Paula McGrath
Substantive Procedures Masterclass
paula.mcgrath@kaplan.co.uk
Session Objectives
1.
2.
3.
4.
What are substantive procedures?
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
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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.
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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
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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
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What are substantive procedures?
ISA 500 Procedures
Inspection of books and records
Inspection of assets
Enquiry
Observation
External confirmation
Recalculation
Re-performance
Analytical procedures
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How to write good procedures
Specific, clear, instructions that can be followed by your
audit team
Action
Source
Objective
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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
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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
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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
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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 isn’t 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 individual’s salary,
length of service and redundancy terms and recalculate
the redundancy payments to confirm appropriate
valuation.
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F8 Dec 11 Exam Question
Check the provision is recorded correctly
How?
Compare the provision with last year’s 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?
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Key learning points
Read the question carefully
If it asks for substantive procedures don’t give tests of
controls
If it asks for tests of controls don’t give substantive
procedures
Be specific
Action Source Objective
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And finally0
Any questions?
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