Modern Audit Procedures for Material Misstatement Risk Assessment

1. Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 12 – Audit Procedures in Response to Assessed Risks: Substantive Tests

2. Chapter Overview

3. Steps for Assessing the Risk of Material Misstatement

4. Determining Detection Risk • Detection Risk Model • If, AR = IR x CR x DR, and • DR = AP x TD so, • DR = AR / (IR x CR)

5. Preliminary Audit Strategy, Planned Detection Risk, and Planned Emphasis on Audit Tests

6. Study Break • Which of the following is the correct representation of detection risk? • DR = AP x CR • DR = AP x IR • DR = TD x AP • DR = TD x AR C. DR = TD x AP

7. Study Break • Which of the following is not a step for assessing the risk of a material misstatement? • Evaluate the magnitude of potential misstatement • Evaluate the likelihood of potential misstatement • Evaluate who identified the potential misstatement • Evaluate the type of potential misstatement C. Evaluate who identified the potential misstatement

8. Tests of Controls and Substantive Tests

9. Using IT to Support Substantive Tests • Generalized Audit Software • Reconcile Detail Audit Data with the General Ledger • Selecting and Printing Audit Samples • Testing Calculations and Making Computations • Testing the Entire Population • Summarizing Data and Performing Analyses

10. Audit Choices in the Design of Substantive Tests • Nature • Timing • Extent • Staffing

11. Nature of Substantive Tests

12. Timing of Substantive Tests • Prior to Balance Sheet Date • Interim Date Risks • Importance of Internal Controls • At the Balance Sheet Date • Comparison of Account Balances • Investigate Unusual Amounts • Other Analytical Procedures

13. Extent of Substantive Tests

14. Summary of Relationships

15. Special Considerations • Balance Sheet and Income Statement Accounts • Related Party Transactions

16. General Framework for Developing an Audit Program for Substantive Tests • Nature of Procedures to be Performed • Outline of the work to be done • Basis for coordinating, supervising, and controlling the audit • A record of the work performed • Addressing All Assertions

17. Audit Program Example

18. Audit Objectives Example

19. Study Break • This type of test determines the fairness of significant financial statement assertions. • Tests of Controls • Substantive Tests • Inherent Tests • None of the above B. Substantive Tests

20. Study Break • This type of substantive test involves comparing plausible relationships among both financial and nonfinancial data. • Initial Procedures • Substantive Analytical Procedures • Tests of Details of Transactions • Tests of Details of Balances B. Substantive Analytical Procedures

21. Study Break • This choice in designing a substantive test specifically identifies the size of a sample that is needed to meet the acceptable level of detection risk. • Nature • Timing • Extent • Staffing C. Extent