Performing Substantive Test

Substantive test – are

audit procedures designs to
substantiate the account
balances or designed to
detect material
misstatements in the
financial statements.
Two types of Substantive
test:
1. Analytical procedures
2. Test of details
1. Analytical Procedure
Analytical procedures applied as
substantive test enables the auditor to
obtain corroborative evidence about a
particular assertion.
Analytical review involves comparison of
financial information with auditor’s
expectation to evaluate the reasonableness
of an account balance or transaction class.
When the application of analytical
procedures identifies significant unusual or
unexpected fluctuations, the auditor should
conduct further investigation.
Factors that affects the effectiveness of
analytical procedure applied as substantive
test:

Nature of the assertion

Reliability of the data used to develop
expectations
Precision of expectation
Predictability of the account balances
When performing analytical
procedure the auditor
should focus on those
accounts that are
predictable
2. Test of details
It involves examining the actual
details making up the various account
balances
This approach may take the form of
test of details of balances or test
of details of transactions
Test of details of balances -
involves examining directly the
balance of an account
Test of details of
transaction - involves testing
the transaction that give rise to
the balance of an account
EFFECTIVENESS OF SUBSTANTIVE
TEST
Factors:
1. Nature of substantive test - the nature
of the substantive test relates to the
quality of evidence
2. Timing of the substantive test -
substantive test may be performed at
interim date or at year end.
3. Extent of the substantive test - The
extent of the substantive test’s is base on
the auditor’s judgement after considering
the materiality, the assessed risk and the
level of the assurance the auditor’s plan
to attain.
Relationship between Substantive
test and Test of Control
Test of Control Substantive Test
Test of Controls provide Substantive tests provide
evidence that indicates a evidence about the existence
misstatement is likely to occur of misstatement in account
balance.

The auditor relies on the On substantive test, it verifies

effectiveness of the internal the amounts in the financial
control to prevent material statements
errors.

If test of controls indicate that The auditor may perform less

the internal control is effective substantive test
If internal control is not reliable The auditor will have to perform
extensive substantive test.
AUDIT EVIDENCE
The auditor should obtain sufficient
appropriate evidence to be able to
draw reasonable conclusions on
which to base the audit opinion
Evidence
 Refers to the information obtained by
the auditor in arriving at the
conclusions on which the audit opinion is
based.
 Audit evidence is necessary to support
the auditor’s opinion and report
Audit evidence consists of:
Accounting records – client’s records of
transactions and events underlying the
financial statements. Such as books of
accounts, related accounting manuals,
worksheet supporting cost allocations and
reconciliations
Other corroborating information –
refers to documents and information
supporting the entity’s accounting records.
Such as invoices, bank statements,
purchase orders, contracts, checks and
other information obtained or developed by
the auditor through confirmation,
Attributes of Audit evidence
Reasonable assurance is attained when the
auditor has obtained sufficient appropriate
evidence to reduce risk to an acceptable
level.
At the conclusion of the audit, the auditor
shall apply his judgement in determining
whether the audit evidence obtained is
sufficient and appropriate enough to
support the opinion.
Sufficiency – refers to the amount of
evidence that the auditor should accumulate.

The ff. factors may be considered in

evaluating the sufficiency of evidence:
The competence of evidence
The materiality of the item being examined
The risk involved in a particular account
Experience gained during the previous audit
may indicate the amount of evidence taken
before and whether such evidence was
enough.
Appropriateness - is the measure of the quality of
audit evidence and its relevance to a particular
assertion and its reliability

The ff. are generalizations that could help the auditor in

assessing the reliability of audit evidence:
Audit evidence obtained from independent outside
sources is more reliable than that generated internally.
Audit evidence generated internally is more reliable
when the related acctg and internal control systems
are effective.
Audit evidence obtained directly by the auditor is
more reliable than that obtained from the entity
Audit evidence in the form of documents and written
representations is more reliable than oral
representations.
Cost/benefit consideration when
obtaining evidence
 The auditor’s opinion to be economically
useful must be formed within a reasonable
period of time and based on evidence
obtained at a reasonable cost.
 There should be rational relationship
between the cost of obtaining evidence and
the usefulness of the evidence obtained.
AUDIT DOCUMENTATION/ WORKING
PAPERS
 The sufficient appropriate evidence
required by the professional standards
must be clearly documented in the
auditor’s working papers.

