Tugas Auditing

CHAPTER 11DETECTION RISK AND THE DESIGN OF SUBSTANTIVE TESTS

CHAPTER 11DETECTION RISK AND THE DESIGN OF SUBSTANTIVE TESTSDetermining Detection RiskDesigning Substantive TestsDeveloping Audit Programs for Substantive TestsSpecial Consideration in Designing Substantive Tests

Determining Detection RiskDetection risk is the risk that the auditor will not find a material misstatement that exists in an assertion. Chapter 8 outlines that planned acceptable level of detection risk is determined for each significant financial statement assertions. Furthermore, regardless of whether the auditor chooses to use the quantitative level of risk or non-quantitative, planned detection risk is determined by the relationship expressed in the following models:

The model shows that for a given level of audit risk as determined by the auditor, detection risk is inversely proportional to the level of inherent risk and control risk are taken into account. Planned detection risk is the planned level of substantive test.

Preliminary Audit Strategy, Planned Detection Risk, and Planned Emphasis on Audit TestsFigure 11-1

Planned

Planned

Preliminary

Planned

Assurance

Level of

Audit

Detection

Obtained

Substantive

Strategy

Risk

From

Tests

A primarily

Low or

Tests of details of

Higher level

substantive

very low

transactions and

Approach

balances

emphasizing

detail tests

A lower assessed

Moderate

Tests of controls

Lower level

level of control

or high

Risk

A primarily

Low or

Analytical procedures

Higher level

substantive

very low

Approach

emphasizing

analytical

procedures

Emphasis on

Moderate

Evidence regarding

Moderate or lower level

inherent risk and

or high

inherent risk and

analytical

analytical procedures

procedures

Evaluating the Planned Level of Substantive TestsWhen evaluating the planned level of substantive tests for each significant financial statement assertion, the auditor will consider the evidence obtained from:1. The assessment of inherent risk.2. Procedures to understand the business and industry and related analytical procedures that have been completed.3. Tests of controls including:a. Evidence about the effectiveness of internal controls gained while obtaining an understanding of internal controls.b. Evidence about the effectiveness of internal controls supporting a lower assessed level of control risk. (Such as tests of controls related to the management of Aseri-specific assertions, testing general computer control, computer application control testing, and follow-up testing of the manual) The auditor should compare the actual or final level of beliefs obtained from the procedure with inherent risk level assessment planned, the risk of analytical procedures and risk control. If the end of the assessed level of risk is equal to the planned level of risk assessment, meaning the auditor succeeded in designing a specific substantive testing based on preliminary audit strategy.

Revise Planned Detection RiskIf necessary, the level of detection risk revised or final revised acceptable level of detection risk are determined for each assertion in the same way with the determination of the planned detection risk, except that it is based on actual or final assessment over control risk, not the level of control risk assessment is planned for these assertions.

Specification Substantive Risk Detection Test For Different On The Same Assertions.The term detection risk used in the previous section to the risk that the entire substantive testing is used to find evidence of the assertion apparently failed to detect material misstatements. In designing substantive tests, the auditor may wish to specify different levels of risk of detection used in different substantive testing over the same assertions. Figure 8-2 on page 340 illustrates an expanded matrix of risk components that can be used to determine the level of risk of detection for all the detailed substantive testing that is applied to an assertion, assuming that the level of risk the implementation of preliminary analytical procedures can not detect a material misstatement.

DESIGNING THE SUBSTANTIVE TESTINGDesigning substantive tests include determining the nature, timing, extensive testing, and audit staffing levels required to meet the acceptable detection risk for each assertion.

NatureThe nature of substantive tests refers to the type and effectiveness of the auditing procedures to be performed.When the acceptable level of detection risk is low, the auditor must use more effective, and usually more costly, procedures.When the acceptable level of detection risk is high, less effective and less costly procedures can be used.

