Execution of The Audit-Performing Substantive Procedures: Chapter Learning Objectives

CHAPTER 8
EXECUTION OF THE AUDIT—PERFORMING SUBSTANTIVE

PROCEDURES
CHAPTER LEARNING OBJECTIVES
1. Define substantive audit procedures.

Substantive audit procedures are procedures designed to obtain direct evidence of the
completeness, accuracy, and validity of data, and the reasonableness of the estimates and other
information contained in the financial statements. Substantive procedures include inspection,
observation, enquiry, confirmation, recalculation, re-performance, analyses of many types,
and analytical reviews.
2. Understand the link between the audit risk model and the nature, timing, and extent of
substantive procedures.
The combination of inherent risk and control risk determines the level of detection risk the
auditor is willing to accept that will still allow them to conclude that the financial statements are
not materially misstated. Detection risk is reduced or increased in direct proportion to the
amount of substantive testing performed. There are several factors that influence how much
substantive testing must be performed, including the nature of the test, the level of assurance
necessary, the type of evidence required, and the complexity of the client’s data-capturing
systems. The timing of substantive procedures is most flexible when controls have been
tested and assessed as effective. In that case, the procedures can be performed up to six
months before year end. When controls are not tested or are not assessed as effective, the
timing of substantive procedures is at or near year end.
3. Provide examples of different substantive audit procedures.

The different types of substantive procedures are tests of transactions/underlying data, and
analytical procedures. Different analytical procedures include absolute data comparisons, ratio
analysis, trend analysis, common-size financial statements, break-even analysis, and pattern
and regression analysis. Substantive analytical procedures are different from those analytical
procedures used during the planning phase of the audit.
4. Explain the different levels of audit evidence obtained when performing substantive
procedures.
The different levels of audit evidence obtained when performing substantive procedures include
persuasive, corroborative, minimal, and general audit evidence.
5. Describe the documentation of the conclusions reached as a result of performing

Conclusion statements are documented for each significant account (including the execution of
the relevant audit program steps), the results, and any significant findings, including any
misstatements. The auditor also documents that the financial statements reconcile to the
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8 - 2Auditing: A Practical Approach, Third Canadian Edition
underlying accounting records. Overall conclusions are usually prepared for each audit program
step completed, as well as for each significant account and significant assertion.
Execution of the Audit—Performing Substantive Procedures 8-3
TRUE-FALSE STATEMENTS
1. A significant account is one that could contain material misstatements based upon their
materiality and/or relationship to identified inherent and financial statement risks.
Answer: True
Bloomcode: Comprehension
Difficulty: Medium
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
2. Control risk is assessed to be low when there are no internal controls tested or relied upon by
the auditor.
Answer: False
Bloomcode: Knowledge
Difficulty: Medium
AACSB: Analytic
3. Normally, it is more efficient to carry out substantive procedures than to test and rely on
controls.
Answer: False
Difficulty: Easy
AACSB: Analytic
4. The timing of substantive procedures is directly influenced by the level of control risk.
Answer: True
Difficulty: Medium
Learning Objective: Understand the link between the audit risk model and the nature, timing,
and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and
Extent of Substantive Procedures
AACSB: Analytic
5. Roll-forward procedures are performed during the period between the end of the financial
year and the date of the audit report.
Answer: False
Difficulty: Medium
AACSB: Analytic
6. Key item testing is an example of a technique used when conducting substantive procedures.
Answer: True
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
AACSB: Analytic
7. Vouching involves tracking a source document back to the underlying accounting records.
Answer: False
Difficulty: Medium
AACSB: Analytic
8. Audit sampling is the application of audit procedures to less than 100 per cent of items within
a population.
Answer: True
Difficulty: Easy
AACSB: Analytic
9. Analytical procedures may not be useful when they are used on a company with significantly
diverse operations and geographical segments.
Answer: True
Difficulty: Medium
AACSB: Analytic
10. Analytical procedures that provide persuasive or corroborative evidence contribute minimal
support for the audit conclusion.
Answer: False
Difficulty: Medium
Learning Objective: Explain the different levels of audit evidence obtained when performing
Section Reference: 8.4 Levels of Evidence
AACSB: Analytic
11. Comparing the number of days purchases in trade payables with prior years would provide
persuasive evidence of accounts payable.
Answer: False
Difficulty: Medium
AACSB: Analytic
12. Corroborative evidence confirms audit findings from other procedures.
Answer: True
Difficulty: Easy
AACSB: Analytic
13. The lack of significant change in an account balance from one year to the next does not
necessarily mean that the auditor can assume the balance is reasonable.
Answer: True
Difficulty: Medium
Learning Objective: Describe the documentation of the conclusions reached as a result of
performing substantive procedures.
Section Reference: 8.5 Evaluating and Documenting Substantive Analytical Procedures’ Results
AACSB: Analytic
14. Misstatements can only arise from fraud.
Answer: False
Difficulty: Easy
AACSB: Analytic
15. The audit program serves as the instructions for the audit team members to complete the
required testing.
Answer: False
Difficulty: Medium
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
16. Matilda Papas has been asked to lead her audit team in the audit of the Toronto Raptors
basketball team. She performed a review of their risks and found that the team’s risks tend to be
driven by the nature of certain significant accounts or business activities that the Raptors
pursue. This risk is
a) audit risk.
b) inherent risk.
c) control risk.
d) detection risk.
Answer: b
Difficulty: Medium
AACSB: Analytic
17. Manny Regimbald is concerned about the audit of a high-risk client, the Lewiston
Stampeders. He believes that there is a high likelihood that because his audit team is
inexperienced, the testing procedures will not detect a material misstatement. This is a(n)
a) audit risk.
b) control risk.
c) detection risk.
d) none of the above
Answer: c
Difficulty: Easy
AACSB: Analytic
18. Maury Lions is ready to undertake substantive procedures at an educational institution.

