CHAPTER 8: SUBTANTIVE TESTS Guidelines for the preparation of working papers
Auditor should consider what would enable an
experienced auditor, having no previous connection
with the audit, to understand:
 Nature, timing, and extent of the audit
procedures performed
 Results of audit procedures and audit evidence
obtained.
 Significant matters arising during audit and
conclusions reached thereon
Items that normally require audit documentation:
 Discussions of significant matters with
management
 When auditor judges it necessary to depart
from a basic principle or an essential procedure
 Record who performed audit work and date
such work was completed and who reviewed
the audit work and date and extent of such
review
Classification of Working Papers
 Permanent file- Contains information of
continuing significance to auditor in performing
recurring audits
 Article of incorporation
 Major contracts
 Engagement letter
 Organizational chart
 Analyses of long term accounts
 Internal control analyses
 Current file- contains evidence gathered and
conclusions reached
 Copy of FS
 Audit program
 Working trial balance
 Lead schedules
 Detailed schedules
 Correspondence with lawyers,
customers, bank and management
Working papers are auditor’s property. This may serve
as reference source for client but not as substitute for
client’s records.
Sec. 4 of Phil. Code of Professional Ethics
- Respect the confidentiality of information
obtained.
 Heading
- Name of client, type of working paper,
description of contents, date or period covered
 Indexing
- Use of lettering or numbering system. Must be
indexed to aid in cross-referencing essential
information
 Cross-indexing/ cross referencing
- Provide trail useful to supervisors in reviewing
working papers.
 Tick marks
- Symbol that describe audit procedures
performed
Accounting estimate
- Approximation of the amounts of an item in the
absence of precise means of measurement.
- Made in conditions of uncertainty
- Risk of material misstatement is greater when
accounting estimates are involved.
- Accounting estimate is properly accounted for
and disclosed. (Requires knowledge of client’s
business and application of relevant FR
standards)
- Accounting estimate is reasonable in the
circumstances (Understanding of procedures
and methods)
- Approaches:
1. Review and test process used by
management to develop estimate
2. Make an independent estimate
3. Review subsequent events which confirm to
estimate made.
Related parties
- Persons or entities that may have dealings with
one another in which one party has ability to
exercise influence or control over the other.
- Auditors need to be are of them because:
 GAAP requires disclosure of certain
related party relationships and
transactions
 Related party transaction may be
motivated by other than ordinary
business considerations
 Its existence may affect FS and
reliability of audit evidence
 2 important phases in considering work of internal
auditor
Expert
1. Making a preliminary assessment of internal
- Person or firm possessing special skill, auditing
knowledge and experience in a particular field 2. Evaluating and testing the work of internal
other than accounting and auditing. auditing
- Common example of expert’s work include:
 Valuation of precious stones, etc Preliminary assessment of internal auditing
 Determination of amounts using
specialized techniques like actuarial 1. Competence
computations Professional qualifications and experience
 Interpretation of technical 2. Objectivity
requirements, regulations, or contracts Organizational level to which internal auditors
report the results of their work
Auditor’s Expert 3. Due Professional care
Proper planning, supervision and
- Expert used by auditor in obtaining sufficient documentation of internal auditor’s work
appropriate audit evidence 4. Scope of function
Nature and extent of auditors’ assignment
Management’s expert
Evaluating and testing the work of internal auditing
- Used by entity in preparing FS
- Include considering whether the work
When determining the need to use the work of an
performed by competent persons
expert, the auditor would consider:
- Sufficient appropriate evidence is obtained
 If management has used management’s expert - Appropriate conclusions are reached
 Nature and significance of the matter - Exceptions are properly resolved.
 Risks of material misstatement
External auditor may request the assistance of internal
 Expected nature of procedures to respond to
auditors in performing routine or mechanical audit
identified risks
procedures.
Evaluating Auditor’s expert
Auditor’s report should not include any reference to the
1. Assess the competence and objectivity of the work performed by internal auditors.
expert.
 Professional certification or licensing
 Experience and reputation
2. Understand the field of the expertise of
auditor’s expert
3. Establish the terms of agreement with the
expert
4. Evaluate the results of the work of the expert

Auditor should not refer to the work of expert in

auditor’s report containing unmodified opinion.

When auditor’s report contains modified opinion,

auditor can make reference to expert’s work but such
reference does not reduce auditor’s responsibility fot
that opinion.

