How to write good procedures What are poor answers? Differences between a substantive procedure and a test of control 5. Exam question example 6. Key learning points
What are substantive procedures?
ISA 500 Definition: Substantive procedures are designed to detect material misstatements at the assertion level. They comprise tests of details and substantive analytical procedures.
What are substantive procedures?
To put it another way: The client has put numbers and disclosures in their FS The auditor needs to prove them
What are substantive procedures?
Should it be there? Existence, Rights and obligations, Occurrence If so, is it in at an appropriate amount? Accuracy, Valuation Is it in the right place? Classification, Allocation Are there any missing? Completeness, Cut-off
What are substantive procedures?
ISA 500 Procedures Inspection of books and records Inspection of assets Enquiry Observation External confirmation Recalculation Re-performance Analytical procedures 6
How to write good procedures
Specific, clear, instructions that can be followed by your audit team
Action
Source
Objective
How to write good procedures
Examples: Inspect a purchase invoice for the amount and agree to the purchase listing to confirm accuracy Obtain a confirmation letter from a customer with a debt outstanding at the year end to confirm existence of the receivable
What are poor procedures?
Inspect invoice. What for? Needs an objective Review the bank statements. What for? Needs an objective Ensure the purchase is recorded accurately. How? Needs an action and a source Inspect to confirm accuracy What am I inspecting? Needs a source
Differences between TOC and Substantive
ISA 500 Definition of tests of controls Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Designing tests of controls to obtain relevant audit evidence includes identifying conditions (characteristics or attributes) that indicate performance of a control
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Differences between TOC and Substantive
Key differences - TOC is not proving the number Test the control processes e.g. Do transactions get authorised? Are there segregation of duties to prevent fraud? Do documents get matched e.g. orders with GDN/GRN and invoices? Look for evidence the control is in place and working effectively 11
F8 Dec 10 Exam Question
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F8 Dec 10 Exam Question
Valuation: Is it included at an appropriate amount? How did the client arrive at the number? Inspect the purchase invoices for the assets and agree the amounts to the asset register. Review the reasonableness of the depreciation policy by comparing with other clients with the same types of asset
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F8 Dec 10 Exam Question
Completeness: Are there any more? Trace a sample of assets from the premises to the asset register to ensure they are recorded. Inspect the repairs and renewals expense account for items that are capital in nature and should be included as assets.
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F8 Dec 10 Exam Question
Rights and obligations: Should it be included? Is it theirs to include? Inspect purchase invoices for the name of the client to ensure they have the right to include the asset in the FS. Inspect vehicle registration documents for the name of the client to ensure they have the right to include the vehicles in the FS.
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F8 Dec 11 Exam Question
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F8 Dec 11 Exam Question
Should it be there? Is there an obligation at year end? Inspect the board minutes to confirm the announcement has been made before year end and an obligation exists. Are there any missing? Inspect bank statements post year end to confirm the amount actually paid agrees to the provision in the FS and isnt understated
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F8 Dec 11 Exam Question
Is it included at an appropriate amount? How did the client arrive at the number? Obtain the schedule showing the redundancy amounts for the 14 people and cast to confirm arithmetical accuracy and completeness Inspect personnel records for the individuals salary, length of service and redundancy terms and recalculate the redundancy payments to confirm appropriate valuation. 18
F8 Dec 11 Exam Question
Check the provision is recorded correctly
How? Compare the provision with last years figure to ensure it is consistent So the company made the same people redundant last year did they? Ensure the provision meets the criteria of IAS 37 How? 19
Key learning points
Read the question carefully If it asks for substantive procedures dont give tests of controls If it asks for tests of controls dont give substantive procedures Be specific Action Source Objective