Which of the following factors will influence his substantive tests?
a) the nature of the test

b) the type of evidence required
c) the complexity of the client's data capturing systems
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
19. After performing a risk assessment of a food processing company, Sean Spino has come to
the conclusion that he will require more evidence to be obtained by his audit team from
substantive procedures. Which of the factors below led him to this conclusion?
a) the level of assurance necessary

b) the type of evidence required
c) the nature of the test
d) the complexity of the client's data capturing systems
Answer: a
Difficulty: Medium
AACSB: Analytic
20. Ying Ye believes that she will have to employ sophisticated substantive audit procedures for
her client. What contributes to this decision?
a) the nature of the client’s accounting system

b) the nature of the internal controls
c) the complexity of the client's data capturing systems
Answer: c
Difficulty: Medium
AACSB: Analytic
21. Inherent risk is
a) assessed as high when there are no internal controls tested or relied upon by the auditor.
b) assessed as low when there are good internal controls in place.
c) the risk of a misstatement occurring irrespective of any internal controls put in place by
management.
d) the risk that the auditor's testing procedures will not detect a material misstatement.
Answer: c
Difficulty: Medium
AACSB: Analytic
22. Which of the following statements is correct?
a) If detection risk is high, significant substantive procedures are necessary to reduce detection
risk.
b) There is an inverse relation between the auditor's assessed risk of material misstatement and
detection risk.
c) There is no relation between the auditor's assessed risk of material misstatement and
detection risk.
d) If detection risk is low, only a small number of substantive procedures are necessary to
reduce the detection risk.
Answer: b
Difficulty: Hard
AACSB: Analytic
23. The purpose of substantive procedures includes obtaining direct evidence as to
a) the reasonableness of the estimates and other information in the financial statements.
b) the completeness, accuracy and validity of data.
c) both a and b
Answer: c
Difficulty: Medium
AACSB: Analytic
Auditing: A Practical Approach, Third Canadian Edition
8 - 10
24. Substantive testing can be conducted using which of the following procedures?
a) enquiry
b) confirmation
c) analytical review
d) all of the above
Answer: d
Difficulty: Easy
AACSB: Analytic
25. Which of the following factors do not influence the extent and timing of substantive
procedures to be undertaken?
a) the audit risk assessment

b) the nature of the procedures
c) complexity of the audit client’s data capturing system
d) the level of assistance received from the internal auditor who responds directly to
management
Answer: d
Difficulty: Hard
Learning Objective: Define substantive audit procedures
AACSB: Analytic
26. Umberto Levinson has performed a test of controls of a flower shop. He is trying to
determine the timing of substantive procedures at year end. Which factor will determine the
timing of his audit procedures?
a) timing of the year-end work

b) audit risk
c) inherent risk
d) control risk
Answer: a
Difficulty: Medium
Execution of the Audit—Performing Substantive Procedures 8 - 11

