2. Learning Outcomes
1. Discuss factors the auditor considers in determining the
nature of audit procedures
2. Explain the various types of audit procedures available
to an auditor and the differences between these.
3. Explain which of these types of procedures are most
appropriate in order to achieve specific audit objectives.
4. Contrast test of controls and substantive procedures
5. Discuss the relationship between assertions, specific
audit objectives and substantive procedures
6. Explain how the auditor uses the assessment of risk of
material misstatement in classes of transactions and
balances to design appropriate substantive procedures
to detect potential misstatements.
7. Formulate specific substantive procedures used by the
auditor in performing substantive tests of detail.
• REFER TO COURSE OUTLINE FOR DETAILED LEARNING
OUTCOMES:
3. AUDIT
EVIDENCE?
• ISA 500
• The objective of the auditor is to design
and perform audit procures in such a was
as to enable the auditor to obtain
sufficient, appropriate audit evidence to
be able to draw reasonable conclusions.
4. What does
sufficiency
refer to?
• This refers to the quantity of audit
evidence gathered.
• Consider if enough evidence has been obtained to
support an opinion.
• Example.
• An auditor is examining client invoice’s which are
500 in quantity.
• Is checking 5 invoices enough or 200 invoices?
5. What does
appropriate
refer to?
• This refer to the quality of audit evidence.
1. This is further broken down into reliability
(source and nature) and:
2. Relevance of the evidence to the assertion.
6. Some evidence is simply more
reliable than other evidence.
▪ Evidence developed by the auditor is the
most reliable source.
• Evidence provided directly by a 3rd party to
the auditor (as opposed to the client) is
reasonably reliable evidence, provided the 3rd
party is independent of the client, reputable
and competent.
• Evidence obtained from a 3rd party but which
was passed through the client is less reliable
as the client may have had the opportunity to
tamper with the evidence.
• Evidence gathered through the client’s system
will be more reliable when related internal
controls are effective.
More
reliable
7. Some evidence is simply more
reliable than other evidence.
▪ Evidence provided by the client is the
least reliable as it lacks
“independence”.
▪ Oral evidence is less reliable compared
to written evidence as oral evidence is
easily denied or misinterpreted.
▪ Evidence provided by photocopies or
facsimiles is less reliable than evidence
from original documents.
Less
reliable
8. Relevance of audit
evidence
1. This refers to the relevance
of the audit evidence to the
assertion.
2. Thus the auditor must
determine which assertion he
wants to test and gather audit
evidence relevant to that
assertion..
9. Considerations
on the
Sufficiency and
Appropriatenes
s of Audit
Evidence
9
Factors Explanation
Assessment of inherent and control risk High risk require more evidence
Materiality of the item examined More focus on material accounts and balances
Experience gained in previous audits Already familiar with possible problem areas for
more extensive audit procedures
Results of audit procedures already conducted Good interim or initial tests could lead to lower
risk and less procedures needed
Sources and reliability of information Sources and reliability of information
Persuasiveness of the audit evidence Evidence from one section can help support
evidence from another section if it corroborates
it, the opposite apply if it contradicts
10. What is an
assertion?
• In layman term: ‘An assertion is a statement of
fact or belief”.
• Assertions are implicitly or explicitly made
regarding
• Recognition.
• Measurement
• Presentation and disclosure.
• The above represent the what is prescribed in the IFRS
accounting standards
11. EXAMPLES OF
Relevancy of
audit evidence
Example
1
Activity:
An auditor wants to test if the inventory recorded
in the audit client records is in existence.
What to consider?
The auditor will select the inventory recorded in the
inventory sheet and physically count the inventory in
the warehouse to confirm its existence.
In Contrast.
If the auditor perform mathematical accuracy
calculation on the inventory sheet, it will not give
evidence of existence of inventory but accuracy of
amounts in the inventory sheet.
Therefore the mathematical calculation will not be
relevant to the existence assertion.
12. 12
Factors Explanation
Occurrence Transactions about events that have been recorded or disclosed, have occurred,
and such transactions and events pertain to the entity.
Completeness All transactions and events that should have been recorded have been recorded,
and all related disclosures which should have been included in the financial
statements, have been included.
Accuracy Amounts and other data relating to recorded transactions and events have been
recorded appropriately, and related disclosures have been appropriately measured
and described.
Cut-off Transactions and events have been recorded in the correct accounting period.
Classification Transactions and events have been recorded in the proper accounts.
Presentation Transactions and events are appropriately aggregated or disaggregated and clearly
described and related disclosures are relevant and understandable in the context
of the requirement of the application financial reporting framework.
