigorous.

Difference between Tests of Controls and Substantive Tests

There are two categories of substantive procedures – analytical procedures and tests of detail. Most of the work auditors do is aimed at conducting substantive procedures. If you’ve ever worked at an organization that has been audited by external or internal auditors, you likely remember the requests for documentation, reports, and other original information. Substantive procedures in auditing are performed in order to verify an assessment about some aspect of an organization. Explore the definition of substantive procedures, and study its importance along with examples. Each of these, in turn, may be affected by a number of factors, and offsetting factors can obscure misstatements.

two types of substantive procedures

A walk-through test is a procedure used during an audit of an entity’s accounting system to gauge its reliability. A walk-through test traces a transaction step-by-step through the accounting system from its inception to the final disposition.

Substantive tests of transactions

This is one of the most important, and 60% of audit work involves the inspection of documents. Neal B. Hitzig, PhD, CPA, is a professor of accounting and information systems at Queens College and a member of the NYSSCPA’s Auditing Standards and Procedures Committee. The following are the steps of the audit process, along with the auditee’s involvement and responsibilities during each of these steps. The accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed.

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