Substantive Testing – Page 2

AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

Question

Baaba & Associates, an audit firm, is conducting a year-end audit of Rashida LTD. The audit team is particularly concerned about the accuracy of the accounts receivable balance reported on the statement of financial position as of December 31, 2023. Therefore, as part of their audit procedures, they need to perform substantive tests to identify any material misstatements, errors, or fraud that could impact the accuracy of the financial statements.

Required:
Explain THREE substantive tests that the audit team at Baaba & Associates should perform to obtain sufficient appropriate audit evidence regarding the accuracy of Rashida LTD’s accounts receivable balance.

Answer

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Tags: Accounts Receivable, Audit evidence, Audit Procedures, Financial Reporting, Risk Assessment, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

AA – Nov 2024 – L2 – Q3b – Audit Assertions for the Income Statement

Explain two key audit assertions for the income statement.

Question

Audit assertions are claims made by management regarding the accuracy and completeness of various elements of financial statements. These assertions are used by auditors to develop audit procedures and gather evidence to support their audit opinion. Assertions are categorised into those related to the income statement and those related to the statement of financial position.

Required:
Explain TWO key Audit Assertions for the Income Statement.

Answer

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Tags: Audit Assertions, Audit evidence, Financial Reporting, Financial Statements, Income Statement, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: Nov 2024

AAA – Nov 2016 – L3 – Q4a – Audit of IT Systems and Data Analytics

Evaluate the advantages and disadvantages of test data and audit software for compliance and substantive testing.

Question

You have been appointed as the Auditor of a company whose accounting transactions are processed using a computer. You have decided to use Computer-Assisted Audit Techniques (CAATs) to generate evidence for the audit assignment.

Required:
i. State FOUR advantages and THREE disadvantages of using test data in compliance testing of application controls. (7 Marks)
ii. List FOUR activities for which audit software may be used to perform substantive tests by the auditor. (4 Marks)
iii. List TWO advantages and TWO disadvantages of the use of audit software. (4 Marks)

Answer

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Tags: Application Controls, Audit Software, CAATs, Compliance Testing, Substantive Testing, Test Data
Level: Level 3

Topic: Audit of IT Systems and Data Analytics

AAA – Nov 2011 – L3 – SA – Q17 – Audit Reporting

Identifies the technique involving ratios and statistical analysis to obtain audit evidence.

Question

The computation of ratios and trends and the use of statistical formula to obtain audit evidence is:

A. Hot review
B. Audit sampling
C. Substantive test
D. Analytical review
E. Audit review

Answer

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Tags: Analytical review, Audit evidence, Ratio Analysis, Statistical Techniques, Substantive Testing
Level: Level 3

Topic: Audit Reporting
Series: NOV 2011

AAA – Nov 2018 – L3 – Q3 – Audit Completion and Final Review

Training new associates on procedures for gathering and assessing audit evidence

Question

You are the auditor in charge of the audit of Big Bank Plc. Two new associates who recently joined the firm have been assigned to your team, and you need to provide them on-the-job training on the audit process. The training should focus on audit evidence and testing procedures for gathering audit evidence.

Required:

a. Explain six procedures for gathering audit evidence. (6 Marks)

b. Explain to members of your team the terms “sufficient” and “appropriate” audit evidence. (2 Marks)

c. Explain four principles that an auditor uses in assessing the reliability of audit evidence in line with ISA 500. (4 Marks)

d. You have allocated the following audit areas to the two new associates on your team:

i. Bank and cash balances; and
ii. Payroll.

Identify the audit procedures that you will discuss with your team members for substantive testing of the audit areas mentioned above. (8 Marks)

Answer

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Tags: Audit evidence, Bank Balances, ISA 500, Payroll, Substantive Testing
Level: Level 3

Topic: Audit Completion and Final Review

AA – May 2017 – L2 – SC – Q7 – Audit-related services

Examination of analytical comparisons, precautions in substantive testing, and limitations of ratio analysis in auditing.

Question

One essential feature of analytical procedures in auditing is ‘comparison’. The auditor will calculate key relationships between figures (non-financial figures as well as financial figures) and then make comparisons.