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Analytical procedures can be used in the testing phase as substantive audit testing to obtain evidence about the particular assertion. For some assertion, the analytical procedure is considered less effective than testing details. However in some cases the opposite effect. In some cases where analytical procedures are effective, the audit efficiency can be increased. In other cases, the relationship between the balance akunn with others expected to be used.AU 329.11, Analytical Procedures (SAS 56), indicates that the expected effectiveness and efficiency of analytical procedures depends on the:Nature of the assertionPlausibility and predictability of the relationshipAvailability and reliability of the data used to develop the expectationPrecision of the expectationWhen the results of analytical procedures as expected, and the level of detection risk is acceptable for high-assertion, not the details of testing needs to be done. Analytical testing procedures are the most inexpensive. Thus, attention must be given to how analytical procedures can help achieve a detection level of risk that is acceptable before selecting the test details.Analytical Procedures

Testing Details of the TransactionTesting the details of the transaction involving the search and examination. For example, detailed transaction can be traced from source documents such as sales invoices and vouchers to entries in the accounting records and registers like sales journal vouchers. The focus of the auditor in conducting this testing is the discovery of a monetary mistake, not a deviation from the control. These tests generally use the documents available on the archive client. The effectiveness of such testing depends on the specific procedures and documents used. Testing the details of the transaction can be effective in certain cases if targeted at potential errors. Cost efficiency on the details of the transaction testing can also be improved if done in conjunction with tests of controls as a dual purpose of testing.

Tests of details of balances focus on obtaining evidence directly about an account balance rather than the individual debits and credits comprising the balance.The effectiveness of this test also depends on the specific procedure performed and the type of evidence obtained. Update on the balance testing often use external documents and / or personal knowledge of the auditor directly. This test is very effective, but time consuming and expensive to do.Testing Details of Balances

DETECTION RISK

TESTS OF DETAILS OF BALANCES

High

Scan client-prepared bank reconciliation and verify

mathematical accuracy of reconciliation.

Moderate

Review client-prepared bank reconciliation and verify major

reconciling items and mathematical accuracy of reconciliation.

Low

Prepare bank reconciliation using bank statement obtained from

client and verify major reconciling items and mathematical

accuracy.

Very Low

Obtain bank statement directly from bank, prepare bank

reconciliation, and verify all reconciling items and mathematical

accuracy.

Accounting estimate is an estimate of the financial statement element, item, or account for the absence of precise measurements. Tests of accounting estimates usually involve testing balances, but usually require unique evidence Accounting estimates include the significant prospective elements, such as whether the receivables will be collectible in the future or whether the warranty can be expected to be paid in the future. Consideration is needed in making accounting estimates. Accounting estimates have a significant impact on the financial statements of the company..AU 342.07, Auditing Accounting Estimates (SAS 57), states that the auditors objective in evaluating accounting estimates is to obtain sufficient competent evidential matter to provide reasonable assurance that:1. All accounting estimates that could be material to the financial statements have been developed.2. The accounting estimates are reasonable in the circumstances.3. The accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed.Testing details of the Accoounting Estimation

Company's internal control structure can reduce the likelihood of material misstatements in the accounting estimates, and can reduce the area of substantive tests. AU 342. 09 outlines that the auditor should concentrate on the assumptions and factors used by management as important 1. Significance to accounting estimates 2. Sensitive to variations 3. Deviations from the old pattern 4. Subjective and can affect the misstatements and Bllue rayEvidence about the reasonableness of estimates can be obtained from one or several auditors approach: Perform procedures to review and test process management in making estimates. Creating an independent expectation of the estimation. To review the transaction and the subsequent events that occurred prior to completing the audit relating to those estimates.

Testing details of the Accoounting Estimation

The procedure is performed: 1. Consideration of relevance, reliability, and adequacy of the data as well as other factors used by management 2. Evaluating the feasibility and consistency of assumptions 3. Conducting calculations have been performed over the management.

Testing details of the Accoounting Estimation

Illustration nature Substantive TestsTo simplify the illustration, only one indicated Accounts Receivable. To determine that the ending balance of accounts receivable is presented with reasonable, the auditor may consider evidence obtained from several substantive tests following: Analytical Testing. The possibilities are: Comparing the absolute value of the year-end balances with prior year balances, the amount budgeted, or other value that is estimated, based on changes in sales activity and credit policy. Using the final balance to determine the percentage of accounts receivable to current assets in comparison with the previous year, industry data, or other expected value. Using the final balance to calculate accounts receivable turnover ratio for the comparison with the previous year, industry data, or other expected value, based on sales activity changes in credit policy dna. Testing the details of the transaction . The possibilities are : Checking the samples individually debiting and crediting the customer's account for the transaction group is indicated to offset journal entry and supporting documents .

