Process for substantive procedures
For substantive procedures, you need to remember that you are auditing a balance or a class of
transactions (COT) at a point in time (i.e. at year-end). They are tests of details to confirm that the
balance exists or the COT occurred, is accurately valued, complete, shown in the correct period,
the client has the right/obligation to that balance or COT and that the balance or COT is presented
and disclosed in terms of IFRS in the AFS (so the assertions!). Your understanding of accounting
is very important as you can’t audit a balance or COT if you don’t understand how that balance or
COT was accounted for in the client’s records. HOWEVER! You must NOT audit the IFRS
Standards. Students have a tendency to audit the accounting standard instead of auditing what
the information you have been given has described in terms of what the client has done in terms
of the balance or COT.
So you need to work through the information in the scenario and ask yourself: can I audit this? If
yes, then how? Then use your ISA 500 methods to obtain audit evidence:
· Observe;
· Inspect;
· Enquire;
· Re-perform;
· Recalculate;
· Perform ARP (analytic review procedures)
· Obtain external confirmation
Once you have determined what needs to be done to audit this, answer at least two questions,
what, whom, how.
So for example:
Inspect what for what; or
Enquire of whom about what.
You will always need to be mindful that you should use CAAT’s. Remember that for substantive
procedures we use data CAAT’s. CAAT’s is a method of obtaining audit evidence by using your
computer (as the auditor) to perform audit procedures. CAAT’s can be used to re-perform
calculations, select a sample of items, stratify or filter information into smaller parts of information
that have similar characteristics in order to effectively audit them and also extract information from
a big set of information.
When you start writing down substantive procedures, please remember that you start with some
general procedures first and the rule of thumb is that you can’t audit fresh air, so you should obtain
a schedule, calculation, breakdown of the balance or COT to audit from. Be alert for working
papers that give you information on a balance or COT that already gives you the breakdown or a
sample selection and you need to discuss further procedures to perform.
So a process to consider for answering substantive procedures would be:
1. Begin with the general procedures (if they have not been done or given already):
a. Obtain a signed management representation letter on all assertions for [balance
or COT] (1) - You must give the assertions as well as the balance or COT, you will
not get marks if you don’t, at ITC, you don’t have to list the assertions separately,
so get into the habit of writing “all assertions”.
b. Obtain the breakdown, schedule, calculation [whichever you feel is appropriate
based on the information] [no mark just] and:
c. Cast and cross cast the schedule (1) – you can also write that you should
recalculate to confirm arithmetical accuracy; and
d. Trace the balance per the schedule to the general ledger, trial balance and annual
financial statements (1) - you can write GL, TB and AFS.
e. Inspect the financial statements for the appropriate disclosure of the balance or
COT and that it is in terms of IFRS [whichever is applicable] (1)
f. This will earn you 4 marks.
2. You can also consider a general procedure for the inspection of the schedule for unusual
figures, such as negative amounts, round amounts etc. depending on the required and
the information given.
3. You then work through the information you have been given in the scenario. If you get
stuck, use your assertions to help you think of more procedures.
4. Then you consider analytical review procedures:
a. these need to be relevant. You cannot just state compare current year to prior year.
For example, if it’s an impairment calculation that you are auditing, impairment is
non-routine and ARP’s would not be appropriate between current year and prior
year, but perhaps some of the underlying assumptions you could use ARP’s. A
COT like revenue, ARP’s could be very useful to identify trends.
5. Consider if there is a valid external confirmation that could be obtained for this balance
or class of transaction.
Once you have done this, you would have earned all your marks! The description of the procedure
is so important, you have to write it as if the reader must get up and perform what you have written
without being able to ask you any questions to clarify what they need to do. If you have not
answered like that (see the point above about how to describe procedures) you will not get a mark
in the ITC and in CTA.
