1.

What is Substantive Test

An audit assesses the level of control risk, inherent risk and accuracy in financial records. Most
audits include some form of substantive testing, which checks for errors and material
misstatements. These substantive test in auditing methods review, test and analyze a company's
financial records. Substantive testing is an auditing technique that checks for any errors or
material misstatements in a company's accounts, financial statements or supporting documents.
Substantive test are those activities performed by the auditor during the substantive testing stage
of the audit that gather evidence as to the completeness, validity and/or accuracy of account
balances and underlying classes of transactions. This traditional auditing method also helps an
auditor to form an overall opinion about the company's financial statements. Substantive testing
includes a wide variety of different auditing procedures and tests that an auditor can use
depending on the situation. substantive testing is likely to include confirmation of account
balances with third parties, recalculating calculations made by the client, and observing
transactions being performed. If substantive testing turns up errors or misstatements, additional
audit testing may be required. It is also designed to obtain audit evidence as to completeness,
accuracy, and validity of data produced by the accounting system. Substantive testing may also
be conducted by a company's internal audit staff. Doing so can provide assurance that internal
recordation systems are performing as planned. If not, the systems can be improved to eliminate
the issues, thereby providing for a cleaner audit when the external auditors conduct their tests at
year-end. Internally-conducted substantive testing may occur throughout the year (Accounting
Tools, 2021). Furthermore, the substantive test is use by Either a company's internal audit staff
or hired external auditors can conduct substantive testing for a company. Using the company's
internal audit staff may provide confirmation for whether their internal record systems are
performing correctly. If the internal record systems are not performing properly, the internal
audit staff can improve the system or eliminate the problem, so the company performs better in
the next audit. Internal auditors typically conduct substantive testing at regular intervals
throughout the year. External auditors often get hired to conduct substantive testing once a year,
usually at the end of the year (Indeed, 2021). Nonetheless, the auditor's reliance on substantive
tests to achieve an audit objective related to a particular assertion may be derived from tests of
details, from analytical procedures, or from a combination of both. The decision about which
procedure to use to achieve a particular audit objective is based on the auditor's judgment on the
expected effectiveness and efficiency of the available procedures. For significant risks of
material misstatement, it is unlikely that audit evidence obtained from substantive test alone will
be sufficient.   The auditor considers the level of assurance, if any, he wants from substantive
testing for a particular audit objective and decides, among other things, which procedure, or
combination of procedures, can provide that level of assurance. When designing substantive
analytical test, the auditor also should evaluate the risk of management override of controls. As
part of this process, the auditor should evaluate whether such an override might have allowed
adjustments outside of the normal period-end financial reporting process to have been made to
the financial statements. Such adjustments might have resulted in artificial changes to the
financial statement relationships being analyzed, causing the auditor to draw erroneous
conclusions. For this reason, substantive test alone is not well suited to detecting fraud.   The
expected effectiveness and efficiency of a test in identifying potential misstatements depends on,
among other things, (a) the nature of the assertion, (b) the plausibility and predictability of the
relationship, (c) the availability and reliability of the data used to develop the expectation, and
(d) the precision of the expectation (PCAOB, 2010).

2. Audit Sampling

Audit sampling is an investigative tool in which less than 100% of the total items within the
population of items are selected to be audited. It is an auditing technique that provides supporting
evidence that allows auditors to issue audit opinions without having to audit every single item
and transaction. It is to ensure that the transactions on the financial records are accurately and
fairly represented (CFI, 2021).  Audit sampling is the application of an audit procedure within an
account balance or class of transactions for the purpose of evaluating some characteristic of the
balance or class. This section provides guidance for planning, performing, and evaluating audit
samples. The auditor often is aware of account balances and transactions that may be more likely
to contain misstatements. He considers this knowledge in planning his procedures, including
audit sampling. The auditor usually will have no special knowledge about other account balances
and transactions that, in his judgment, will need to be tested to fulfill his audit objectives. Audit
sampling is especially useful in these cases. Furthermore, the standard recognizes that auditors
will not ordinarily test all the information available to them because this would be impractical as
well as uneconomical. Instead, the auditor will use sampling as an audit technique in order to
form their conclusions. It is important at the outset to understand that some procedures that the
auditor may adopt do not involve audit sampling. The use of sampling is widely adopted in
auditing because it offers the opportunity for the auditor to obtain the minimum amount of audit
evidence, which is both sufficient and appropriate, in order to form valid conclusions on the
population. Audit sampling is also widely known to reduce the risk of ‘over-auditing’ in certain
areas, and enables a much more efficient review of the working papers at the review stage of the
audit. In devising their samples, auditors must ensure that the sample selected is representative of
the population. If the sample is not representative of the population, the auditor will be unable to
form a conclusion on the entire population (ACCA, 2021). There are two general approaches to
audit sampling: nonstatistical and statistical. Both approaches require that the auditor use
professional judgment in planning, performing, and evaluating a sample and in relating the
evidential matter produced by the sample to other evidential matter when forming a conclusion
about the related account balance or class of transactions. Either approach to audit sampling can
provide sufficient evidential matter when applied properly. This section applies to both
nonstatistical and statistical sampling. The sufficiency of evidential matter is related to the design
and size of an audit sample, among other factors. The size of a sample necessary to provide
sufficient evidential matter depends on both the objectives and the efficiency of the sample. For a
given objective, the efficiency of the sample relates to its design; one sample is more efficient
than another if it can achieve the same objectives with a smaller sample size. In general, careful
design can produce more efficient samples.  In a strict sense, the sample evaluation relates only
to the likelihood that existing monetary misstatements or deviations from prescribed controls are
proportionately included in the sample, not to the auditor's treatment of such items. Thus, the
choice of nonstatistical or statistical sampling does not directly affect the auditor's decisions
about the auditing procedures to be applied, the appropriateness of the evidential matter obtained
with respect to individual items in the sample, or the actions that might be taken in light of the
nature and cause of particular misstatements (PCAOB, 2010). Thus, No matter what kind of
audit is being performed – internal, external, or government – audit sampling needs to be used so
that auditors can complete their audits without wasting resources in checking every single item.
Audit sampling enables auditors to make conclusions and express fair opinions based on
predetermined objectives without having to check all of the items within financial statements.
The auditors will only verify selected items, and through sampling, can infer their opinion on the
entire population of items.

REFERENCES:

ACCA. (2021). Audit Sampling. Retrieved from

https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-
resources/f8/technical-articles/audit-sampling.html on November 5, 2021
Accounting Tools. (2021). Substantive Testing Definition. Retrieved from
https://www.accountingtools.com/articles/what-is-substantive-testing.html on November 5, 2021
CFI. (2021). Audit Sampling. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-audit-sampling/
on November 5, 2021
Indeed. (2021). Substantive Tests: Definition, How They Work and Example. Retrieved from
https://www.indeed.com/career-advice/career-development/substantive-tests on November 5,
2021
PCAOB. (2010). AS 2315: Audit Sampling. Retrieved from
https://pcaobus.org/oversight/standards/auditing-standards/details/AS2315
PCAOB. (2021). AS 2305: Substantive Analytical Procedures. Retrieved from
https://pcaobus.org/oversight/standards/auditing-standards/details/AS2305 on November 5, 2021