AACSB: Analytic
27. Larry French is trying to determine the extent of testing his team will have to perform in
order to determine whether controls are working. How will he decide how much testing to
perform?
a) He will utilize statistical sampling.

b) He will use his professional judgment.
c) He will use last year’s results as a basis for this year’s tests.
Answer: b
Difficulty: Easy
AACSB: Analytic
28. Which of the following factors should not influence the extent and timing of when
substantive procedures are performed?
a) the type of audit opinion that the client would like the auditor to issue
b) the complexity of the client's data capturing systems
c) the level of assurance necessary
d) the type of evidence required
Answer: a
Difficulty: Medium
AACSB: Analytic
29. Typically, substantive testing tends to be performed
a) at the start of the financial year.
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b) at or near year end.

c) half way through the financial year.
d) only when the client's management allows the auditor to conduct the tests.
Answer: b
Difficulty: Medium
AACSB: Analytic
30. Roll-forward procedures are performed
a) to update the audit findings from the time of the interim procedures through to year end.
b) to detect fraud in various balance sheet accounts.
c) before the end of the financial year.
Answer: a
Difficulty: Medium
AACSB: Analytic
31. Which of the following examples of substantive procedures would often be performed prior
to year end?
a) confirming the client's bank balance

b) attending the client's annual inventory count
c) testing additions and disposals to the fixed asset register
d) performing confirmations of accounts receivable
Answer: c
Difficulty: Easy

AACSB: Analytic
32. Performing substantive procedures prior to year end, in the absence of specific effective
controls, may be acceptable when
a) the auditor is able to conclude overall that the client's control environment is effective.
b) the likelihood of errors or fraud is high.
c) the likelihood of errors or fraud is low.
d) both a and c
Answer: d
Difficulty: Medium
AACSB: Analytic
33. An auditor’s ability to perform substantive procedures at an interim date is dependent on
a) the evaluation of audit risk.

b) convenience.
c) the materiality of the account to be tested.
d) an effective control environment.
Answer: d
Difficulty: Hard
AACSB: Analytic
34. A substantive test that an auditor would conduct at year end is
a) physical inspection of assets on hand.

b) review of the audit client’s credit procedures.
c) testing the mathematical accuracy of invoices.
d) confirmation of accounts receivable.
Answer: d
8 - 14
Difficulty: Medium
AACSB: Analytic
35. Roll-forward procedures are conducted to
a) update findings from the previous year’s audit to the current year.
b) update findings from an interim date to year end.
c) adjust accounts at year end for prepayments.
Answer: b
Difficulty: Medium
AACSB: Analytic
36. Which of the following factors would most likely influence an auditor's consideration of the
reliability of data when performing analytical procedures?
a) if the data were developed in a computerized accounting system

b) if the data were prepared in conformity with GAAP
c) if the data were developed under a system with adequate controls
d) if the data were processed in an online system
Answer: c
Difficulty: Medium
AACSB: Analytic
37. Jocelyne Yu is performing procedures and has decided to vouch the balance in the fixed
assets ledger of a furniture manufacturing company back to supporting documentation. She is

performing a
a) test of details.
b) test of controls.
c) risk assessment.
Answer: a
Difficulty: Medium
AACSB: Analytic
38. Daniel Morency has performed evaluations of financial information and determined whether
the fluctuations of his client’s sales figures are consistent with other data he has gathered. He
has used this information to predict year-end amounts of sales. This is an example of
substantive procedures called
a) tests of details.
b) computer assisted audit techniques.
c) analytical procedures.
Answer: c
Difficulty: Medium
AACSB: Analytic
39. Tobias Appel is trying to ensure that he can review controls over purchasing transactions. In
addition, he would like to substantiate the dollar amounts he is reviewing. What type of
procedures can he perform that will provide evidence as to whether a control is effective as well
as if an item is being recorded properly?
a) statistical sampling
b) dual purpose tests
c) test of balances
d) test of controls
Answer: b
8 - 16
Difficulty: Medium
AACSB: Analytic
40. Stella Zhang has been performing analytical procedures techniques as a substantive test.
The techniques that can be used to perform analytical procedures are
a) preparation of common sized financial statements.