You are required to:

(a) Identify FOUR areas of comparison when using analytical procedures and explain their purpose. You could tabulate your answers. (8 Marks)
(b) List FOUR precautionary steps the Auditor is required to take before using analytical procedures in substantive testing. (4 Marks)
(c) Describe THREE limitations of ratio analysis in its use in substantive testing. (3 Marks)

Answer

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Tags: Analytical procedures, Audit Limitations, Comparison, Ratios, Substantive Testing
Level: Level 2

Topic: Audit-related services
Series: MAY 2017

AA – May 2018 – L2 – Q2 – Audit Evidence

This question addresses the auditor’s determination of sufficient and reliable audit evidence as required by ISA 500.

Question

The auditor is required by ISA 500 to design and perform appropriate audit procedures for obtaining sufficient and appropriate audit evidence.

Required: a. Explain briefly THREE factors that an auditor will consider in determining what constitutes sufficient audit evidence. (6 Marks) b. Explain briefly TWO principles that would assist an auditor in assessing the reliability of the audit evidence. (4 Marks) c. Describe FOUR principles that would assist an auditor in assessing the relevance of audit evidence. (10 Marks)

Answer

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Tags: Audit evidence, ISA 500, Relevance, Reliability, Substantive Testing
Level: Level 2

Topic: Audit evidence
Series: MAY 2018

AA – May 2018 – L2 – Q1 – Audit Evidence

This question focuses on substantive procedures to verify additions and disposals of non-current assets and statutory books to be audited.

Question

The following figures were supplied by a small business client to your firm regarding its non-current assets for the year ended 31 December 2016:

	Generating Plant (N)	Equipment & Fittings (N)	Furniture (N)	Motor Vehicles (N)
Opening Balance	400,000	3,637,000	247,000	1,450,000
Additions	–	530,000	–	–
Disposal	–	–	–	(400,000)
Closing Balance	400,000	4,167,000	247,000	1,050,000

Depreciation:

	Generating Plant (N)	Equipment & Fittings (N)	Furniture (N)	Motor Vehicles (N)
Opening Balance	160,000	873,000	59,800	859,000
Charge for the Year	80,000	416,700	24,700	260,000
Charge on Disposal	–	–	–	(236,966)
Closing Balance	240,000	1,289,700	84,500	882,034

Required:

Identify FIVE substantive procedures you will carry out to verify additions to the assets in 2016. (10 Marks)
Explain FIVE substantive procedures for verifying disposal of assets during the year. (10 Marks)
Explain briefly FOUR of the statutory books that the auditor is required to audit in the course of his audit engagement in an entity. (10 Marks)

Answer

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Tags: Additions, Audit Procedures, Disposals, Non-current Assets, Statutory Books, Substantive Testing
Level: Level 2

Topic: Audit evidence
Series: MAY 2018

AA – Nov 2023 – L2 – Q3a – Audit and Assurance Evidence

This question asks for four substantive testing methods that could detect fraud in the accounts payable balance.

Question

Automech Ltd is a manufacturer of automotive parts based in Ghana. The company’s accountant has been manipulating the accounts payable balance by teeming and lading to misrepresent the financial position of the company. The accountant has been recording fictitious invoices and payments to suppliers to increase the accounts payable balance and misrepresent the company’s expenses.

The external auditor, who was engaged to audit the financial statements of the company, performed substantive testing for transaction cycles and verification procedures for assets, liabilities, and equity items. However, the auditor failed to identify the risk of teeming and lading in the accounts payable balance.

During the audit, the auditor reviewed the accounts payable balance and performed confirmation procedures to verify the balance with the suppliers. However, the accountant had provided the auditor with fake confirmation responses, and the auditor failed to detect the fraud.

Although the financial statements of Automech Ltd were misstated, the Auditor issued an unqualified opinion, stating that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework. After the audit, the fraud was discovered by a whistle-blower, and the accountant was fired. The company’s reputation was damaged, and the external auditor faced legal action for failing to detect the fraud.