Internal Auditing

- Appraisal activity established within an entity as

service to the entity
 CHAPTER 9: AUDIT SAMPLING
Audit sampling (PSA 530)
- The application of audit procedures to less than
100% of items within an account balance or
class of transactions
- Performed on the assumption that sample
selected for testing is representative of the
population.
Risks in sampling
1. Sampling risk
- Possibility that the auditor’s conclusion, based
in a sample may be different from the
conclusion reached if the entire population
were subjected to the same audit procedures.
 Alpha risk
Risk of under reliance and risk of incorrect
rejection, efficiency
 Beta risk
Risk of over reliance and risk of incorrect
acceptance, effectiveness
2. Non-sampling risk
- Risk that the auditor may draw incorrect
conclusions about account balances or class of
transactions because of human errors
Control sampling risk by
1. increasing the sample size
2. using an appropriate sample selection method
Non-sampling risk can be minimized by
1. proper planning
2. adequate direction, review, and supervision of
audit team
General approaches to Audit Sampling
1. statistical sampling
- uses random based selection of sample
- uses the law of probability to measure sampling
risk and evaluate sample results
- allows auditor measure or quantify the
sampling risks by using mathematical formula
- helps the auditor to:
 design efficient sample
 measure sufficiency of evidence
obtained
 objectively evaluate sample results
2. non-statistical sampling
- purely uses auditor’s judgement in estimating
sampling risks, determining sample size,
evaluating sample results
When statistical sampling is used, auditor may use
either:
1. Attribute Sampling
- Used to estimate frequency of occurrence of a
certain characteristic in a population
(occurrence rate)
- Generally used when performing TOC to
estimate rate of deviations
2. Variable Sampling
- Used to estimate a numerical measurement of
a population
- Generally used in performing SUBTANTIVE
TESTS to estimate the amount of misstatements
in FS
Basic steps in Audit Sampling
1. Define the objective
2. Determine the procedure
- Involves defining population and characteristics
to be tested.
3. Determine the sample size
- Statistical sampling is used, uses statistically
based formula
- Non-statistical sampling is used, uses auditor’s
professional judgement
4. Select the sample
- Statistical sampling requires sample items be
selected at random so that each sampling unit
has a chance of being selected.
5. Apply the procedures
6. Evaluate the results
It is t be emphasized that steps 1, 2, 5, 6 will be
performed whether auditor uses audit sampling or not.
Hence, the only difference between audit sampling and
100% examination is Steps 3, 4, 6.
Factors affecting the determination of sample size for
test of controls
1. Acceptable sampling risk
2. Tolerable deviation rate
3. Expected deviation rate
Acceptable sampling risk 2. Compare the sample deviation rate with the
tolerable deviation rate and draw an overall
- Inverse relationship conclusion about the population
- Smaller sampling risk the auditor is willing to  The sample deviation rate exceeds the
accept, the larger the sample size to be. tolerable deviation rate
- control risk will be assessed at a high
Tolerable deviation rate
level and more extensive tests should
- Maximum rate of deviations the auditor is be performed
willing to accept, without modifying the  The sample deviation rate is less than
planned degree of reliance on the internal the tolerable deviation rate
control. -consider allowance for sampling risk,
- Inverse relationship the possibility that these sample results
- Decrease in tolerable deviation rate will cause could have occurred even if actual
sample size to increase population rate is higher than tolerable
rate
Expected deviation rate

- Rate of deviations the auditor expects to find in

the population before testing begins.
- Direct relationship
- The larger the expected population deviation
rate, the larger would be the sample size
- It should not exceed tolerable deviation rate

Principal methods of selecting sample

1. Random number selection

- Selects sample by matching random numbers
- Equal opportunity to be selected
2. Systematic selection
- Determining constant sampling interval and
then selects the sample based on the size if that
interval.
- Population items do not have to be pre-
numbered in order for the auditor to use this
technique
3. Haphazard selection
- Sample is selected without following an
organized or structured technique.
- Useful for non-statistical sampling but is not
used in statistical sampling
- When used, auditor may encounter
 Voided documents
If document has been properly voided,
document should be replaced by another
sample item
 Missing documents
Treated as deviation for the purpose of
evaluating sample results

Guidelines used when evaluating sample results

1. Determine the sample deviate rate

-number of deviations found over sample size