b) break-even analysis.
c) ratio analysis.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
41. The nature of substantive procedures normally consists of one or a combination of which of
the following techniques?
a) analytical procedures
b) representative sampling
c) key item testing
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
42. Vouching involves
a) tracking a source document through to the underlying accounting records.

b) agreeing the details of a transaction to supporting evidence outside of the company's
accounting records.
c) the application of audit procedures to less than 100 per cent of items within a population.
Answer: b
Difficulty: Medium
AACSB: Analytic
43. Tracing is primarily directed towards verifying which of the following assertions?
a) completeness
b) existence
c) occurrence
d) valuation
Answer: a
Difficulty: Medium
AACSB: Analytic
44. The primary purpose of vouching is to ensure that
a) the balances or transactions are not understated.

b) sufficient information is disclosed in the notes to the financial statements.
c) the balances or transactions are not overstated.
d) all transactions have been recorded.
Answer: c
Difficulty: Medium
AACSB: Analytic
45. Variables estimation sampling is used
a) when the auditor does not expect any errors in an account balance.
b) to obtain a level of confidence that key attributes for the sample tested can be inferred to be
in existence for the entire population.
c) when the auditor conducts tests of controls.
d) if the auditor expects more than a few errors in an account balance.
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Answer: d
Difficulty: Medium
AACSB: Analytic
46. Common examples of substantive procedures related to key items testing and
representative sampling include
a) tests of income statement accounts for account classification.

b) tests of client prepared schedules.
c) tests of underlying data to be used as part of the analytical procedures.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
47. Analytical procedures may not be used
a) as primary tests of an account balance.

b) in testing internal controls.
c) to provide at least some minimal level of support for the conclusion.
d) as corroborative tests in combination with other procedures.
Answer: b
Difficulty: Medium
AACSB: Analytic
48. Which of the following is not a type of analytical procedure?
a) confirmation analysis
b) ratio analysis
c) break-even analysis
d) trend analysis
Answer: a
Difficulty: Medium
AACSB: Analytic
49. Which of the following is the first step an auditor performs when performing analytical
procedures?
a) determine appropriate procedures for investigating the reasons for differences if they are
significant
b) draw conclusions
c) identify the computation, comparison or relationship to be made or investigated
d) assess the reliability of any data to be used
Answer: c
Difficulty: Medium
AACSB: Analytic
50. Using computer assisted audit techniques (CAATs) makes the audit
a) more comprehensive.
b) more expensive.
c) more efficient.
d) both a and c
Answer: d
Difficulty: Easy
AACSB: Analytic
51. Jacqueline Martineau was told by her audit senior to ensure that the evidence she provided
through analytical procedures was both persuasive and corroborative. Which of the following
evidences are persuasive?
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a) When reviewing accruals for commissions, refer to terms of agreements and payment dates.
b) When reviewing trade receivables or sales, review the volatility of the customer base and
compare with expectations.
c) When reviewing sales and commissions expense, compare sales commissions or bonuses
with related sales.
d) When reviewing payroll expense, compare payroll tax expenses to the annual payroll times
the statutory tax rates.
Answer: a
Difficulty: Hard
AACSB: Analytic
52. Analytical procedures that provide persuasive evidence include
a) reviewing the cash accounts in the general ledger for unusual items.
b) relating average amounts invested to an average interest rate.
c) comparing the number of days purchases in trade payables with prior years.
d) reviewing the property, plant and equipment account in the general ledger for unusual items.
Answer: b
Difficulty: Hard
AACSB: Analytic
53. Comparing sales commissions or bonuses with related sales provides what level of
evidence?
a) corroborative
b) absolute
c) minimal
d) persuasive
Answer: a
Difficulty: Medium
AACSB: Analytic
54. The levels of evidence obtained when performing substantive procedures includes
a) minimal.
b) persuasive.
c) general.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
55. Corroborative evidence
a) supplements the results from analytical procedures.

b) confirms audit findings from other procedures.
c) confirms the auditor’s evaluation of internal controls.
Answer: b
Difficulty: Medium
AACSB: Analytic
56. Which of following procedures provides an example of minimal support for conclusions?
a) comparison of sales commissions with related sales

b) comparison of direct labour costs and the number of employees with prior periods
c) comparing selling prices less selling costs to normal gross margins
Answer: b
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Difficulty: Medium
AACSB: Analytic
57. An example of an analytical procedure which provides persuasive evidence is
a) calculating commissions paid as a percentage of sales.