Search transaction data from source documents and journal entries related to the customer's account for the indicated transaction group . Testing the details on the remaining balance . The possibilities are : Determine that the final balance in the account each individual customer to control the account balance . Confirm the final balance on the customer account the sample directly to the customer concerned . Testing the details on the balance involving accounting estimates . The possibilities are : Test the determination of the age of receivables with vouching amounts in the determination of the age categories for accounts receivable sample to the supporting documents . For accounts that have passed , examine evidence collectability of evidence such as correspondence with customers and outside collection agencies , credit reports , and customer financial statements , as well as discuss the amounts that can be charged to the appropriate management personnel . Evaluate account management process in estimating the allowance for doubtful accounts reconsideration . Evaluate the adequacy of the allowance given information on industry trends , the tendency of determination of the age of accounts receivable , and billing history for a specific customer .

Illustration nature Substantive TestsIn the case of accounts receivable, the three types of substantive testing can be applied on top of everything. As for the accounts - other accounts, sometimes that can be applied to only one or two types of course to obtain evidence sufficient to meet the level of detection risk that can be accepted. To determine that sales have been reported to account for a reasonable amount, the auditor may obtain evidence through the following: Analysis procedures. Possibilities include:

Comparison between the absolute amount of the balance before the end of the balance, the amount budgeted, or the value of other estimates comparing the final balance ending balance according to independent estimates of the final balance

The acceptable level of detection risk may affect the timing of substantive tests.1. If detection isk is high, the tests may be performed several months before the end of the year.2. When detection risk for an assertion is low, the substantive tests will normally be performed at or near the balance sheet date.Timing of Substantive Tests

substantive tests prior to the date of the balance sheetThe decision to perform substantive tests prior to balance sheet date should be based on whether the auditor canControl the added risk that material misstatements existing in the account balance sheet date will not be detected by the auditor.This risk becomes greater as the time period between audit tests and balance sheet date increases.Reduce the cost of performing substantive tests necessary at balance sheet date to meet planned audit objectives, so testing before the date of the balance sheet to be effective in terms of cost.

AU 313, Substantive Tests Prior to Balance Sheet Date. (SAS No. 45)1.Internal control during the remaining period is effective.2.There are no conditions or circumstances that might predispose management to misstate the financial statements in the remaining period.3.The year-end balances of the accounts examined at the interim date are reasonably predictable as to amount, relative significance, and composition.

substantive tests prior to the date of the balance sheet4.The clients accounting system will provide information concerning unusual transactions and significant fluctuations that may occur during the remaining period.Substantive tests prior to the date of the balance sheet need not restrict substantive testing on the balance sheet date. Some testing for the remainder of the period usually covers Comparison of account balances on two dates to identify the number that seems unusual and investigate the amount. Other analytical procedures or other substantive tests of details to provide reasonable grounds for the extension of the interim audit conclusions to the balance sheet date.

More evidence is needed to achieve a low acceptable level of detection risk than a high detection risk.

Extent is used in practice to mean the number of items or sample size to which a particular test or procedure is applied.Extent of Substantive Tests

AU 230, due professional care in the performance of work (SAS No.1),states that the auditor should assign tasks and supervision commensurate with the level of knowledge, skills, and abilities so that they can evaluate the audit evidence they are testing.SAS No, 82 consideration of fraud in a financial statement audit (AU 316,27) The auditor may respond to the risk of material misstatement by the assignment of personnel. A task such as auditing an accounting estimate (e.g., inventory obsolescence) may require a greater level of industry expertise and experience than performing a test of balances (e.g., observing inventory). Staffing Substantive Tests

Summarize Relationships among Audit Risk Components and the Nature, Timing, and Extent of Substantive Tests Figure 11-2

Developing a Substantive Audit Program For Testing

Using Information Technology to Support Substantive TestsWhen the client using information technology for application of significant accounting, auditors have the opportunity to use audit software packages to make audits more effective and more efficient.

