The trial balance is prepared after all the entries have been posted to the ledger accounts and assists in preparing the final accounts of a firm. In the predecessor’s opinion, internal control of the company has been satisfactory. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether 1. The predecessor’s work should be used.
- I am the author of The Little Book of Local Government Fraud Prevention, Preparation of Financial Statements & Compilation Engagements, The Why and How of Auditing, and Audit Risk Assessment Made Easy.
- Using more granular information (e.g., trial balance) muddies the water.
- It also aims to assess the overall financial statement, evaluate internal controls‘ effectiveness, increase the audit process’s efficiency, and provide valuable information for decision-making.
- We use our expectations to make judgments concerning the appropriateness of changes and of numbers that remain stable.
- An audit program is a list of audit procedures to be performed.
Using more granular information (e.g., trial balance) muddies the water. You might have three hundred accounts in the trial balance and only fifty at the financial statement level. Chasing down trial-balance-level changes can be a waste of time. At least, that’s the way I look at it. When performing analytical procedures, the auditor considers relevant nonfinancial information, which generally is related to financial data in some way. For example, a relationship might exist between the square footage of selling space and the level of sales.
Special Considerations in Designing Substantive Tests
There will always be some type of difference between what the auditor is expecting and the actual outcomes. The key in auditing is to understand when that difference becomes a problem. Audit evidence has not yet been gathered during the planning process, so its adequacy cannot be assessed.
- So, again, this may be a positive indicator of the company’s financial health and performance.
- Unusual spikes may indicate that fraudulent payments are being made to fake employees through the payroll system.
- They are part of the overall planning for the audit, so the auditor knows what they need to focus on by looking for variances.
- When the CEO requests a check with no purchase order, this is an example of management override.
The accounting system of an organization generates various data concerning various transactions. Their effect is reflected in the profit and loss account and balance sheet. Evidence that an account balance or transaction class is not complete, valid or accurate is evidence of a substantive misstatement. Account balances and underlying transaction classes must not contain material misstatements.
In this case, the trend analysis shows that there has been a consistent increase in revenue over the past three years, with a significant increase of 11.1% from 2021 to 2022. So, again, this may be a positive indicator of the company’s financial health and performance. In contrast, when the detection risk for an assertion is low, the substantive tests will ordinarily be performed at or near the balance sheet date. The acceptable level of detection risk may affect the timing of substantive tests. If detection risk is high, the test may be performed several months before the end of the year.
They must be materially complete, valid, and accurate. Decreased sales with increased receivables Uncollectible receivables Decreased compensation expense with increase in sales Payroll accrual analytical procedures used in planning an audit should focus on recognition issues, improper cost allocation issues, etc. Increased net income with decreased cash flows Uncollectible receivables, going concern issues, sales or expense cut-off issues, etc.
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Overview of the objectives of the engagement. Statement that management is responsible for the financial statements. Description of the level of assurance obtained when conducting the audit. Audit engagement teams perform preliminary analytical review procedures related to revenue to identify unusual or unexpected relationships that may indicate fraudulent financial reporting.
- Substantive transaction tests emphasize verifying transactions recorded in the journals and then posted in the general ledger.
- Serving a full range of constituents in the public accounting profession, we help identify issues before they become problems.
- C) the various assertions that are embodied in the financial statements.