Assurance and Attestation
Services
BA 427
Winter 2007
Substantive Procedures
Glenn Lovett, Shareholder
What can
Certified Public Accountants
do that no one else can?
Answer:
Express an opinion on
financial statements
Audit Report
Independent Auditors' Report
Board of Directors
Portland, Oregon
We have audited the accompanying balance sheets of ABC
Corporation as of December 31, 2006 and 2005, and the related
statements of operations and shareholders’ equity and cash flows for
the years then ended. These financial statements are the responsibility
of the Company’s management. “Our responsibility is to
express an opinion on these financial statements
based on our audits.”
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we “plan and perform the audits to obtain
reasonable assurance about whether the financial
statements are free of material misstatement.” An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. “An audit includes examining, on a test
basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management”, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ABC Corporation as of
December 31, 2006 and 2005, and the results of its operations and
cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Significant Cycles
Significant Cycles
• Revenue > Sales > Accounts Receivable
• Conversion > Cost of Sales > Purchases
> Accounts Payable > Inventory
• Financial Management >Interest > Cash >
Investments > Goodwill > Debt > Equity
Significant Cycles
• Payroll > Payroll Expenses > Accruals >
Compensated Absences
• Expenditure > All other expenses >
Prepaids > Accruals
• Other > Taxes
Assertions
• Completeness
• whether all transactions and accounts that should be present in the
financial statements are included.
• Rights and Obligations
• whether, at a given date, all assets are the rights of entity and all
liabilities are the obligations of the entity.
• Valuation or Allocation
• whether the assets, liabilities, revenues, and expenses of an entity
have been included in the financial statements at the appropriate
amounts in conformity with GAAP.
• Existence or Occurrence
• whether assets/liabilities exist at a given date and whether recorded
transactions have occurred during a given period.
• Statement Presentation and Disclosure
• whether financial statement components have been properly
classified, described, and disclosed.
Risks - Overall and Direction
Risks - Overall and Direction
•
•
•
•
•
•
Management
Industry
Economic
Governance
Ownership
Susceptibility to Misappropriation
Fraud Risk
Fraud Risk
• Pressure
• Opportunity
• Rationalization
Glenn’s Insight #1
“You always trust the one
that steals from you”
Internal Controls
Internal Controls
•
•
•
•
•
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
Glenn’s Insight #2
“You cannot audit financial
statements that are
unauditable”
Relationship Between Risk,
Internal Control and Detection
(Substantive) Procedures
Relationship Between Risk, Internal Control
and Substantive Procedures
Low Inherent Risk
Moderate or High
Substantive Risk
Low Analytic Risk
Moderate or High
Substantive Risk
Low Internal Control
Risk
Moderate or High
Substantive Risk
None of the Above
Low or very low
Substantive Risk
High Substantive
Risk
Low Control, Inherent
and Analytic Risk
High Control (SAS)
Inherent and
Analytic Risk
Low Substantive
Risk
Types of Substantive
Procedures
Types of Substantive
Procedures
•
•
•
•
•
•
Initial understanding of the client
Analytical procedures
Tests of details
Tests of balances
Tests of accounting estimates
Tests of Disclosures
Selecting the Appropriate
Substantive Tests
Selecting the Appropriate
Substantive Tests
• Level of detection risk
• Timing of procedures
• Quality of Results (competence of
evidential matter)
• Efficiency
Glenn’s Insight #3
“An audit workpaper should
be designed to be read on
an average computer
screen in 10pt font.”
Level of Quality of
Substantive Procedures
Level of Quality of
Substantive Procedures
•
•
•
•
•
•
Personal Inspection/Observation
Specialist report
Third party corroboration
Vouching to documents
Analytical procedures
Related party representation
Audit Procedures for
Substantive Tests
Audit Procedures for
Substantive Tests
•
•
•
•
•
•
•
•
Counting
Tracing/Vouching
Observing/Inspecting
Confirming
Analytical Procedures
Inquiring
Reperforming
Experts
Glenn’s Insight #4
“Don’t put workpapers in
the file that don’t have any
audit procedures on them.”
Examples of Substantive
Procedures Related to Cycles
and Assertions
Conversion
• Completeness
Counting
Inventory Observation
Vouching
Experts
• Existence
Inventory Observation
Vouching
Experts
Conversion
• Valuation
Inventory Observation
Reperformance
Observation/Inspection
Vouching
• Rights and Obligations
Inventory Observation
Vouching
• Disclosure
Vouching/Tracing
Reading Contracts
Revenue
• Completeness
Vouching
• Existence
Confirmation
Vouching
Inquiry
Revenue
• Valuation
Reperformance
Analytical Procedures
• Rights and Obligations Vouching
• Disclosure
Inquiry
Vouching
Glenn’s Insight #5
“Document all work
outlined in the audit
program and only do work
outlined in the audit
program.”