chapter 9 substantive procedures and the financial statement audit prepared by richard j. campbell...
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Learning Objectives 1. Recognize the audit associations of transaction cycles, account balances, management assertions, and audit steps. 2. Understand the reasons an audit opinion is limited to reasonable assurance. 3. Learn to draw conclusions from the results of audit tests of account balances. 4. Understand the audit documentation appropriate for substantive tests and procedures. Chapter 9 -1TRANSCRIPT
Chapter 9Substantive Procedures and the
Financial Statement Audit
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Learning Objectives1. Recognize the audit associations of
transaction cycles, account balances, management assertions, and audit steps.
2. Understand the reasons an audit opinion is limited to reasonable assurance.
3. Learn to draw conclusions from the results of audit tests of account balances.
4. Understand the audit documentation appropriate for substantive tests and procedures.
Chapter 9 -1
Learning Objectives5. Become familiar with specific topics that
are particularly important to financial statement audits, for example, estimation processes, going-concern considerations, and period-end cutoff.
6. Learn the substantive tests and procedures that are important for the various financial statement accounts.
Chapter 9 -2
TRANSACTION CYCLES AND ACCOUNT BALANCES
Learning Objective #1Chapter 9 -3
Transaction cycles can be defined differently for different businesses and industries, but generally most businesses have a cycle dealing with• Sales or sources of revenue and cash receipts• Purchases or acquisitions and cash disbursements• Human resources• Production or inventory, which, when necessary includes cost accounting• Activities that are financing related, such as investment, debt, and equity transactions
Substantive Procedures on Accounts and Disclosures
Chapter 9 -4 Learning Objective #1
EXHIBIT 9-1
MATERIALITY AND REASONABLE ASSURANCE
Chapter 9 -5 Learning Objective #2
Sampling is used for tests of details of balances
Errors in audit tests and procedures are either nonsampling or sampling errors
Sampling error can also occur on an audit when the selected sample does not represent the population
MATERIALITY AND REASONABLE ASSURANCE
Chapter 9 -6 Learning Objective #2
Analytical Procedures, Fluctuation Analysis
Learning Objective #2Chapter 9-7
EXHIBIT 9-2
Audit Risk Model
Chapter 9 -8 Learning Objective #2
AR stands for audit riskRMM is the risk of material financial statement misstatementIR stands for inherent risk CR stands for control risk
DR stands for detection risk.TD is the risk that a material misstatement will be missed by the auditor’s tests of details of balances.
AP is the risk that a material misstatement is missed by the audit’s analytical procedures
PERFORMING SUBSTANTIVE TESTS AND PROCEDURES
Chapter 9 -9 Learning Objective #2
Auditors perform substantive tests using tests of details of balances and substantive analytical procedures
A general description of the initial steps for a test of details of balances using a sample is as follows:
1. Determine which account and assertion is being evaluated
2. Decide what audit procedure needs to be used to test the assertion
3. Decide on the sampling method.4. Decide on the sampling frame, or physical
population from which the sample is selected, and the sampling unit.
PERFORMING SUBSTANTIVE TESTS AND PROCEDURES (Part 2)
Chapter 9 -10 Learning Objective #2
5. Determine the method to select the sample, such as utilizing identifying numbers produced by a random number generator, systematic sampling with a random start, or haphazard sampling.
6. Determine the sample size needed.7. Select the sample, perform the test, and
identify discrepancies8. Evaluate the sample results.
Conclusions as a Result of Substantive Tests and Procedures:Evaluating Results
Steps to evaluate an account balance based on an audit test of a sample are summarized as follows:
1. Determine the recorded amount of the sample.2. Using evidence collected from the sample,
investigate the misstatements.3. Using the sample as a basis, estimate the “true”
account balance.4. Set a tolerable misstatement5. Evaluate whether the account balance is
materially misstated and requires an adjustment6. Consider the impact of the audit findings on
other accounts, fraud risk, and ICFR.