Required:
State and explain FOUR (4) substantive testing that would have detected the fraud being perpetuated by the Accountant.
(10 marks)

Answer

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Tags: Audit evidence, Fraud Detection, Substantive Testing, Teeming and lading, Transaction cycles
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2023

AA – Nov 2016 – L2 – Q2e – Audit and Assurance Evidence

List factors to consider when relying on the results of analytical procedures as substantive audit procedures.

Question

ISA 520 Analytical procedures provides guidance to auditors on the use of analytical procedures during the course of the external audit.

Required:
When using analytical procedures as substantive audit procedures, list and briefly explain with examples THREE factors to consider when determining the extent of reliance that can be placed on the results of such procedures. (6 marks

Answer

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Tags: Analytical procedures, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2016

AA – Aug 2022 – L2 – Q3c – Audit and Assurance Evidence

Recommends actions the auditor can take when audit evidence is insufficient due to control weaknesses.

Question

After performing tests of controls, the auditor is of the opinion that the audit evidence is not sufficient to support the audit opinion; in other words, many control errors were found.

Required:
Recommend FIVE (5) actions that the auditor may take in response to this problem

Answer

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Tags: Audit response, Control weaknesses, Insufficient audit evidence, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: AUG 2022

AA – May 2019 – L2 – Q2b – Audit and Assurance Evidence

Explains the components of internal control per ISA 315 and reasons for focusing on internal controls during substantive testing.

Question

b) For many firms, the audit evidence that they obtain does not focus on a client’s internal systems and controls; rather, the work is focused on the substantive testing of the transactions and balances which make up the entity’s accounts. Consequently, many practitioners do not believe that they are required to spend much time documenting a client’s internal systems and controls or indeed to test whether any of the controls actually operate in practice in any detail. However, to ignore this area will mean that the requirements of ISA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment are not complied with.

Required:
i) Explain the components of an internal control system in line with ISA 315.
(5 marks)
ii) Why is the work on internal controls necessary when auditors take the substantive approach?
(4 marks)

iii) Why is the work on internal controls necessary when auditors take the substantive approach?
(4 marks)

Answer

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Tags: Audit evidence, Internal Control Components, ISA 315, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2019

AA – April 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains the determination of net realisable value and outlines audit procedures for verifying inventory valuation.

Question

b) The management of Zenda Plc have told you that inventory is correctly valued at the lower of cost and net realisable value. As the Auditor of Zenda Plc, you have already satisfied yourself that cost is correctly determined.

Required:
i) Explain how to determine net realisable value. (2 marks)
ii) Explain FOUR (4) audit procedures that you will perform to ensure that net realisable value of the inventory is at or above cost. (8 marks)

Answer

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Tags: Audit Procedures, Inventory, Net Realisable Value, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: APR 2022

AA – April 2022 – L2 – Q3a – Audit and Assurance Evidence

Describes audit procedures for sales reliability and substantive tests for royalties in a publishing company.

Question

a) Oxtom Plc, is a publisher and producer of books of poetry. The company has been listed on the Ghana Stock Exchange. Also, it has been a client of your firm of Chartered Accountants for a number of years. The manager in charge of the audit prior to the commencement of the work, has been discussing the audit plan with the audit team, of which you are a member. The audit manager informed the team, among other things, that there has been a growing interest in poetry generally and that the company has acquired a reputation for publishing poets who are still relatively unknown.

During your audit you observed the following:

Contracts with the poets state that they are given a royalty of 10% on sales. Free copies of the books are provided to the poets and to some organizations such as copyright libraries and to others, such as reviewers and university lecturers. No royalties are paid on free copies.
The computerised customer master file contains a code indicating whether a dispatch is to earn a royalty for the author. This code is shown on the sales invoice and dispatch note when they are prepared.
A computerised royalty file is held, all entries therein bearing the invoice number and date.
The company keeps detailed statistics of sales made, including trends of monthly sales by type of customer, and colleges where its books are recommended as part of course material.
Bookshops have the right to return books which are not selling well, however, 10% of these are slightly damaged when returned. The company keeps similar records of returns as it does for sales.

