Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th 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