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SUBSTANTIVE TESTS. Keys to Designing a Substantive Audit Program. Obtain a list (or create one) of audit procedures and sort that list by account and by assertion within that account Identify the relative strength of (how much assurance is provided by) each test
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Keys to Designing aSubstantive Audit Program • Obtain a list (or create one) of audit procedures and sort that list by account and by assertion within that account • Identify the relative strength of (how much assurance is provided by) each test • Select procedures based on previous assessments of IR and CR.
REMEMBER: Assertions Objectives Procedures
NATURE: TIMING: EXTENT: Confirm Cash Balances Positive A/R Confirms Perform all Tests at Year End Larger Sample Sizes Additional Procedures Inspect subs. transactions Examples of LowDetection RiskTests for the Existence Assertion
NATURE: TIMING: EXTENT: Scan Bank Rec. PBC Negative A/R Confirms Analytical Review Interim Work Confirm A/R at interim Smaller Sample Sizes No Additional Procedures Examples of HighDetection RiskTests for the Existence Assertion
Compliance Testing: Risk of Overreliance Risk of Underreliance Tolerable Error Rate Expected Population Deviation Rate Substantive Testing: Risk of Inc. Accept. Risk of Inc. Reject. Tolerable Error ($) Anticipated Error ($) Reliance on Internal Controls Compliance vs. Substantive Sampling
ADVANTAGES: Usually a smaller sample size No standard deviation needed Easier to calculate P.P.S.
DISADVANTAGES: Can’t handle understatements May overstate risk if errors are found May produce larger sample sizes if expected errors increase P.P.S.
ADVANTAGES: Can use for both understatements and overstatements Easier to expand sample size Can handle a large number of differences CLASSICAL VARIABLES(MPU, Ratio, and Difference)
DISADVANTAGES: Generally need a computer to design and evaluate the sample Must have an estimate of the standard deviation CLASSICAL VARIABLES
1) Does Stratifying Pop. help? 2) Are Book Values needed for each unit? 3) Is an estimate of the pop. S.D. needed? NoYesNo No YesNoYes Yes NoYes Yes Yes PPSMPURATIODIFF
4) Do a minimum # of differences need to exist? 5) Use for BOTH under or over statements? NoNoYes Yes NoYes Yes Yes PPS MPU RATIO DIFF
SUBSTANTIAL MODERATE LITTLE 2% to 7% 6% to 12% 11% to 20% PLANNED DEGREE TOLERABLEOF RELIANCE RATE(AICPA AUDIT SAMPLING GUIDE, p. 32)
UDL ASR SDR Evaluating I/C Sample Results Tolerable dev rate 0%
Upper Misstatement Limit ASR Projected Misstatement Evaluating PPS Sample Results Tolerable Misstatement Zero Misstatement
Sample Est. + ASR ASR x 2 Sample Est. - ASR Evaluating Classical Variables Results BV + Tolerable Misstatement Book Value BV - Tolerable Misstatement