PERFORMING

SUBSTANTIVE
TESTS
Unit VI
OVERVIEW

After assessing inherent risk and control risk, the auditor

performs substantive tests to reduce the level of detection
risk to an acceptable level by obtaining sufficient
appropriate audit evidence to satisfy financial statement
assertions and to support audit opinion on the fairness of the
financial statements.
 ASSERTIONS AND
AUDIT OBJECTIVES
 ASSERTIONS

Assertions (or management assertions) are representations by

management, explicit or otherwise, that are embodied in the financial
statements. These assertions relate to the fairness of presentation of
the financial statements, thus, they are directly related to applicable
financial reporting framework.
Levels of Assertions

1. Financial statement level – entity’s management representation that

the financial statements as a whole are presented fairly, in all
material respects, in accordance with the applicable financial
reporting framework
2. Account balance or class of transactions level – entity’s
management representation that the underlying account balances and
class of transactions, including related disclosures, are free of
material misstatements
Assertions about classes of transactions and
events for the period under audit
Assertion Description
Occurrence Recorded transactions and events have occurred and pertain to the entity

Completeness All transactions and events that should have been recorded have been recorded

Accuracy Amounts and other data relating to recorded transactions and events have been
recorded appropriately

Cutoff Transactions and events have been recorded in the correct accounting period

Classification Transactions have been recorded in the proper accounts

Assertions about account balances at the
period end
Assertion Description
Existence Assets, liabilities, and equity interests exist
Rights and obligations The entity holds or controls the rights to assets, and liabilities are the
obligations of the entity
Completeness All assets, liabilities and equity interests that should have been
recorded have been recorded
Valuation and allocation Assets, liabilities, and equity interests are included in the FS at
appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded
Assertions about presentation and disclosure
Assertion Description
Occurrence and rights and obligations disclosed events, transactions, and other matters
have occurred and pertain to the entity
Completeness all disclosures that should have been included in the
financial statements have been included
Classification and understandability financial information is appropriately presented and
described, and disclosures are clearly expressed
Accuracy and valuation financial and other information are disclosed fairly
and at appropriate amounts
Auditor’s Use of Relevant Assertions

1. Consider the types of potential misstatements that may occur

2. Assess the risks of material misstatement – The auditor should
identify what controls have been implemented to address the
relevant assertions.
3. Design audit procedures that are responsive to the assessed risks
Audit Objectives

◦ The auditor develops audit objectives that relate to management

assertions about the financial statement components.
◦ To achieve audit objectives, the auditor shall design audit
procedures and gather sufficient appropriate audit evidence whether
the assertions are in accordance with the applicable financial
reporting framework.
Types of Audit Objectives
1. Whether general or specific:
a. General audit objectives – are broad objectives of auditing an account balance or class of
transactions
b. Specific audit objectives – audit objectives stated in terms tailored to the specific audit
engagement.
2. Whether substantive or compliance
a. Substantive audit objectives – objectives that relate to the determination of the validity of
assertions on account balances or class of transactions or disclosures found in the financial
statements
b. Compliance audit objectives – objectives that relate to the degree of entity’s compliance with
relevant controls
AUDIT PROCEDURES
AUDIT PROCEDURES
◦ Based on audit objectives, the auditor should plan and perform audit procedures.
◦ Audit procedures are the means for obtaining sufficient appropriate audit evidence to satisfy
financial statement assertions and to support audit opinion on the fairness of the financial
statements. They are the detailed instructions for the collection of a particular type of evidence
that is to be obtained during the audit.
◦ Audit procedures are performed to gather necessary (not all) corroborative evidence to achieve
audit objectives in order to result to sufficient appropriate audit evidence on the fairness of the
presentation of the entity’s financial statements.
Audit procedures distinguished from audit
standards and audit techniques
Audit standards – measure of the quality of the audit performance; they are set
by the AASC, thus, they remain the same from one audit engagement to another
Audit procedures – performed to meet the audit standards; determined by the
auditor, thus, they vary from audit to audit; although they vary from audit to
audit, the auditor should perform relevant essential audit procedures provided by
the audit standards (PSAs)
Audit techniques – methods used by the auditor or the details of the audit
procedures; they also vary from audit to audit
Nature, Timing and Extent of Audit
Procedures
1. Nature of an audit procedure – refers to(1) Its purpose (i.e., test of controls
or substantive procedure) and (2) Its type (i.e., inspection, observation,
inquiry, confirmation, recalculation, reperformance, or analytical procedures)
2. Timing of an audit procedure – refers to when to perform the audit
procedure, or the period or date to which the audit evidence applies
3. Extent of an audit procedure – refers to the quantity to be performed or the
extent of testing or the number of items to be examined
Audit Procedures for Obtaining Audit
Evidence
1. Risk assessment procedures – procedures to obtain an understanding of the entity and its
environment, including its internal control, in order to identify and assess the risks of
material misstatement (RMM)
2. Further audit procedures – The auditor shall design and perform audit procedures whose
nature, timing, and extent are based on and are responsive to the assessed RMM at the
assertion level.
i. Tests of controls (compliance tests) – audit procedures designed to evaluate the operating
effectiveness of relevant controls in preventing, or detecting and correcting material
misstatements at the assertion level
ii. Substantive procedures – audit procedures designed to detect material misstatements at the
assertion level
Types of substantive procedures
1. Tests of details – examining or obtaining audit evidence on the actual details of account
balance, class of transactions, and disclosure. The objective of tests of details is to substantiate
or identify misstatements in the recorded amounts.
1. Test of details of transactions – smaller volume of transactions of relatively material
amounts occurring during the year (for example, PPE, intangibles, bonds payable and
stockholders’ equity accounts)
2. Tests of details of balances – For accounts whose balances are affected by large volume
transactions of relatively immaterial amounts (such as cash, accounts receivable and
inventories)
2. Substantive analytical procedures – these are analytical procedures performed during testing
phase to substantiate predictable relationships among both financial and non-financial data
Limitations of analytical procedures

