assurance and attestation services ba 427 winter 2007 substantive procedures glenn lovett,...

Assurance and Attestation Assurance and Attestation ServicesServices

BA 427Winter 2007

Substantive Procedures

Glenn Lovett, Shareholder

What can Certified Public Accountants

do that no one else can?

Answer: Express an opinion on financial statements

Audit Report

Independent Auditors' Report

Board of DirectorsPortland, Oregon

We have audited the accompanying balance sheets of ABC Corporation as of December 31, 2006 and 2005, and the related statements of operations and shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility

of the Company’s management. “Our responsibility is to express an opinion on these financial statements based on our audits.”

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards

require that we “plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.” An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material

misstatement. “An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management”, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Corporation

as of December 31, 2006 and 2005, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Significant Cycles

Significant Cycles

• Revenue > Sales > Accounts Receivable

• Conversion > Cost of Sales > Purchases > Accounts Payable > Inventory

• Financial Management >Interest > Cash > Investments > Goodwill > Debt > Equity

Significant Cycles

• Payroll > Payroll Expenses > Accruals > Compensated Absences

• Expenditure > All other expenses > Prepaids > Accruals

• Other > Taxes

Assertions

• Completeness• whether all transactions and accounts that should be present in the

financial statements are included.

• Rights and Obligations • whether, at a given date, all assets are the rights of entity and all

liabilities are the obligations of the entity.

• Valuation or Allocation • whether the assets, liabilities, revenues, and expenses of an entity

have been included in the financial statements at the appropriate amounts in conformity with GAAP.

• Existence or Occurrence • whether assets/liabilities exist at a given date and whether recorded

transactions have occurred during a given period.

• Statement Presentation and Disclosure • whether financial statement components have been properly

classified, described, and disclosed.

Risks - Overall and Direction

Risks - Overall and Direction

• Management

• Industry

• Economic

• Governance

• Ownership

• Susceptibility to Misappropriation

Fraud Risk

Fraud Risk

• Pressure

• Opportunity

• Rationalization

Glenn’s Insight #1

“You always trust the one that steals from you”

Internal Controls

Internal Controls

• Control Environment

• Risk Assessment

• Control Activities

• Information and Communication

• Monitoring

Glenn’s Insight #2

“You cannot audit financial statements that are

unauditable”

Relationship Between Risk, Internal Control and Detection

(Substantive) Procedures

Relationship Between Risk, Internal Control and Substantive Procedures

Low Inherent Risk

Low Analytic Risk

Low Internal Control

Risk

None of the Above

Moderate or High Substantive Risk

Moderate or High Substantive Risk

Moderate or High Substantive Risk

Low or very low

Substantive Risk

Low Control, Inherent and Analytic Risk

High Substantive Risk

High Control (SAS) Inherent and Analytic Risk

Low Substantive Risk

Types of Substantive Procedures

Types of Substantive Procedures

• Initial understanding of the client

• Analytical procedures

• Tests of details

• Tests of balances

• Tests of accounting estimates

• Tests of Disclosures

Selecting the Appropriate Substantive Tests

Selecting the Appropriate Substantive Tests

• Level of detection risk

• Timing of procedures

• Quality of Results (competence of evidential matter)

• Efficiency

Glenn’s Insight #3

“An audit workpaper should be designed to be read on

an average computer screen in 10pt font.”

Level of Quality of Substantive Procedures

Level of Quality of Substantive Procedures

• Personal Inspection/Observation

• Specialist report

• Third party corroboration

• Vouching to documents

• Analytical procedures

• Related party representation

Audit Procedures for Substantive Tests

Audit Procedures for Substantive Tests

• Counting• Tracing/Vouching• Observing/Inspecting• Confirming• Analytical Procedures• Inquiring• Reperforming• Experts

Glenn’s Insight #4

“Don’t put workpapers in the file that don’t have any audit procedures on them.”

Examples of Substantive Procedures Related to Cycles

and Assertions

Conversion

• Completeness Counting

Inventory Observation

Vouching

Experts

• Existence Inventory Observation

Vouching

Experts

Conversion• Valuation Inventory Observation

Reperformance

Observation/Inspection

Vouching

• Rights and Obligations Inventory Observation

Vouching

• Disclosure Vouching/Tracing

Reading Contracts

Revenue

• Completeness Vouching

• Existence Confirmation

Vouching

Inquiry

Revenue• Valuation Reperformance

Analytical Procedures

• Rights and Obligations Vouching

• Disclosure InquiryVouching

Glenn’s Insight #5

“Document all work outlined in the audit

program and only do work outlined in the audit

program.”