Confirm debt. Analytical analysis of assets , liabilities , revenue , and expenses. Thus, an auditor who is testing a validity assertion regarding a company's fixed assets could conduct a physical observation of the assets, and then test for record accuracy by evaluating whether there is an asset impairment. Substantive procedures are included in the audit plan around which an audit is structured. If the results of substantive procedures are not as expected, additional procedures may be added to the audit plan.
Accounting Books. Finance Books. Operations Books. Articles Topics Index Site Archive. About Contact Environmental Commitment. An expectation is a prediction of a recorded amount or ratio. The prediction can be a specific number, a percentage, a direction or an approximation, depending on the desired precision.
The auditor develops expectations by identifying plausible relationships eg between store square footage and retail sales, market trends and client revenues that are reasonably expected to exist based on his knowledge of the business, industry, trends, or other accounts. STEP 2: Define a significant difference or threshold While designing and performing substantive analytical procedures the auditor should consider the amount of difference from the expectation that can be accepted without further investigation ISA Thresholds may be defined either as numerical values or as percentages of the items being tested.
Establishing an appropriate threshold is particularly critical to the effective use of substantive analytical procedures.
To prevent bias in judgment, the auditor should determine the threshold while planning the substantive analytical procedures, ie before Step 3, in which the difference between the expectation and the recorded amount are computed. The threshold is the acceptable amount of potential misstatement and therefore should not exceed planning materiality and must be sufficiently small to enable the auditor to identify misstatements that could be material either individually or when aggregated with misstatements in other disaggregated portions of the account balance or in other account balances.
STEP 3: Compute difference The third step is the comparison of the expected value with the recorded amounts and the identification of significant differences, if any. This should be simply a mechanical calculation. It is important to note that the computation of differences should be done after the consideration of an expectation and threshold. STEP 4: Investigate significant differences and draw conclusions The fourth step is the investigation of significant differences and formation of conclusions ISA Differences indicate an increased likelihood of misstatements; the greater the degree of precision, the greater the likelihood that the difference is a misstatement.
Explanations should be sought for the full amount of the difference, not just the part that exceeds the threshold. There is a chance that the unexplained difference may indicate an increased risk of material misstatement. The auditor should consider whether the differences were caused by factors previously overlooked when developing the expectation in Step 1, such as unexpected changes in the business or changes in accounting treatments.
If the difference is caused by factors previously overlooked, it is important to verify the new data, to show what impact this would have on the original expectations as if this data had been considered in the first place, and to understand any accounting or auditing ramifications of the new data. The objective of the audit procedure will determine whether data for an analytical procedure should be disaggregated and to what degree it should be disaggregated.
Disaggregated analytical procedures can be best thought of as looking at the composition of a balance s based on time eg by month or by week and the source s eg by geographic region or by product of the underlying data elements. The reliability of the data is also influenced by the comparability of the information available and the relevance of the information available.
The data used to form an expectation in an analytical procedure may consist of external industry and economic data gathered through independent research. The source of the information available is particularly important. Analytical procedures are more high level, ration driven analysis. For example, comparing Accounts Receivable turnover to prior year. Analytical procedures are used during the planning phase, and in the final review phase.
If internal controls are strong enough which we'll know from tests of controls , or if circumstances warrant, analytical procedures can be used in place of substantive tests to test balances.
I think in this situation, Substantive Analytical Procedures like you list above is the correct phrase for these analytical procedures. Substantive tests, aka tests of balances, are more statistical driven and really dig into the details of the balances themselves.
Notice the S in substantive. Int Ctrl tests have to do with finding an error in processesing data. Analytical Procedures are simple procedures. You use them in the planning phase and in the review phase. Examples include evaluation of estimates, financial ratios, etc. Mike Thanks for the exam hint, its the difference between knowledge alone and knowledge with exam skills. Well said.
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