Since analytical procedures are based on expected plausible

relationships among data, differences do not necessarily indicate
errors or fraud, but simply indicate the need for further investigation.
Changes in an account, changes in accounting principle, and inherent
differences between industry norms and the client all contribute to
fluctuations in expected amounts.
Audit Procedures According to Types
1. Inspection – consists of examining records or documents (whether internal or external, in paper form,
or other media), or a physical examination of an asset
2. Observation – consists of viewing/looking at a process or procedure being performed by others.
3. External confirmation – represents audit evidence obtained by the auditor as a direct written response
to the auditor from a third party (the confirming party) in paper form, or by electronic or other medium
4. Recalculation (computation) – consists of checking the mathematical accuracy (manually or
electronically) of documents or records
5. Reperformance – involves the auditor’s independent execution of procedures or controls that were
originally performed (by the client’s staff) as part of the entity’s internal control
6. Analytical procedures – consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data
7. Inquiry – consists of seeking information of knowledgeable persons, both financial and non-financial,
within the entity or outside the entity.
Audit Techniques
1. Confirm – to obtain information directly from an independent third party
2. Inspect – to obtain evidence through physical examination
3. Count – physical examination of assets (such as cash count or petty cash count)
4. Compare – technique used after count of assets; also used to compare current period balances with those of
prior periods
5. Inquire – asking questions, whether oral or written, directed to the client or to third parties
6. Trace – to determine whether transactions supported by source documents are properly recorded and posted
7. Vouch – examine and authenticate of underlying evidential papers
8. Verify – to prove the accuracy of extensions, footings, postings, ownership and existence
9. Reconcile – to bring into agreement information obtained from two groups of related, but independent, figures
10. Analysis of accounts – to detail the composition of an account or to detail the individual debits and credits in
the account in a chronological sequence
11. Review – perform to obtain evidence of authoritative documentation to support certain transactions
12. Extend – to prove the accuracy of multiplications (on invoices, payroll records, etc.)
13. Foot – to prove the accuracy of vertical or horizontal additions
14. Scan – looking for evidence of unusual amounts/items, which, if found, would be further investigated
AUDIT PROGRAM AND
AUDIT EVIDENCE
Audit Program

An audit program is a detailed listing of the nature, timing and extent

of planned audit procedures (tests of controls and/or substantive
tests) that the auditor will perform to gather sufficient appropriate
evidenced. It is a set of instructions to assistants involved in the audit
and as a means to control and record the proper execution of work.
Audit Evidence

Audit evidence refers to all the information used by the auditor in

arriving at the conclusions on which the audit opinion is based. Thus,
audit evidence supports the opinion and the auditor's report.
Sometimes called as evidential matter, it is the main output/product
of performing audit procedures.
Nature of Audit Evidence

1. Accounting records (Underlying data) – accounting records/data

prepared by the client’s personnel and from which financial
statements are prepared
2. Corroborating evidence – corroborating information that are used
by the auditor to verify the fairness of the accounting records
Types of Audit Evidence
1. Physical evidence – obtained by physical examination of assets (such as count of stock certificates in support of
stock investment account or observation of client’s processes or procedures)
2. Mathematical recomputations – auditor’s recomputation of the accuracy of client’s computations such as
depreciation, amortization, doubtful accounts, etc.
3. Documentation – examination of the supporting documents of recorded transactions and balances appearing in the
financial statements
4. Representation by third parties (or confirmation) – a document originating from independent outside party and
sent directly to the auditor
5. Representation by client personnel – statements from client personnel in response to queries posed by the auditor
6. Results of analytical procedures
7. Internal control – existence of effective internal control may be regarded as a strong evidence of the validity of the
accounts and amounts found in the financial statements
8. Subsequent events – they provide additional evidence regarding conditions that already existing on the balance
sheet that and affect accounting estimates
Sufficient Appropriate Audit Evidence

1. Sufficiency – the measure of the quantity or amount of

audit evidence that the auditor shall accumulate
2. Appropriateness – measures the quality of audit
evidence, that is, its relevance and its reliability in
providing support for the conclusions on which the
auditor's opinion is based
Hierarchy of reliability of evidence
1. Direct evidence or personal observation and knowledge (such as physical observation)
2. Externally generated evidence sent directly to the auditor (such as confirmations from banks and
customers and bank statements and cut-off bank statements received from banks)
3. Externally generated evidence kept by the client (such as vendor’s invoices, bank statements received
from the client)
4. Internally generated evidence circulated externally (such as sales invoices from sale to customers and
paid checks and cost allocations)
5. Internally generated evidence not circulated externally (such as purchase requisitions, customer’s order
and cost allocations)
6. Oral evidence
Factors affecting sufficient appropriate audit
evidence
◦ Significance of the potential misstatement in the assertion and the likelihood of
its having a material effect on the financial statements.
◦ Effectiveness of management’s responses and controls to address the risks.
◦ Experience gained during previous audits with respect to similar potential
misstatements.
◦ Results of audit procedures performed, including whether such audit
procedures identified specific instances of fraud or error.
THANK YOU