Learning Objective #3Chapter 9 - 11
Quantitative Evaluation of Sample Results
Learning Objective #3Chapter 9-12
EXHIBIT 9-3
Quantitative Evaluation of Fishtrackers’ Inn Outcome
Learning Objective #3Chapter 9-13
EXHIBIT 9-4
Quantitative Evaluation of Fishtrackers’ Inn Outcome
Learning Objective #3Chapter 9-14
EXHIBIT 9-4
AUDIT DOCUMENTATION
Learning Objective #4Chapter 9-15
Lead schedule is the term for the audit work paper that lists and specifies the components
that make up the line item on the working trial balance.
Detailed work papers support the information on the lead schedule, providing information about the audit tests performed on each component of the trial balance line item and results of the tests.
Work Paper Examples
Learning Objective #4Chapter 9-16
EXHIBIT 9-5
Work Paper Examples
Learning Objective #4Chapter 9-17
IMPORTANT CONSIDERATIONS IN A FINANCIAL STATEMENT AUDIT
Learning Objective #5Chapter 9-18
Estimates
Fair Value Measurements and Disclosures
Learning Objective #5Chapter 9-19
Illegal Acts
Learning Objective #5Chapter 9-20
Related Party Transactions
Learning Objective #5Chapter 9-21
Going Concern
Learning Objective #5Chapter 9-22
AREAS ADDRESSED IN A FINANCIAL STATEMENT AUDIT
Learning Objective #6Chapter 9-23
Examples of AuditSteps for Cash
EXHIBIT 9-6
AREAS ADDRESSED IN A FINANCIAL STATEMENT AUDIT
Learning Objective #6Chapter 9-24
Receivables
Learning Objective #6Chapter 9-25
Receivables
Learning Objective #6Chapter 9-26
Inventory
Learning Objective #6Chapter 9-27
Inventory
Learning Objective #6Chapter 9-28
Investments, Emphasis on Marketable Securities
Learning Objective #6Chapter 9-29
EXHIBIT 9-9
Investments, Emphasis on Marketable Securities
Learning Objective #6Chapter 9-30
Current Payables
Learning Objective #6Chapter 9-31
Examples of AuditSteps for AccountsPayable
EXHIBIT 9-10
Long-Term Debt
Learning Objective #6Chapter 9-32
Examples of AuditSteps for Long-TermDebt
EXHIBIT 9-11
Long-Term Debt
Learning Objective #6Chapter 9-33
SUMMARY OF SUBSTANTIVE TESTS AND PROCEDURES
Learning Objective #6Chapter 9-34
APPENDIX A: STATISTICAL TECHNIQUES AND TESTS OF DETAILSOF BALANCES
Appendix AChapter 9-35
Characteristics andSample Size
EXHIBIT A9-1
APPENDIX A: STATISTICAL TECHNIQUES AND TESTS OF DETAILSOF BALANCES
Chapter 9-36
Confidence Coefficients
EXHIBIT A9-2
Appendix A
APPENDIX A: STATISTICAL TECHNIQUES AND TESTS OF DETAILSOF BALANCES
Learning Objective #3Chapter 9-37
Results of the Sampleand Audit Analysis
EXHIBIT A9-3
Review Question
Chapter 9-38
Which of the following audit processes will the auditor have to wait until the end of the fiscal year, or after, to perform?(a) Observing the inventory count(b) Testing the operating effectiveness of the yearend closing and reporting process(c) Inquiring of the client and identifying related parties(d) Evaluating the possibility of illegal acts
Review Question
Chapter 9-39
Regarding illegal acts, which of the followingis not true?(a) The auditor is more likely to become aware of illegal acts that have a direct impact on the financial statements.(b) The auditor does not have to follow up onmaterial illegal acts that he or she becomesaware of as long as they do not have a directeffect on the financial statements.(c) Illegal acts are one of the topics that is covered in the management representations letter.(d) All of the above are true.
Review Question
Chapter 9-40
Which of the following is not important tothe auditor regarding related party transactions?(a) Adequacy of disclosure of material related party transactions(b) Material misstatement of any of the transactions because they are not arms length(c) Identifying all the related parties so that the related party transactions and financial statement disclosure can be evaluated(d) All of these are important to auditing related party transactions.
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