b) comparing sales commissions and bonuses paid with related sales.
c) reviewing cash accounts in the general ledger for unusual items.
d) comparing the debtor’s turnover in the current year to the previous year.
Answer: a
Difficulty: Medium
AACSB: Analytic
58. Analytical procedures may be used
a) as primary tests of a balance.

b) as corroborative tests in combination with other procedures.
c) to provide at least some minimal level of support for the conclusion.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
59. Which of the following is not an event which causes a fluctuation in the accounting data?
a) changes in the payroll rates

b) the introduction of a new sales item
c) changes to the organizational chart of the entity
d) increased costs of inventory
Answer: c
Difficulty: Medium
AACSB: Analytic
60. Judgmental misstatements can arise from
a) the auditor conducting substantive tests inappropriate to the account being tested.
b) differences in the interpretation or application of accounting policies.
c) selecting a sample that is not representative of the population.
Answer: b
Difficulty: Hard
AACSB: Analytic
61. When an auditor identifies unexpected misstatements or errors, he/she will
a) re-evaluate the effectiveness of internal controls and overall assessment of risk.

b) plan to conduct predominately substantive tests.
c) increase the level of tests of internal controls.
Answer: a
Difficulty: Hard
AACSB: Analytic
62. Judgmental misstatements can arise from
a) the auditor conducting substantive tests inappropriate to the account being tested.
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b) differences in the interpretation or application of accounting policies.

c) selecting a sample that is not representative of the population.
Answer: b
Difficulty: Medium
AACSB: Analytic
63. Fluctuations in financial data identified by the auditor when planning the audit may be
caused by
a) dependent relationships.
b) seasonal patterns.
c) external decisions directly impacting the business.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
64. Which of the following statements is correct?
a) Misstatements can only arise from fraud.

b) Misstatements can only arise from error.
c) Misstatements can arise from error or fraud.
Answer: c
Difficulty: Easy
AACSB: Analytic
65. Overall significant account conclusion statements are captured on
a) audit programs.
b) lead sheets.
c) confirmation requests.
d) minutes of board of directors' meetings.
Answer: b
Difficulty: Medium
AACSB: Analytic
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SHORT ANSWER QUESTIONS
66. Indicate whether you agree or disagree with the following statements and explain your
reasoning.
a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to
determine detection risk. She concluded: “Both my inherent and control risks are low. I
guess I should be willing to accept high detection risk.”
b) Boris Ivanov had performed an assessment of the accounts payable system at

Magnitogirsk Iron and Steel Works Operations in the Urals. His focus was on the
completeness assertion for accounts payable balances. Inherent risk and control risk were
both high. He decided that because the overall risk assessment was high he would have to
set his detection risk high.
c) Jana Novotna, the auditor in charge of the Mosenergo petroleum giant, was explaining to
Valentin Titov the importance of the timing of substantive procedures: “Although we
associate examinations of internal controls with interim work and substantive procedures
with year-end work, we can perform substantive procedures before year end if there exists
an effective control environment.”
d) Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior
auditor how vouching works: “We take a balance or a transaction from the underlying
accounting records and agree it to the supporting evidence inside the company.”
e) Larisa McCarthy, the auditor in charge of the Firestone audit, feels that the large population
of sales transactions warrants the use of representative sampling. She mentions to her
staff: “Representative sampling using audit risk tables is especially useful when a lot of
errors exist in an accounting system and the auditor perceives the risk of understatement to
be high.”
Answer:
a) Agree. There is an inverse relation between the auditor's assessed risk of material
misstatement and detection risk.
Detection risk is reduced or increased in direct proportion to the amount of substantive
testing performed.
If the combined inherent risk and control risk are low, as it is in this case (the client is in a
low-risk industry and the account has a lower chance of being materially misstated if there
are controls put in place), the amount of detection risk the auditor is willing to accept is high
and therefore only a small number of substantive procedures are necessary to reduce the
detection risk.
b) Disagree. There is an inverse relation between the auditor's assessed risk of material
misstatement and detection risk.
Detection risk is reduced or increased in direct proportion to the amount of substantive
testing performed.
If the combined inherent risk and control risk is high this indicates that the client is in a high-
risk industry. As a result, the account has a higher chance of being materially misstated if
there are no controls put in place and no controls have been tested. Therefore, the amount
of detection risk the auditor is willing to accept is low and therefore significant substantive
procedures are necessary to reduce the detection risk.
c) Agree. The auditor's ability to perform substantive audit procedures at an interim date is
generally dependent on the existence of an effective control environment and the
effectiveness of controls.
When the control environment is ineffective or there are specific ineffective controls, the
auditor considers whether or not it is appropriate to perform substantive procedures at an
interim date.
The timing of the substantive procedures is most flexible when controls have been
assessed as effective and tested to confirm this assessment. In these circumstances, the
substantive procedures may be performed earlier in the year. When controls are assessed
as effective but not tested, the substantive procedures may still be performed at an interim
date.
d) Disagree. Vouching is when a balance or transaction is taken from the underlying

