UNIT 2 LESSON 4

Substantive testing of transactions in this cycle (by assertion):
(for Purchases and Payments)

Occurrence – the recorded transaction has occurred and it pertains to the company

Accuracy – the amount of the purchase has been recorded appropriately

Cut-off – the purchase has been recorded in the correct accounting period

Classification – the purchase has been recorded in the proper accounts

Completeness – all purchases that should have been recorded have been recorded

Substantive procedures:
Nature

The auditor has carry to out the following procedures before doing substantive testing:
• identify and assess the risk of material misstatement, and
• gather audit evidence about the operating effectiveness of the controls (tests of controls).

Substantive tests consist of:
• tests of details of classes of transactions, account balances and disclosures, and
• substantive analytical procedures

The difference between tests of detail and analytical procedures:
the former consists of auditing the detail of the transaction, account balance or disclosure whilst the latter provides more general or overall evidence.

Substantive procedures
Timing and extent of testing:

  • Most substantive testing takes place at or after year-end.
  • the greater the risk of material misstatement, and the less effective the controls appear to be, the greater the amount of substantive testing.

Substantive analytical review procedures

• comparisons of expenditure categories month to month or to prior periods

• calculation of each expense as a percentage of say, gross profit or total expenses and comparison of the percentages to prior periods

• comparison of actual expenses to budgeted expenses.

• Abnormal fluctuations would be followed up

Substantive procedures on the trade and other payables

Obligations – trade payables represent obligations pertaining to the company

Existence – trade payables in the balance actually exists and is not fictitious

Accuracy, Valuation and Allocation – appropriate amounts and related disclosures have been appropriately measured and described

Completeness – all trade payables and accruals which should have been recorded have been recorded

Classification

Presentation

Example of weakness

The head chef is responsible for ordering all the seafood, and there is no separate purchasing department or buyer

INTERNAL CONTROL
A separate purchasing department or buyer must be employed by the company;