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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 a substantive audit program
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.
slide3

REMEMBER:

Assertions

Objectives

Procedures

examples of low detection risk tests for the existence assertion
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
examples of high detection risk tests 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 vs substantive sampling
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
p p s
ADVANTAGES:

Usually a smaller sample size

No standard deviation needed

Easier to calculate

P.P.S.
p p s8
DISADVANTAGES:

Can’t handle understatements

May overstate risk if errors are found

May produce larger sample sizes if expected errors increase

P.P.S.
classical variables mpu ratio and difference
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)
classical variables
DISADVANTAGES:

Generally need a computer to design and evaluate the sample

Must have an estimate of the standard deviation

CLASSICAL VARIABLES
pps mpu ratio diff
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
pps mpu ratio diff12
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
planned degree tolerable of reliance rate aicpa audit sampling guide p 32
SUBSTANTIAL

MODERATE

LITTLE

2% to 7%

6% to 12%

11% to 20%

PLANNED DEGREE TOLERABLEOF RELIANCE RATE(AICPA AUDIT SAMPLING GUIDE, p. 32)
evaluating i c sample results

UDL

ASR

SDR

Evaluating I/C Sample Results

Tolerable dev rate

0%

evaluating pps sample results

Upper Misstatement Limit

ASR

Projected Misstatement

Evaluating PPS Sample Results

Tolerable Misstatement

Zero Misstatement

evaluating classical variables results

Sample Est. + ASR

ASR x 2

Sample Est. - ASR

Evaluating Classical Variables Results

BV + Tolerable Misstatement

Book Value

BV - Tolerable Misstatement