accounting records and verified by agreeing the details to supporting evidence outside of
the accounting records of the company. Typically, the details are agreed to external third-
party information such as a supplier invoice or delivery documentation.
e) Disagree. The auditor uses this technique when they do not expect errors or they expect a
low number of errors. Auditors use representative sampling when the risk of material
misstatement has been assessed as low, and their primary concern is with the
overstatement in an account balance.
Difficulty: Medium
Learning Objective: Provide examples of different substantive audit procedures.
AACSB: Analytic
67. Discuss the factors that influence the extent and timing of substantive procedures.
Answer: How much substantive testing is performed and when it is performed are influenced by
several factors. The most important factor is the overall risk assessment for the item being
tested. Prior to making this assessment, the auditor will have performed planning procedures
and controls testing (including testing of any controls identified that the auditor intends to place
reliance on). The results of these planning and interim procedures allow the auditor to make an
overall assessment as to how much detection risk still exists prior to any substantive testing
being performed. The auditor then designs what they believe are appropriate substantive audit
procedures that will allow material errors and exceptions to be identified and rectified before an
overall conclusion is made.
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There are several other factors (over and above the audit risk assessment) that influence how
much (extent) and when (timing) substantive procedures are performed. These include the
following:
a) The nature of the test. Some tests lend themselves more easily to testing during the year-
end visit as opposed to during the interim audit visit(s). For example, vouching prepayment
amounts to their supporting documentation (the invoices that were paid during the year) is
easy to perform prior to year end; verifying the calculation of the split between the amount
to be recognized as a prepayment and the amount to be expensed in the income statement
is easiest to perform at or after year end.
b) The level of assurance necessary (reasonable assurance requires more evidence to be

obtained from substantive procedures than limited assurance in order to reach a
conclusion).
c) The type of evidence required (for example, are the procedures designed to provide
persuasive, corroborative or minimal audit evidence?).
d) The complexity of the client's data capturing systems (the more complex the systems, the
more complex and sophisticated the substantive audit procedures need to be).
Difficulty: Medium
AACSB: Analytic
68. Explain the difference between vouching and tracing.
Answer: Vouching is when a balance or transaction is taken from the underlying accounting
records and verified by agreeing the details to supporting evidence outside of the accounting
records of the company (typically the details are agreed to external third-party information such
as a supplier invoice or delivery documentation). Because vouching involves testing and
verifying information already recorded in the accounting records, the primary purpose of the
testing is to ensure the balances or transactions are not overstated (for example, existence and
occurrence assertions).
Tracing is when a source document is traced back to the underlying accounting records.
Because tracing involves testing and verifying information outside of the accounting records that
is not necessarily recorded (for instance, on a source document such as an invoice), the primary
purpose of the testing is to ensure the balances are not understated (for example, completeness
assertion).
Difficulty: Medium

AACSB: Analytic
69. Explain the three common sampling strategies that can be applied when the auditor applies
representative sampling.
Answer: When the auditor applies representative sampling, there are three common sampling
strategies applied, depending on the auditor's expectations of error and their overall audit
objective (overstatement or understatement of the amount being audited).
1. Representative sampling using audit risk tables – The auditor uses this technique when
they do not expect errors or they expect a low number of errors; that is, the risk of material
misstatement has been assessed as low, and their primary concern is with the
overstatement in an account balance. This is a common technique used to obtain
'coverage' of a total balance as at year end and can be used to calculate errors that can
then be extrapolated across a total balance.
2. Variables estimation sampling – The auditor uses this technique if they expect more than a
few errors in an account balance. This technique can be used when the concern is both
understatement and overstatement, and is therefore different to representative sampling.
Variables estimation sampling is usually applied to detect misstatements of the book values
(carrying amounts or recorded values) of populations.
3. Attribute sampling – The auditor uses this technique to supplement other substantive
procedures to obtain audit assurance related to tests of transactions when they do not
expect errors (or they expect a low number of errors). Discovery sampling is used to obtain
a level of confidence, based on a statistically valid sample of transactions, that key
attributes in existence for the sample tested can be inferred to be in existence for the entire
population.
Difficulty: Medium
AACSB: Analytic
70. Identify the steps used by the auditor when performing analytical procedures.
Answer: When performing analytical procedures, the steps the auditor performs can be
summarized as follows:
1. Identify the computation, comparison or relationship to be made or to be investigated.

