What are the different types of audit tests? Answer 2022

The five components of the internal control framework are control environment, risk assessment, control activities, information and communication, and monitoring. Usually, auditors also need to define a threshold for differences beyond which they must investigate the differences. Once they calculate a difference, they can check it against the set threshold and investigate if it exceeds it. Auditors can base their threshold on figures such as materiality or performance materiality. Based on their investigations, they can then draw conclusions related to the figure tested.

• Not every procedure an auditor conducts has to be substantive; but, where non-substantive procedures are used, auditors should report the limitations of their work.
• For example, they compare the details in sales invoices with goods delivery notes or sales orders.
• Auditing standards provide a list of audit procedures to use for various items.
• Test of details refers to collecting evidence that helps evaluate the correctness of the account balances, disclosures, and other accounting transactions made by the business entity in their financial statements.
• You are responsible for the audit of SHE Limited which is a client of ABC & Co.

Determining and implementing overall responses to assessed risks at the financial statement level. Identifying a previously unrecognized risk of material misstatement. Identify factors which have material effects on the financial statements and consider their relationship. Indicate critical aspects or risk areas of client’s business so as to identify the existence of unusual transactions and amount, ratios and trends that might have audit implications. Examine documents, records, and reports for evidence of control procedures.

Developing Audit Programs for Substantive Tests

An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws. It is useful to note that the word “substantive analytical procedures” refers to analytical procedures that are performed as a substantive test. For example, auditors usually perform substantive analytical procedures on interest expense of borrowings by multiply the average outstanding balance two types of substantive procedures of borrowings with the average interest rate. Some of these factors include the type and nature of the client, the areas being examined, the materiality, etc. State FIVE factors that auditors would consider when planning to perform analytical procedures as substantive procedures. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level .

An item is disclosed, classified and described in accordance with the applicable reporting framework. Original documents are more realistic than photocopies, or facsimiles. Describe matters that the auditor must communicate to audit committees of public companies. List five types of authorizations in the payroll and personnel cycle and state the type of misstatement that is likely to occur when each authorization is lacking.

What types of substantive procedures are available to an auditor?

In the United States, Certified Public Accountants are legally eligible to conduct the auditing and provide opinion on financial statements. The following are the six phases involved in the financial statement audit. Substantive audit tests of detail may also involve collecting information from a client’s vendors and customers. Auditors ask these groups to declare the money owed by the company or to the company, respectively. Flaws in this test require a second sample so auditors can determine how pervasive the problem is in the company. Documentation regarding these errors removes auditor subjectivity as the information proves accounting errors. To seek to provide audit evidence as to completeness, accuracy and validity of the information contained in the books of accounts or in financial statements.

It sounds like auditors usually perform a variety of audit tests, which I think is a good idea too. It wouldn’t be very accurate to just rely on the results of one test. Indication of the presence of possible misstatements in the financial statements. Vouching (憑單核對証明) – establishing the existence or occurrence of recorded transactions by following a transaction back to supporting documents from a subsequent processing step (also referred to as “tracing back”). For example, comparing recorded purchase transactions in the purchases journal to supporting evidence such as invoices, paid cheques, and receiving reports. Tracing (追蹤) – establishing the completeness of transaction processing by following a transaction of forward through the accounting records. For example, comparing information on selected receiving reports to the purchases journals.

Availability and Reliability of Data

Distinguish between a management letter and a letter about significant deficiencies in internal control. Give examples of items that might be included in a management letter. If it is a positive payroll the timesheet is the most important evidence. Compare acquisition-related expense account balances wit prior years. List the eight balance related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.

List one possible internal control for each of the six transaction-related audit objectives for cash disbursements. List the transaction related audit objectives for the verification of cash receipts. For each objective state one internal control the client can use to reduce the likelihood of miss statement. Explain how control risk assessment differs from an integrated audit versus a financial statement audit. The purpose of the accuracy tests of gross accounts receivable is to determine the correctness of the total amounts receivable from customers. While the realizable value of accounts receivable is the gross Accounts Receivable less the allowance for uncollectible accounts to estimate the amount of the accounts receivable balance that will not be collected. Analytical review is not the procedure that uses to obtain audit evidence.

Accounts Involving Related Party Transactions

Analytical procedures reveal unusual relationships and unexpected fluctuations. The extent used in practice means the number of items or sample sizes to which a particular test or procedure is applied. Then the posting of items received in the relevant ledger accounts should be verified. For Trade Payable balances, the purchase invoices should be verified, and also the Creditors can be asked to confirm their balances. If any differences still exist, the auditor should inquire to find out the difference. The physical verification of the cash balance is to be done to check that the balance is accurate.

This fundamental assumption has serious implications for an AP’s use as a principal audit procedure, because it is too often false in those situations where its truth is essential. Inquire of management regarding the collectibility of customer accounts. Inquire of management regarding the collectability of customer accounts.

Is reconciliation a substantive test?

Accounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet https://online-accounting.net/ as the payments expected within a year. In a business-to-business transaction, a technology company fulfills the request to send 12 desktop computers to a buyer. The invoice states the price of each computer and the total cost of the order.

Analytical involve evaluations of financial information by analyzing plausible relationships between financial and non-financial data. Nonetheless, analytical procedures are a critical part of any auditing process. These procedures are less complex compared to substantive procedures. Testing internal controls is often the last set of audit tests completed by auditors.

Comparisons take two sets of information — one from the current period and one from a previous period — and determine if the current information is grossly different than the other period. Auditors may also look at budgets, forecasts, or other predictive information to determine if these were significantly different than previous periods.

For example, the checking of bank reconciliation prepared by client. Substantive audit tests of details may also include gathering information from a customer’s suppliers and customers.