Assertions: Classes of transactions
13. EXAMPLES OF
assertion
relation to Sales
account
Example
2
Accuracy assertion:
Amounts and other data relating to recorded
transactions and events have been recorded
appropriately, and related disclosures have been
appropriately measured and described.
What it means?
All sales have been recorded appropriately: this
implies prices are correct and that the correct
discount and VAT rates have been used and
correctly calculated..
14. Example of an
invoice
Are the
prices as per
the official
price list
Is the sum
correctly
calculated
Is this the
correct
price for
the items
listed
15. 15
Factors Explanation
Existence Assets, liabilities and equity exist.
Rights and
obligation
The entity holds or controls the rights to assets, and liabilities are the obligation of the
entity.
Completeness All assets, liabilities and equity interest that should have been recorded , and all related
disclosures that should have been included in the financial statement, have been
included.
Accuracy, valuation
and allocation
Assets, liabilities and equity interests have been included in the financial statements at
appropriate amounts and any resulting valuation or allocation adjustments have been
appropriately recorded, and related disclosures have been appropriately measured and
described.
Classification Assets, liabilities and equity interest have been recorded in the proper accounts
Presentation Assets, liabilities and equity interests are appropriately aggregated or disaggregated and
clearly described , and related disclosures are relevant and understandable in the context
of the requirement of the applicable financial reporting framework.
Assertions: Account balances
16. EXAMPLES OF
assertion
relation to Ppe
{property, plant
and equipment]
Example
3
Rights assertion:
The entity holds or controls the rights
to assets, and liabilities are the
obligation of the entity.
What it means?
ABC Ltd hold or controls the right of
ownership to the property, plant and
equipment reflected in the statement of
financial position.
[Any encumbrances on that ownership must
be disclosed].
18. HOW IS THIS
AUDIT
EVIDENCE
OBTAINED?
• Audit evidence is obtained by performing the
following:
• 1. Risk assessment procedures
• 2. Further audit procedures which comprise.
• Substantive procedures [Test of details + Analytical
procedures]
• Test of Control
19. RISK
ASSESSMENT
PROCEDURE?
• The auditor shall perform risk assessment
procedures:
• To identify risks of material misstatement at the overall
financial statement level and:
• To identify risk of material misstatement at the
assertion level [Covered in detail in first semester]
• Responding to the risks identified:
• The auditor will carry out further audit procedure to
respond to the above risks through:
• Substantive procedures or tests of control.
21. Substantive
procedures
• What is a
substantive
procedure?
• An audit procedure designed
to detect material
misstatement at the
financial statement level
• When should
substantive
procedures be
performed?
• The audit procedure must
be performed regardless
of the risk of the result of
the risk assessment
procedures.
21
22. WHY SHOULD
SUBSTANTIVE
PROCEDURES
BE
PERFORMED?
• To obtain audit evidence regarding the amounts and
disclosures in the financial statements that there are free
from material misstatements.
• Thus it involves a direct determination of the fair
presentation of balances and transaction reported in the
annual financial statements.
23. WHEN SHOULD
SUBSTANTIVE
PROCEDURES
BE
PERFORMED?
• The three types of substance procedures that can be used are
as follows:
1. Analytical procedures- where a trend can be determined
and there are large volumes of transactions that can be
predictable over time.
2. Here the auditor is looking at plausible relationships
❖ Examples
❖ Analysis year to year sales to identify the fluctuations or inconsistencies
3. The auditor gets a general idea on whether sales have been
overstated. (Occurrence assertion)
24. WHEN SHOULD
SUBSTANTIVE
PROCEDURES
BE
PERFORMED?
Consider the following: Tipps sells alcohol and beverages and the
following relate to 2020.
Alcohol ban timeline.
27 March to 30 May: Alcohol ban
1 June to 11 July: Alcohol ban lifted
12 July to 16 August: Alcohol ban
17 August 202: Alcohol ban lifted
Required:
Analyze the units sold per each month and determine if there are
any inconsistencies or not based on the above information.
March April May June July August
Units
Sold
8 000 10 000 25 000 38 000 65 000 74 000
25. WHEN SHOULD
SUBSTANTIVE
PROCEDURES
BE
PERFORMED?
1. Test of detail- The auditor carries out procedures on the
specific detail of a transaction, account balance or
disclosure.
❖ Example:
❖ The auditor inspects the date on a sample of purchase invoice to confirm
that the purchase was recorded in the correct accounting period.
❖ Assertion tested: Cut-off
26. How to design
a substantive
procedure?
• Depends on the following
1. Nature ISA 330 par
2. Timing ISA 330 par A11 to A14
❖ Refers to when the audit procedures can be performed whether it’s
the period or date
3. Extent
❖ Refers to the quantity of the audit evidence. This relates to one of the
characteristics of audit evidence which is ‘sufficiency’.