General Audit SoftwareUsed by the auditor to the client computer archives generated in a variety of data organization and processing methods, so it can be connected from one client to another client. Depending on the application, one or more of the following phases included in the use of audit software packages: Identifying goals and objectives of the auditor's tests performed. Determining the feasibility of using the software package to the client system. Design applications, including logic, calculation, and output forms. Coding and testing of applications, including the manufacture of standard forms and important information. Processing of applications on the client and the actual archived data to review the results

Selection and Printing Sample-Sample Audit The computer can be programmed to select an audit sample according to criteria specified by the auditor. The auditor also may use audit software to sample items that may contain some errors.

Test of Calculation and Preparation of calculation Other common uses of computer is to test the accuracy of the calculation in a machine that can read the data archive.

Summarizing Data Analysis and Implementation Auditors usually want the client data rearranged in a way that will suit a particular purpose.

Benchmarking Audit Data with Computer Notes Audit data generated from work performed by the auditor can be compared with the information in the computer records.

The relationship between assertions, Special Purpose Audit and Substantive TestsTo develop a number of specific audit objectives for each account based on the five categories in the financial statement assertions. In designing substantive tests, the auditor should determine that the appropriate testing has been identified to achieve specific audit objectives that exist in every assertion.

Illustration of Assertions, Specific Audit Objectives, and Substantive TestsFigure 11-3

Specific

Examples of

Audit

Substantive

Assertion

Objective

Tests

Valuation or

Inventory records are

Review activity in general

Allocation

accurately compiled and

ledger accounts for

the totals are properly

inventories and investigate

included in the inventory

unusual items.

accounts.

Verify extensions of

quantities times unit prices

and totals of inventory

records, and agreement

with general ledger.

Trace test counts recorded

during physical inventory

observation to inventory

records.

Reconcile physical counts

to perpetual records and

general ledger balances and

investigate significant

fluctuations.

Inventories are properly

Examine paid vendors

stated at cost.

invoices.

Review direct labor rates.

Test computations of

standard overhead rates

and standard costs, if

applicable.

Examine analyses of

purchasing and

manufacturing standard

cost variances, if

applicable.

Illustration of Assertions, Specific Audit Objectives, and Substantive TestsFigure 11-3

Specific

Examples of

Audit

Substantive

Assertion

Objective

Tests

Valuation or

Slow-moving, excess,

Inquire of production and

Allocation

defective, and obsolete

sales personnel concerning

items included in

possible excess or obsolete

inventories are properly

inventory items.

identified.

Examine an analysis of

inventory turnover.

Review industry experience

and trends.

Analytically review the

relationship of inventory

balances to anticipated

sales volume.

Inventories are reduced,

Obtain current market

when appropriate, to

value quotations.

replacement cost or to net

Evaluate net realizable

realizable value.

value.

The auditors decisions regarding the design of substantive tests are required to be documented in the working papers in the form of written audit programs (AU 311.09). An audit program is a list of audit procedures to be performed.In addition to listing audit procedures, each audit program should have columns for:1. A cross-reference to other working papers containing the evidence obtained from each procedure (when applicable),2. the initials of the auditor who performed each procedure, and3. the date the performance of the procedure was completed.Audit programs should be sufficiently detailed to provide:1. An outline of the work to bedone2. A basis for coordinating, supervising, and controlling the audit3. A record of the work performedIllustrative Audit Programs For Substantive Testing

We can construct a general framework for developing audit programs for substantive tests. Such an approach is described in Figure 11-5.

The steps listed in the upper portion of Figure 11-5 summarize the application of several important concepts and procedures explained in Chapters 5 through 10.General Framework for Developing Audit Programs for Substantive Tests

General Framework for Developing Audit Programs for Substantive TestsFigure 11-5Complete Audit Planning1. Identify the financial statement assertions to be covered by the audit program.2. Develop specific audit objectives for each category of assertions.3. Obtain an understanding of the clients business and industry including such items as the clients business cycle, managements goals and objectives, organizational resources, the entitys products, services market, customers, competition, the entitys core processes and operating cycle, and the entitys investing and financing decisions.4. Assess inherent risk for the assertion.5. Assess control risk for the assertion based on: Evidence of the effectiveness of controls gained while obtaining an understanding of internal controls. Evidence of the effectiveness of management controls or other manual controls over computer output.

