What is the relationship between materiality and audit risk?
There is an inverse relationship between materiality and the level of audit risk, that is the higher the materiality level, the lower the audit risk and vice versa. Auditors take into account the inverse relationship between materiality and audit risk when determining the nature, timing and extent of audit procedures.
What is the relationship between detection risk and audit risk?
It is a component of audit risk. Detection Risk and quality of audit have an inverse relationship: if detection risk is high, lower the quality of audit and if detection risk is low, generally increase the quality of audit.
How does detection risk affect substantive tests?
The acceptable level of detection risk may affect the timing of substantive tests. In contrast, when detection risk for an assertion is low, the substantive tests will ordinarily be performed at or near the balance sheet date.
What are the two components of detection risk?
Detection risk is linked up with the other links i.e. The business risk, material misstatement risk and its two components which are the control risk and the inherent risk.
What are some examples of substantive tests?
As indicated by the examples, substantive testing is likely to include confirmation of account balances with third parties (such as confirming receivables), recalculating calculations made by the client (such as valuing inventory), and observing transactions being performed (such as the physical inventory count).
Which of the following is a substantive procedure?
Examples of Substantive Procedures Accounts receivable confirmation. Inquire of management regarding the collectibility of customer accounts. Match customer orders to invoices billed. Match collected funds to invoices billed.
What are the different types of substantive tests?
There are two categories of substantive tests – analytical procedures and tests of detail. Analytical Procedures consist of the comparison of data from different sources to determine if reported information looks ‘odd’ or ‘wrong’.
What are the two forms of test of details?
There are three types of tests to check for the test of details; the test of controls, the test of transactions, and the test of balances. Tests of controls are performed to measure the effectiveness of controls. The test of transactions is done to check for the accuracy of the financial statement transactions.
What is the difference between control testing and substantive testing?
In simple terms, control tests involve checking that a client’s control is working, whereas a substantive test involves ignoring client systems and just checking the numbers. This control test provides evidence that the client is checking their own figures.
What are the four types of tests of controls?
Four Types of Test of Controls
- Inquiry.
- Observation.
- Inspection.
- Re-performance.
What are the five audit assertions?
The following five items are classified as assertions related to the presentation of information within the financial statements, as well as the accompanying disclosures:
- Accuracy.
- Completeness.
- Occurrence.
- Rights and obligations.
- Understandability.
What is the advantage of a substantive test sample?
An audit is meant to reduce the likelihood of material mis-statements. Substantive testing allows the auditor to carefully review various organisational documents and controls, making sure that financial records are as accurate as possible before publishing an official report.
Is vouching a substantive test?
Because the purpose of the vouching technique is to obtain evidence about a recorded item in the accounting records, the direction of the search for the supporting documents is crucial. Re-performance – The re-performance of client activities involved in the accounting process is a common substantive technique.
What is the difference between analytical procedures and substantive procedures?
Substantive procedures are reviews of documents for a “substantial portion” of account activity, while analytical procedures include controls test and test relying on mathematical relationships reflectinb accounting mechanics, contractual provisions [debt times interest rate], or business capabilities [production per …
Why might an auditor choose to not conduct substantive tests?
For a given account, why might an auditor choose to: [a] not conduct substantive tests? The auditor should not conduct substantive test as the effectiveness of the control cannot be inferred from the absence of misstatements which cannot be detected by the substantive tests.
What tests do auditors perform?
There are five core testing methods that auditors use to confirm the facts and answers that a business wants to attain during an audit….
- Inquiry.
- Observation.
- Examination or Inspection of Evidence.
- Re-performance.
- Computer Assisted Audit Technique (CAAT)
What are the five types of tests auditors use to determine whether?
The five types of audit tests used to determine whether financial statements are fairly stated are: risk assessment procedures, tests of controls, substantive tests of transactions, substantive analytical procedures, and tests of details of balances.
Does an auditor have to test every control explain?
Does an auditor have to test every control? Explain. An auditor does not have to test every control because some controls are redundant or control errors that are not likely to result in material misstatements of the financial report. The auditor selects the controls that they believe are critical to their opinion.
How do you identify a control in a process?
Actual controls can be identified from discussion with the auditee, observation, review of process documentation and risk registers / board assurance framework. Perform a walk-through to confirm controls are in place.
Why do we check internal controls while auditing?
The aim of tests of control in auditing is to determine whether these internal controls are sufficient to detect or prevent risks of material misstatements. A robust internal control system is essential for businesses to keep their financial records accurate. This, in turn, reduces the client’s risk.