❖ What is considered to be sufficient audit evidence?
❖ What sample size should we test?
❖ The following steps should be followed when formulating substantive
procedures:
27. Steps for formulating substantive procedures
Step1.
• Identify all classes of transactions or account balance in the scenario.
Step 2
• Formulate audit objective (YOUR ASSERTIONS) that are applicable to
classes of transactions or account balance.
Step 3
• Identify all relevant documents and client personnel involved in
each class of transactions
Step 4
• Select the type of procedure to be performed such as (e.g. inspection,
reperformance, recalculations etc
28. What are the
types of audit
procedures
mentioned in
step 4?
Involves examining records or documents,
whether internal or external in paper or electronic
form.
Inspection
Consists of looking at a process or procedure
being performed by others or, of observing the
performance of control activities.
Observation
Involves obtaining a direct written response from
a third party to a request/query from the auditor
to that third party in paper or electronic form.
External
confirmation
Consist of checking manually or electronically, the
mathematical accuracy of documents or records.
Recalculation
Involves the auditor's independent execution of
procedures or controls that were originally
performed as part of the entity’s internal control.
Reperformance
Consists of seeking information , both financial
and non-financial from knowledgeable persons
within the entity or outside the entity.
Inquiry
29. These type of procedure are also
applicable for
1. Risk assessment procedures
and
2. Test of Controls
30. Types of substantive
procedures.
Example 1
Inquiry (Substantive Procedure) – The auditor makes enquiries of
the factory manager as to the impairment write downs for a
particular machine.
Example 2
Re-performance (Substantive Procedure) – The auditor re-performs
the year-end bank reconciliation as part of the verification of the bank
balance reflected in the year-end financial statements (same
procedure, different objective).
.
31. What are the
type of
substantive
procedures
questions you
can be
examined on?
• Perform substantive procedures on an entire
cycle.
• Perform substantive procedures on a certain
account balance per assertion.
• Perform substantive procedures for a specific
assertion on a specific account balance.
• Perform additional substantive procedures to
address the audit risk.
• Criticize substantive procedures already
performed.
• Identify a risk area and respond by designing
appropriate substantive procedures.
• Combination of the above
• Criticize working papers on assertions
32. How do you
write a
substantive
procedure?
• When designing a substantive procedure, the following
should be included.
1. How - A verb which describe an action.
2. What – This refer to the source of your audit
evidence/information.
❖This can be a document, a personnel/ or an object.
3. Why - This is simply the reason or purpose of your
substantive procedure.
❖This links to the assertion your are testing and the risk
you are responding to.
4. NB: If your substantive procedure does not have these ,
it will not be marked.
33. EXAMPLES OF
formulating a
substantive
procedure….cont’
d
Example
4
Scenario:
Included in the trial balance of ABC Ltd is a balance of
leased equipment at R 600 000. The equip was leased
on 31 April 2020. ABC Ltd has a 31 December year-end.
The lease contract is available signed by both parties.
Formulating substantive procedures.
As an auditor you must first Understand the scope,
recognition, measurement and subsequent
measurement in terms of the relevant IFRS.
Leases fall under IFRS 16:
IFRS 16- recognises the right of use asset whereas:
The obligation to pay rentals is recognised as a lease
lability.
34. EXAMPLES OF
formulating a
substantive
procedure….cont’
d
Example
4….cont’d. Formulating substantive procedures.
Remember the 5 steps to designing an audit
procedure.
Step 1: The right of use of the lease is an asset for lessee
Step 2: The assertions relating to balances will be the
objective for the audit procedure (rights/obligation,
existence, accuracy, valuation and allocation and cut-off.
Step 3: Documents include lease agreements, schedule
of leases, minutes of meetings etc. and personnel will
be management, fixed asset controller etc.
Step 4: Formulate the procedure
35. EXAMPLES OF
formulating a
substantive
procedure….cont’
d
Example
4….cont’d. Formulating substantive procedures.
NB: Your procedures must be under the assertion you are
testing.
Let’s select the existence assertion
Inspect (How) the lease agreements for pertinent details
such as:
- name of lessor and lessee (i.e. client) (What)
- amount of minimum lease payments (What)
- term of lease (What)
- other salient condition (What)
As proof that the lease agreement exist and took place
(Why).
NB: Here you are responding to the risk that the client
include a fictitious lease in their balance sheet to overstate
the asset.
36. Finally, read the Investment and
Finance cycle to be apply to
know the systems and controls in
place so you can successfully
answer the substantive
procedures questions.
