AUDITING

Substantive Testing
 What is it?

Tests of transactions – gather evidence in relation to

validity, completeness and accuracy of transactions.
Trace source document to accounting records
(journals and ledgers)
Looking to ensure transaction actually took place;
that is was recorded in the correct account for the
correct amount
 What is it? (write)

Tests of balances – review accuracy, validity and

completeness of account balances
– Debtors / creditors
– Stock
Looking to ensure that assets and liabilities actually
exist; that the company owns those assets and
liabilities; that the balances were recorded at the
correct value.
 Procedure (write)

Analytical review – review relationships between

figures and to highlight unusual trends
Trial Balance re-added and checked against P&L
Opening and closing balances checked
Review journal entries and ledger postings
 Testing (write)

Balance Sheet items:

– Test liabilities for understatement
– Test assets for overstatement
– Test owners’ equity for overstatement
P&L items:
– Test expenses for understatement
– Test revenue for overstatement
 Testing & Audit Objectives (pg 263)

Accuracy – recalculations, tracing, reconciliations

Existence and occurrence – inspection, observation,
enquiry, analytical review, vouching tracing and
confirmation of assets and balances
Completeness – AR, completeness of balances
between periods, tracing and vouching, cut-offs
Valuation and measurement – inspection, enquiry,
recalculation and estimates of reasonableness
Presentation, disclosure and classification –
inspection, confirmation, enquiry
Rights and obligations – check ownership of rights,
confirmation , representation letters from solicitor
 Substantive Audit Program (pg 264)

A list of procedures to be carried.

How the procedures will be carried out
A record of the work done (shown in the working
papers that support the Program)
See pg 265 and 266 for an example of a substantive
testing program for the cash subsystem- Have the
clients figures actually achieved the audit objectives
with a degree of confidence
 Reltionship b/w compliance & substantiative
testing (pg 267)

The Auditor must consider the assessed level of inherent and control
risk in determining the nature, timing and extent of substantive tests
needed to reduce audit risk to an acceptable level
If inherent risk and control risk is high substantive testing must be
inhanced so as to reduce detection risk and maintain the overall audit
risk at an acceptable level
AR =IR * CR * DR
If control risk is high compliance tests will cease and greater substantiative testing
will be performed to lower the detection risk (and therfore audit risk)

Even if inherent and control risk is low the auditor must still carry out
some stubstantive testing
 Substantiative testing

Substantiative testing is increased by:

– Larger samples of transaction and balances
– Further analytical review
– Gaining a range of evidence – audit trail, enquiry,
confirmation in relation to each audit objective or
assertion
– Raising materiality ie lowering the dollar value of items to
be verified
 Detection of errors & irregularities

Types of errors
– Errors of principle – misapplication of accouning standards ie recording capital
expenditure as a expense
• Adjusting Journal required to Dr Asset and Cr Expenses and adjustment for
depreciation so that assets are not understated and expenses are not overstated
– Errors of timing – cut off tests ie goods invoiced prior to June 30th but not
recorded
• Adjusting Journal required to Dr Accounts receivable and Cr Sales assets are not
understated and revenues are not understated
– Miscalculations- arithmetical or data entry ie recording sales as $3200 instead of
$3400
• Adjusting Journal required to Dr Accounts receivable $200 and Cr Sales $200 so that
assets are not understated and revenues are not understated
If the client refuses to amend the draft figures to adjust for a material
error, the auditors may eventually qualify their report
 Sales
(chapter 15)
Select a number of entries in SJ and vouch to
Source doc (sales invoice)
Trace a number of sales invoices to the SJ and
ledger accounts
Verify arithmetic accuracy of sales invoice and SJ
Review SJ for large or unusual items
Perform year-end cut-of test and prepare adjusting
entries
 Purchases

Select a number of entries in the PJ and vouch to

source documents
Trace a number of supplier invoices to the PJ and
ledger accounts
Perform recalculations on supplier invoices
Review the PJ for large or unusual items
Perform year-end cut-of test and prepare adjusting
entries
 Accounts Receivable

Verify Accs Rec T/B figure and reconcile to Gen

Ledger acc and subsidiary ledgers.
Confirm Accs Rec – letters are sent to various
debtors asking them to confirm the balance as at 30
June.
– Positive confirmations are used where the debtor is asked
to respond if they agree with the balance as well as if
there is a difference.
 Accounts Receivable

Vouch accounts receivable entries in accounting

records to source documents
Review an aged analysis of debtors and check for
debtors to 120 days.
Review adequacy of Provision for Doubtful Debts
Perform Sales cut-off tests
 Accounts Payable

Verify accuracy of accounts payable trial balance figure and

reconcile to creditors’ balances subsidiary and general ledger
Vouch recorded creditors to supporting documentation
Confirm creditors – Confirmation letters sent out to creditors.
Letters are sent to various creditors asking them to state the
balance as per their records as at 30 June. Positive
confirmations are used.
 Accounts Payable

Perform purchases cut-off tests

Perform cash payments cut-off tests
 Inventory

Verify accuracy of schedules and perpetual records

and agreement with inventory balances
Observe client inventory taking – be present at the
client’s stocktake
Vouch recorded purchases to supporting
documentation
Enquiry of management regarding ownership
 Cash Receipts and Payments

Confirm bank and loan balances with the bank

Count cash on hand
Prepare independent bank reconciliation
Perform cash cut-off tests
Review prepayments
 Non-current assets

Verify accuracy of fixed asset register and agree fixed

assets register with property, plant and equipment balances
Recalculate depreciation and accumulated depreciation
Inspect property, plant and equipment additions
Vouch property, plant and equipment additions to register
Vouch property, plant and equipment disposals/trade-ins to
register
Examine title or lease documents
 Payroll

Review payroll records and recalculate payroll

Recalculate accrued wages
Select a sample of transactions from the payroll
register and vouch to the journal entries and general
ledger
Verify payroll calculations
Review preparation of payroll tax and deductions
 Investments

Send out Confirmation Letters to confirm balances

Verify accuracy of balances, schedules and
Investment Register
Inspection of documentation – broker invoices,
remittance advice for dividend income received
and/or interest earned
Vouch entries in investment accounts
Recalculate interest earned
 Long-Term Liabilities

Send out Confirmation Letters to confirm long-term

debt
Review documentation – debt authorisation and
contracts and vouch to entries in accounting records.
Analytical review
 Shareholders’ Funds

Inspect share Register

Vouch entries to share capital accounts, retained
profits and reserves
Review Constitution of the company
Check the share and equity issues have adhered to
Corporations Law and other relevant legislative or
technical requirements.
Check that dividends are properly authorised.