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SUBSTANTIVE TESTS

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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

Select procedures based on previousassessments of IR and CR.

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REMEMBER:

Assertions

Objectives

Procedures

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Examples ofLowDetection RiskTests

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

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Examples ofHighDetection RiskTests

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

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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

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P.P.S.

ADVANTAGES: Usually a smaller

sample size

No standard deviation

needed

Easier to calculate

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P.P.S.

DISADVANTAGES: Cant handle

understatements

May overstate risk if

errors are found

May produce larger

sample sizes if

expected errorsincrease

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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

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CLASSICAL VARIABLES

DISADVANTAGES: Generally need a

computer to design

and evaluate the

sample

Must have an estimate

of the standarddeviation

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PPS MPU RATIO DIFF

1) Does Stratifying Pop.

help?

2) Are Book Valuesneeded for each unit?

3) Is an estimate of the

pop. S.D. needed?

No Yes No No

Yes No Yes Yes

No Yes Yes Yes

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PPS MPU RATIO DIFF

4) Do a minimum # of

differences need to

exist?

5) Use for BOTH under

or over statements?

No No Yes Yes

No Yes Yes Yes

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PLANNED DEGREE TOLERABLE

OF RELIANCE RATE

(AICPA AUDIT SAMPLING GUIDE, p. 32)

SUBSTANTIAL

MODERATE

LITTLE

2% to 7%

6% to 12%

11% to 20%

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Evaluating I/C Sample Results

Tolerable dev rate

0%

UDL

SDRASR

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Evaluating PPS Sample Results

Tolerable Misstatement

Zero Misstatement

Upper Misstatement Limit

Projected MisstatementASR

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Evaluating Classical Variables

Results

BV + Tolerable

Misstatement

Sample Est. + ASR

Sample Est. - ASRASR x 2

BV - Tolerable

Misstatement

Book Value