2. Assess the reliability of any data to be used.
3. Estimate the probable balance in the account or the probable outcome of the computation.
4. Make whatever computations are needed using data in the client's records or data from
reliable outside sources.
5. Compare the estimated amount with the computed or recorded amount and evaluate
whether the difference, if any, is significant.
8 - 30
6. Determine appropriate procedures for investigating the reasons for the difference if it is
significant.
7. Perform the procedures.
8. Draw conclusions.
Difficulty: Medium
AACSB: Analytic
71. Explain the four different levels of evidence obtained when performing substantive
procedures.
Answer: Several different levels of evidence are obtained when performing substantive
procedures, depending on the type of substantive procedure performed. Evidence can be
persuasive, corroborative, minimal or general.
Persuasive: Analytical procedures can be the primary test of a balance (that is, the primary
basis for the conclusion) if they provide persuasive evidence. This would be the case when the
procedures generate an amount that the auditor believes is a reasonable estimate of what the
balance should be, thus enabling them to conclude whether or not the account balance is free
from material errors. The effect of classifying an analytical review procedure as persuasive
means that no further substantive procedures need to be performed on the related account
balance, even in moderate risk situations.
Corroborative: An analytical procedure provides corroborative evidence if it (1) confirms audit

findings from other procedures and (2) supports management representations or otherwise
decreases the level of audit scepticism. A corroborative analytical procedure includes
comparisons of account balances to expectations developed and documented earlier in the
audit. These comparisons generally provide corroborative evidence about an account balance
and enable the auditor to limit the extent of other procedures in that area.
Minimal: Analytical procedures that do not provide persuasive or corroborative evidence

contribute minimal support for the conclusion. In deciding whether a particular analytical
procedure or combination of procedures provides corroborative evidence or only minimal
support for the conclusion, the auditor evaluates both the extent of their analytical procedures
and the quality of the evidence they expect to obtain.
General: Analytical procedures might provide persuasive evidence in one circumstance but not
in another. To illustrate, the risk assessment related to investments might indicate a low
likelihood of material misstatement related to recording investment income. If a client has a
relatively stable investment portfolio, a comparison of the average amount invested to an
average market rate of interest or yield may provide the auditor with persuasive evidence to
conclude that the amount of investment income recorded for the year is free from material
misstatement. On the other hand, another client's portfolio might be more diversified and turn
over quite rapidly. In that case, the auditor may need to expand the analytical review by
segmenting the client's portfolio and applying the average yield test to the various segments.
Difficulty: Medium
AACSB: Analytic
8 - 32
ESSAY QUESTIONS
72. There are certain audit procedures that are required to be performed according to various
auditing standards. Identify specific examples of such procedures and explain why the
procedures are mandatory.
Answer: Answers may vary.
Bloomcode: Application
Difficulty: Medium
AACSB: Analytic
73. Analytical procedures are evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data. Discuss why analytical procedures
are used by an auditor and explain several of the common types of analytical procedures.
Difficulty: Medium
AACSB: Analytic
74. Before they can complete an audit, auditors need to evaluate the causes of any unexpected
fluctuations in a client’s financial statements detected by the use of analytical procedures.
Explain how auditors interpret the results of analytical procedures and why it is done.
Difficulty: Medium
AACSB: Analytic
CASE QUESTION
75. Raisa Alexseev was getting ready to perform analytical procedures at Vulcan Spice Mills.
She had made the following notes in her audit file:
1. Review allowance for doubtful accounts.

