Analytical Procedures – a Powerful Tool for Auditors by David Chow
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Analytical Procedures – A Powerful Tool for Auditors
(Relevant to Paper 8 – Principles of Auditing and Management Information Systems)
David Chow FCCA, FCPA, CPA (Practising)
Audit tests
Auditors normally carry out the following types of audit tests to determine whether financial statements are fairly stated: (i) procedures to obtain an understanding of internal control (ii) tests of controls (iii) substantive tests: • substantive tests of transactions; • analytical procedures; and • tests of details of balances.
assessment of risks of material misstatement at the assertion level includes an expectation that controls are operating effectively. This means that auditors perform tests of controls only when: (i) a system exists; and (ii) the system has controls. The performance of tests of controls is to establish whether those controls in the systems are actually functioning properly and effectively so that the auditors can determine whether or not they can rely upon the controls. Substantive tests Substantive tests (also known as substantive procedures) are procedures designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances. Auditors perform substantive tests in an audit to detect material misstatement at the assertion level. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. Analytical procedures emphasize the overall reasonableness of transactions and the general ledger balances. Tests of details of balances consider the closing balances in the general ledger.
Auditors perform types (i) and (ii) audit tests to reduce assessed control risk, whereas substantive tests are used to reduce planned detection risk. There are three types of substantive test: substantive tests of transactions, analytical procedures, and tests of details of balances.
Analytical Procedures – A Powerful Tool for Auditors
(Relevant to Paper 8 – Principles of Auditing and Management Information Systems)
David Chow FCCA, FCPA, CPA (Practising)
Audit tests
Auditors normally carry out the following types of audit tests to determine whether financial statements are fairly stated: (i) procedures to obtain an understanding of internal control (ii) tests of controls (iii) substantive tests: • substantive tests of transactions; • analytical procedures; and • tests of details of balances.
assessment of risks of material misstatement at the assertion level includes an expectation that controls are operating effectively. This means that auditors perform tests of controls only when: (i) a system exists; and (ii) the system has controls. The performance of tests of controls is to establish whether those controls in the systems are actually functioning properly and effectively so that the auditors can determine whether or not they can rely upon the controls. Substantive tests Substantive tests (also known as substantive procedures) are procedures designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances. Auditors perform substantive tests in an audit to detect material misstatement at the assertion level. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. Analytical procedures emphasize the overall reasonableness of transactions and the general ledger balances. Tests of details of balances consider the closing balances in the general ledger.
Auditors perform types (i) and (ii) audit tests to reduce assessed control risk, whereas substantive tests are used to reduce planned detection risk. There are three types of substantive test: substantive tests of transactions, analytical procedures, and tests of details of balances.