Working Papers – are records kept by the

auditor that document the audit procedures
applied, information obtained and
conclusions reached.
Functions of the working paper
Working papers are prepared primarily to
support the auditors opinion on financial
statements; to support the auditor's
presentation as to compliance with PSA;
and to assist the auditor in the planning,
performance, review and supervision
engagement.
Secondarily, working papers also assist the
auditor in planning future audits, providing
information useful in rendering other
service providing adequate defense in case
of litigation.
Form, Content and Extent of Audit
Documentation
 In deciding on the form, content and extent of
audit documentation, the auditor should consider
what would enable an experienced auditor,
having no previous connection with the audit, to
understand:
a) The nature, timing, and extent of the audit
procedures performed to comply with PSAs and
applicable legal and regulatory requirements;
b) The results of the audit procedures and the
audit evidence obtained; and
c) Significant matters arising during the audit and
the conclusions reached thereon.
The form, content and extent of audit
documentation depend on factors such as:
The nature of the audit procedures to be
performed.
The identified risks of material
misstatement.
The significance of audit evidence
obtained.
The nature and extent of exceptions
identified.
The need to document a conclusion or the
basis for a conclusion not readily
determinable from the audit evidence
obtained.
Classification of working
papers
Working papers are typically
classified into permanent file or
current working paper file:
Permanent file – contains information of
continuing significance to the auditor in
performing recurring audits. This file would
most likely include:

copies of the articles of incorporation and

by-laws
major contracts
engagement letter
organizational chart
analyses of long-term accounts such as
plant assets, long-term liabilities and
stockholders' accounts.
internal control analyses
Current file - contains evidence gathered
and conclusions reached relevant to the
audit of a particular year. This file would
normally include

a copy of the financial statements

audit program
working trial balance
lead schedules
detailed schedules
correspondence with other parties such as
lawyers. customers, banks, and
management.
Ownership of working papers
Working papers are the property of the
auditor and the client has no right to the
working papers prepared by the auditor.
Working Papers may sometimes serve as a
reference source tor the client (at the
discretion of the auditor) but they should
not be considered as part or as a substitute
for the clienť's records.
Confidentiality of working papers
Although the working papers are the
personal property of the auditor, these
working papers can not be shown to third
parties without the client's permission.
The Philippine Code of Professional Ethics
requires the CPA to respect the
confidentiality of information obtained
during the course of performing
professional services.
There are circumstances that the auditor can
disclose confidential information to third
parties even without the client's consent
under the following:

 When disclosure is required by law or when the

working papers are subpoenaed by a court.
 When there is a professional right to disclose
information such as when the auditor uses his
working papers to defend himself when sued
by the client for negligence.
 When the profession requires like the review of
quality of audit conducted by the Board of
Accountancy for the purpose or evaluating
whether to grant a practitioner an accreditation
to practice public accountancy.
Retention of working papers
Working papers should be retained by the
auditor for a period of time sufficient to
meet the needs of his practice and to
satisfy any pertinent legal requirements of
record retention.
The retention period for audit engagement
must be at least 5 years from the date
of the audit report. However, Securities
Regulations or the SEC requires that audit
working papers be kept for at least 7
years.
Assembly of Final Working Paper
After the audit report has been issued,
the auditor may need to make changes
in the working papers to come up with a
final audit working paper file that will be
archived.
Guidelines for the preparation of working papers
Working papers should be properly
organized to facilitate their review. The
following techniques may be used by
the auditor when preparing working
papers.
Heading
 Each working paper must be properly identified with
such information as the name of the client, type of
workıng paper, a description of its content, and the
date or period covered by the examınation.
 Indexing
 Indexing refers to the use of lettering or numbering
system. Each working paper must be indexed to aid
in cross-referencing essential information.
Cross-indexing/cross referencing
 cross-referencing is important to provide a trail useful
to supervisors in reviewing the working papers.
 Tick marks
- Working procedures performed must include must
include symbols that describe the audit procedures
performed.