2. Don’t forget to bring calculator to work.
3. Figure out the probability of $5,000,000 sales commissions threshold of last year.
4. Perform variance analysis.
Instructions
Can you summarize the steps Raisa will have to go through using analytical procedures before
she can draw any conclusions about the subject matter?
Answer: When performing analytical procedures, the steps Raisa will perform can be
summarized as follows:
1. Identify the computation, comparison or relationship to be made or to be investigated. Raisa

would compare the allowance or commissions amounts in the current year’s accounts and
compare them to the methods and outcomes of previous years.
2. Assess the reliability of any data to be used. Raisa will ensure that the accounts receivable
controls over transactions have been tested and that substantive procedures such as
accounts receivable confirmations have been carried out.
3. Estimate the probable balance in the account or the probable outcome of the computation.
If the client uses percentage of receivables or aging percentages, Raisa will estimate this
year’s anticipated balance using the data available.
4. Make whatever computations are needed using data in the client's records or data from
reliable outside sources. Raisa will use her calculator or software to perform computations
on the allowance for doubtful account amount or the reasonableness of the commissions
expense.
5. Compare the estimated amount with the computed or recorded amount and evaluate
whether the difference, if any, is significant.
6. Determine appropriate procedures for investigating the reasons for the difference if it is
significant. Raisa will have discussions with the client’s personnel such as the credit
manager and sales vice president.
7. Perform the procedures.
8. Draw conclusions. Based on the procedures applied and her conclusions, Raisa may have
to perform more substantive work in order to be satisfied with the reliability of underlying
data.
Bloomcode: Application
Difficulty: Medium
8 - 34

AACSB: Analytic
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Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under license and may be used only in accordance with the terms of such license.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
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CHAPTER 8

EXECUTION OF THE AUDIT—PERFORMING SUBSTANTIVE

1. Define substantive audit procedures.

3. Provide examples of different substantive audit procedures.

5. Describe the documentation of the conclusions reached as a result of performing

12. Corroborative evidence confirms audit findings from other procedures.

14. Misstatements can only arise from fraud.

MULTIPLE CHOICE QUESTIONS

18. Maury Lions is ready to undertake substantive procedures at an educational institution.

a) the nature of the test

a) the level of assurance necessary

a) the nature of the client’s accounting system

21. Inherent risk is

22. Which of the following statements is correct?

23. The purpose of substantive procedures includes obtaining direct evidence as to

a) the audit risk assessment

a) timing of the year-end work

and extent of substantive procedures.

a) He will utilize statistical sampling.

29. Typically, substantive testing tends to be performed

a) at the start of the financial year.

b) at or near year end.

30. Roll-forward procedures are performed

a) confirming the client's bank balance

CPA: Audit and Assurance

33. An auditor’s ability to perform substantive procedures at an interim date is dependent on

a) the evaluation of audit risk.

34. A substantive test that an auditor would conduct at year end is

a) physical inspection of assets on hand.

35. Roll-forward procedures are conducted to

a) if the data were developed in a computerized accounting system

assets ledger of a furniture manufacturing company back to supporting documentation. She is

a) preparation of common sized financial statements.

42. Vouching involves

a) tracking a source document through to the underlying accounting records.

44. The primary purpose of vouching is to ensure that

a) the balances or transactions are not understated.

45. Variables estimation sampling is used

a) tests of income statement accounts for account classification.

47. Analytical procedures may not be used

a) as primary tests of an account balance.

48. Which of the following is not a type of analytical procedure?

52. Analytical procedures that provide persuasive evidence include

55. Corroborative evidence

a) supplements the results from analytical procedures.

a) comparison of sales commissions with related sales

57. An example of an analytical procedure which provides persuasive evidence is

a) calculating commissions paid as a percentage of sales.

58. Analytical procedures may be used

a) as primary tests of a balance.

a) changes in the payroll rates

60. Judgmental misstatements can arise from

61. When an auditor identifies unexpected misstatements or errors, he/she will

a) re-evaluate the effectiveness of internal controls and overall assessment of risk.

62. Judgmental misstatements can arise from

b) differences in the interpretation or application of accounting policies.

64. Which of the following statements is correct?

a) Misstatements can only arise from fraud.

65. Overall significant account conclusion statements are captured on

SHORT ANSWER QUESTIONS

b) Boris Ivanov had performed an assessment of the accounts payable system at

d) Disagree. Vouching is when a balance or transaction is taken from the underlying

b) The level of assurance necessary (reasonable assurance requires more evidence to be