Before applying substantive procedures to the details of accounts at an interim date
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A. Assess control risk at high for the assertions embodied in the accounts selected for interim testing.B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.C. Consider the availability of information at a later date that will be necessary for the auditor's procedures (e.g., electronic data).D. Obtain written representations from management that all financial records and relateddata will be made available. Uploaded by: thatsmydog Step-by-step answerconacinia pulvi or nes a molestisum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam la Fusce dui lentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellent a. Fusce dui lectus, congue vel laoreet ac, Subscribe to view the full answerWhy Join Course Hero?Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.
This article considers the requirements of ISA 330, The Auditor’s Responses to Assessed Risks. The main objective of ISA 330 is to give guidance on how auditors should obtain sufficient appropriate evidence regarding the assessed risks of material misstatement by designing and implementing appropriate responses to those risks. UK and Irish students should note that there are no significant differences between ISA 330 and the UK and Ireland version of this standard. Of central importance to both ISA 315 (Revised 2019) and ISA 330 is the recognition that assessing risk is at the core of the audit process, and these two ISAs specify that the auditor is required to obtain an understanding of the risk relevant to the financial statements. Paragraph 6 of ISA 330 requires that: ‘The auditor shall design and perform further audit procedures whose nature, timing, and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level.’ DefinitionsISA 330 requires that auditors should carry out tests of control and substantive procedures, and paragraph 4 of the ISA gives the definitions shown in Table 1. Students often find it quite difficult to comprehend what tests of control and substantive procedures are, to explain the difference between them, and also to give examples of both. One important difference between them is that tests of control are usually short, quick tests which generate either a ‘yes’ or a ‘no’ answer, where ‘yes’ is favourable (confirming the operation of an internal control), and ‘no’ is unfavourable (indicating that an internal control is not operating satisfactorily). Substantive procedures, however, as the name suggests, are more substantive and time consuming, requiring more detailed audit work to be carried out. The following examples, in the context of a purchases system, should help. Tests of control – examples for a purchases systemConsider when the auditor reviews a company’s purchases system and internal controls, and the assertion of occurrence (that recorded purchases represent goods and services received and which pertain to the entity). An appropriate internal control would be that purchase orders are raised for each purchase and are authorised by appropriate senior personnel. Table 1: ISA 330 tests of control and substantive procedures definitions
A test of control would be to examine a sample of purchase orders to ensure that they have been appropriately authorised. A ‘yes’ answer would confirm that the internal control requiring authorisation of purchase orders is working, whereas a ‘no’ answer would indicate that the internal control does not appear to be working, hence requiring further audit investigation. Another example of a test of control for a purchases system would be to inspect a sample of goods received notes to confirm that stores inwards staff sign for goods received. Once again, a ‘yes’ answer is positive, confirming that staff have signed the goods received note and a ‘no’ answer would be negative, requiring further audit work to be carried out to determine why the goods received note had not been signed. This test of control would also help to confirm the occurrence assertion. Substantive procedures and tests of detail – overviewISA 330 requires that the auditor shall always carry out substantive procedures on material items irrespective of the assessed risks of material misstatement, and that the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure. According to the IAASB Glossary of Terms 1, substantive procedures fall into two categories, ‘tests of details’ and ‘substantive analytical procedures’ (or simply ‘analytical procedures’, as they are usually described). ISA 330 says that auditors must decide when it is most appropriate to use which type of substantive procedure. Analytical procedures are outside the scope of this current article and the examples given below are examples of tests of details. Substantive procedures – examples of tests of detail for a purchases systemSubstantive procedures will invariably tend to involve more work than tests of control. Consider once again the example of the purchases system for a manufacturing company and the assertion of existence for account balances in the statement of financial position. Typical tests of detail would involve some physical verification of year-end balances outstanding, which would require obtaining and reviewing the closing purchase ledger account balances for a sample of purchase ledger accounts with selected suppliers. Typically, this could include agreeing the closing balance figure to the supplier’s statement, or even possibly requesting third party confirmation by the supplier of the amount outstanding. Cut-off testing would also be typically carried out on year-end purchase ledger balances, which would involve obtaining a sample of pre- and post - year-end goods received notes and agreeing these to the matching pre- or post-year-end purchase invoices, to ensure that only goods received before the end of the accounting period were included. This test would also help to confirm the assertion of existence. TimingISA 330 indicates that the auditor may perform tests of control or substantive procedures at an interim date or at the period end. If substantive testing is performed at an interim date then additional substantive procedures alone or combined with tests of control are required for the intervening period. This will provide a reasonable basis for extending the audit conclusions from interim date to the period end. The standard also indicates that, in general, the extent of audit procedures increases as the risk of material misstatement increases. Overall responsesISA 330 lists the following overall responses that may be used by auditors in order to address the assessed risks of material misstatement at the financial statement level:
SummaryAssessing risk lies at the core of the audit process and this article has introduced and explained some of the terminology used by ISA 330, giving guidance to auditors on how to respond to assessed risks. In general, tests of control are short, quick audit tests, whereas substantive procedures will require more detailed audit work. ISA 330 requires that, irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each class of transactions, account balance and disclosure. Finally, students should try to identify tests of control and substantive procedures for the main accounting systems. Reference When substantive procedures are performed at an interim date?45. When substantive procedures are performed at an interim date, the auditor should cover the remaining period by performing substantive procedures, or substantive procedures combined with tests of controls, that provide a reasonable basis for extending the audit conclusions from the interim date to the period end.
What factors should the auditor consider when substantive procedures are to be completed at an interim date?The auditor should consider the following factors when substantive tests are to be completed at an interim date: The level of control risk. Changing business conditions or circumstances that may cause management to misstate financial statements in the remaining period.
When should substantive procedures be performed?Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Tests of details are ordinarily more appropriate to obtain audit evidence for certain assertions, including existence, eligibility and valuation.
Under what condition would substantive testing of accounts receivable before the balance sheet date be appropriate?Where internal controls are operating effectively, substantive testing will be more appropriate before the balance sheet date for accounts receivable.
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