Substantive Testing and Analytical Procedures in Audit

This document provides an overview of substantive testing and analytical procedures in an audit. It explains the purpose of substantive testing and provides examples of types of substantive tests. It also discusses analytical procedures and how they can be used as substantive tests in an audit. The document explores the relationship between the amount and timing of substantive testing and overall risk assessment. It highlights the problems with using Haddin's audit program for designing substantive procedures for Sangekar. Additionally, it covers procedures addressing assertions and the persuasiveness of evidence from analytical procedures.

Tutorial Questions

TABLE OF CONTENTS
MCQ................................................................................................................................................1
REVIEW QUESTIONS...................................................................................................................1
9.11 Purpose of the substantive testing and examples of types of substantive tests....................1
9.13 What are analytical procedures and how they could be used as substantive tests in audit..1
9.15 How the decisions on how much and when substantive testing is performed related to
overall risk assessment for item tested. .......................................................................................2
9.23 Problems with using Haddin's audit program as the basis for designing substantive
procedures for the Sangekar.........................................................................................................2
9.24 Procedures addressing the assertions ..................................................................................3
9.30 Persuasiveness of the evidence from the analytical procedures..........................................3
REFERENCES................................................................................................................................5

MCQ
Q.1 – C
Q.2 - D
Q.3 - B
Q.4 - C
Q.5 - B
Q.6 - B
Q.7 - C
Q.8 - C
Q.9 - B
Q.10 - D
REVIEW QUESTIONS
9.11 Purpose of the substantive testing and examples of types of substantive tests
Substantive testing refers to audit procedure which examines financial statements and the
supporting documentations for identifying the errors and mistakes. Tests are required as the
evidence for supporting assertion that financial records of entity are valid, complete and
accurate. There are many types of substantive tests that the auditor could use. Following are
examples of substantive testing
 Confirming validity of the calculations for inventory valuations
 Physical match of the fixed assets to records
 Issuing bank confirmation for testing ending cash balance
 Contacting lenders for confirming loan balances
9.13 What are analytical procedures and how they could be used as substantive tests in audit.
Analytical procedures could be described as evidence used in the audit. The procedures
indicate possible issues with financial records of client, that could be then investigated
thoroughly (Saadullah and Elsayed, 2020). It involves comparison of the different sets of the
financial as well as operational information to identify if the historical relations have continued
forward in period under review.
Analytical procedures could be used as the substantive test for obtaining evidential
matters about the particular assertions related to the account balances or the class of transactions.
Reliance of the auditor on substantive tests for achieving the audit objective related to particular
assertion could be derived from the test of details. Decision about the procedures is used for
achieving specific audit objective based over judgement.
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9.15 How the decisions on how much and when substantive testing is performed related to
overall risk assessment for item tested.
The decision about the amount of substantive testing performed is verified by inspecting
the quantity of specific audit procedures to be performed like sample size or number of
observations of the control activity. Extent of audit procedures is determined by Judgement
considering tolerable misstatement, assessed risks of the material misstatements and degree of
assurance that auditor plans at obtaining. If in the selected samples level of misstatement are
higher than the overall risk assessment is not performed accurately. Valid conclusions are
generally drawn on the basis of sampling approach. Operating effectiveness testing is different
from gathering audit evidence regarding implementation of test controls (Cohen and Rozario,
2019). Timing of the test controls depend over objective of auditor and period of reliance.
9.23 Problems with using Haddin's audit program as the basis for designing substantive
procedures for the Sangekar
In the present case Jenny had been doing audit of Haddin which was a service company
while the audit proposed to be performed is of Sangekar Industries which is manufacturing and
trading concern. The nature of business is different of both the companies due to which whole
operations would be different as compared with the other (Uludağ, 2016 ). The substantive
procedures adopted for the service industry may not be useful for manufacturing concern.
 It may not be able to verify the inventory using the previous substantive procedures
 It might face issues in inspecting the purchases of materials and sales transactions as they
have to identify quantity, rate and other related factors.
 The scale of accounts payable would be higher in Sangekar being manufacturing concern.
 Substantive procedures will not be useful to identify the physical counts of the inventory.
 Increased level of substantive testing will be required to identify the misstatements or
errors
 The operational processes are different from the service industry
 Proper inspection of the opening and closing inventory would be difficult.
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9.24 Procedures addressing the assertions
Cut off assertions means that the revenues are recorded in period to which they belong . It
could cause understated and the over statement of revenues being shown in income statement.
Correct cut off procedures are essential for the auditors.
The procedure involves selecting sample of the sales from sales journal and agreeing
dates on invoices to dates in delivery documents signed by customer.
The procedure will analyse sales recorded in the journal is agreeing with dates on
invoice. The dates on invoice are entered on the day sales is made and not on the day goods are
delivered but are to be recorded on the same day in sales journal. The date on delivery document
signed by customer shows that the goods have been delivered in the same period and there are
not major variation between the dates (Appelbaum, Kogan and Vasarhelyi, 2018). As general
the date of invoice and date of delivery documents should agree. If they do not agree reasons for
the same are to be confirmed by the company and customer in certain cases if the variations
between dates is high.
The dates agree – If the dates of invoice and date of delivery documents agree with each other
then it could be assumed that the sales belong to the same accounting period.
The dates do not agree – If dates do not agree then the auditor has to ensure that the variation
between dates is not high. It could also mean that the revenues are not recorded in the same
accounting period and are recorded falsely for manipulating the profits or sales figures.
9.30 Persuasiveness of the evidence from the analytical procedures
a) Questions by Brian about the analytical procedure
 What is the method used for depreciation ?
 The amount of additions and deletions on PPE ?
 What is the rate of sales commission ?
 Amount of sales returns and the average sales ?
 Number of joiners and left employee ?
 Increment from the last year and the bonus if any ?
b)
If all the answers are answered satisfactorily the evidence from every analytical procedures
would be corroborative. The implications would require the auditor to conduct further testing to
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identify the accuracy of the substantive procedures. Opinion on the financial statements could be
made only when substantive procedures carried out are satisfactory and no misstatements are
found. Further testing will help to identify that the expenses and claims are correct and free from
the errors.
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REFERENCES
Books and Journals
Saadullah, S.M. and Elsayed, N., 2020. An audit simulation of the substantive procedures in the
revenue process–A teaching case incorporating Bloom’s taxonomy. Journal of Accounting
Education. 52. p.100678.
Cohen, M. and Rozario, A., 2019. Exploring the Use of Robotic Process Automation (RPA) in
Substantive Audit Procedures. The CPA Journal. 89(7). pp.49-53.
Uludağ, S., 2016. The importance of control environment in an organization for an independent
auditor to determine nature, timing, and extent of substantive tests: An application in
Turkey. JABS. 2(6). pp.294-303.
Appelbaum, D.A., Kogan, A. and Vasarhelyi, M.A., 2018. Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature. 40. pp.83-101.
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