Required:
i) Describe TWO (2) procedures you will perform to ensure that the sales kept by the company may be relied upon. (4 marks)
ii) Describe THREE (3) substantive tests you should perform to ensure that the royalties charged are accurate and complete, stating the objective of each test. (6 marks)

Answer

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Tags: Audit Procedures, Royalties, Sales Testing, Substantive Testing
Level: Level 2

Topic: Audit and Assurance Evidence
Series: APR 2022

AAA – Dec 2023 – L3 – Q5B – Audit Approach

Discuss the audit strategy BLA should adopt for a small company and an investment company.

Question

Brotherlink & Associates (BLA) has been appointed as Auditors of Kontiba Ltd and Bambi
Ltd. Kontiba Ltd is a small company and Bambi Ltd is an investment company whose assets
and liabilities are substantial in relation to its transactions.
Required:
Discuss the audit strategy/approach BLA should adopt in auditing both companies.
(4 marks)

Answer

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Tags: Audit strategy, Risk-Based Approach, Substantive Testing
Level: Level 3

Topic: The audit approach
Series: DEC 2023

Question Tag: Substantive Testing

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AA – Nov 2024 – L2 – Q5b – Substantive Testing of Accounts Receivable

Explain three substantive tests for verifying accounts receivable balance.

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AA – Nov 2024 – L2 – Q3b – Audit Assertions for the Income Statement

Explain two key audit assertions for the income statement.

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AAA – Nov 2016 – L3 – Q4a – Audit of IT Systems and Data Analytics

Evaluate the advantages and disadvantages of test data and audit software for compliance and substantive testing.

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AAA – Nov 2011 – L3 – SA – Q17 – Audit Reporting

Identifies the technique involving ratios and statistical analysis to obtain audit evidence.

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AAA – Nov 2018 – L3 – Q3 – Audit Completion and Final Review

Training new associates on procedures for gathering and assessing audit evidence

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AA – May 2017 – L2 – SC – Q7 – Audit-related services

Examination of analytical comparisons, precautions in substantive testing, and limitations of ratio analysis in auditing.

You're reporting an error for "AA – May 2017 – L2 – SC – Q7 – Audit-related services"

AA – May 2018 – L2 – Q2 – Audit Evidence

This question addresses the auditor’s determination of sufficient and reliable audit evidence as required by ISA 500.

You're reporting an error for "AA – May 2018 – L2 – Q2 – Audit Evidence"

AA – May 2018 – L2 – Q1 – Audit Evidence

This question focuses on substantive procedures to verify additions and disposals of non-current assets and statutory books to be audited.

You're reporting an error for "AA – May 2018 – L2 – Q1 – Audit Evidence"

AA – Nov 2023 – L2 – Q3a – Audit and Assurance Evidence

This question asks for four substantive testing methods that could detect fraud in the accounts payable balance.

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AA – Nov 2016 – L2 – Q2e – Audit and Assurance Evidence

List factors to consider when relying on the results of analytical procedures as substantive audit procedures.

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AA – Aug 2022 – L2 – Q3c – Audit and Assurance Evidence

Recommends actions the auditor can take when audit evidence is insufficient due to control weaknesses.

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AA – May 2019 – L2 – Q2b – Audit and Assurance Evidence

Explains the components of internal control per ISA 315 and reasons for focusing on internal controls during substantive testing.

You're reporting an error for "AA – May 2019 – L2 – Q2b – Audit and Assurance Evidence"

AA – April 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains the determination of net realisable value and outlines audit procedures for verifying inventory valuation.

You're reporting an error for "AA – April 2022 – L2 – Q3b – Audit and Assurance Evidence"

AA – April 2022 – L2 – Q3a – Audit and Assurance Evidence

Describes audit procedures for sales reliability and substantive tests for royalties in a publishing company.

You're reporting an error for "AA – April 2022 – L2 – Q3a – Audit and Assurance Evidence"

AAA – Dec 2023 – L3 – Q5B – Audit Approach

Discuss the audit strategy BLA should adopt for a small company and an investment company.

You're reporting an error for "AAA – Dec 2023 – L3 – Q5B – Audit Approach"

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