General Framework for Developing Audit Programs for Substantive TestsFigure 11-5 Evidence of the effectiveness of computer control procedures including manual follow-up.6. Determine the final level of detection risk for each assertion consistent with the overall level of audit risk and applicable materiality level.7. From knowledge acquired from procedures to obtain an understanding of relevant internal controls, envision the accounting records, supporting documents, accounting processes (including the audit trail), and financial reporting process pertaining to the assertions.8. Consider options regarding the design of substantive tests: Alternatives for accommodating varying acceptable levels of detection risk: Nature Analytical procedures, Tests of details of transactions, tests of details of balances,Tests of accounting estimates Timing Interim versus year-end

General Framework for Developing Audit Programs for Substantive TestsFigure 11-5 Extent Sample size Staffing Skill and experience of audit staff Consider how generalized audit software might make the audit more effective or more efficient. Possible types of corroborating evidence available: Analytical, Electronic, Mathematical,Written Representation, Documentary, Confirmations, Physical, and Oral Possible types of audit procedures available:Analytical procedures, Inquiring, Vouching,Computer-assisted audit techniques, Inspecting,Counting, Observing, Confirming, Tracing, Reperforming

General Framework for Developing Audit Programs for Substantive TestsFigure 11-5Specify Substantive Tests to Be Included in Audit Program1. Obtain an understanding of the business and industry and determine:a. The significance of the transaction class and account balance to the entity.b. Key economic drivers that influence the transaction class and account balance that are relevant to evaluating issues of existence, completeness, valuation and allocation, rights and obligations, and presentation and disclosure.2. Specify initial procedures to:a. Trace beginning balance to prior years working papers (if applicable).b. Review activity in applicable general ledger accounts and investigate unusual items.

General Framework for Developing Audit Programs for Substantive TestsFigure 11-5

c. Verify totals of supporting records or schedules to be used in subsequent tests and determine their agreement with general ledger balances, when applicable, to establish a tie-in of detail with control accounts.3. Specify analytical procedures to be performed.4. Specify tests of detail of transactions to be performed.5. Specify tests of detail of balances to be performed.6. Specify tests of detail of balances involving accounting estimates to be performed.7. Consider whether there are any special requirements or procedures applicable to assertions being tested in the circumstances such as procedures required by SASs or by regulatory agencies that have not been included in (3) and (4) above.8. Specify procedures to determine conformity of presentation and disclosure with GAAP.

Audit Program In initial engagementIn an initial engagement, the detailed specification of substantive tests in audit programs is generally not completed until after the auditor: Obtains an understanding of the business and the industry it operates in.The study and evaluation of internal control has been completed, and The acceptable level of detection risk has been determined for each significant assertion.

2 matters requiring special consideration in designing audit programs for initial audits are:Determining the propriety of the account balances at the beginning of the period being audited, andAscertaining the accounting principles used in the preceding period as a basis for determining the consistency of application of such principles in the current period.

In a recurring engagement, the auditor has access to audit programs used in the preceding period(s) and the working papers pertaining to those programs.

In such cases, the auditors preliminary audit strategies are often based on a presumption that the risk levels and audit programs for substantive tests used in the previous period will be appropriate for the current period.Audit Programs In Recurring Engagement

Special Considerations in Designing Substantive TestsThis section outlines concluded that there is a difference between control and test substantive testing.

The accounts of the Income StatementEach account income statement related to one or more of the balance sheet accounts. When compared with the substantive tests of account balance, testing the profit and loss account are more inclined slightly to the analytical procedure and testing details.

BALANCE

RELATED

SHEET

INCOME STATEMENT

ACCOUNT

ACCOUNT

Accounts receivable

Sales

Inventories

Cost of sales

Prepaid expenses

Various related expenses

Investments

Investment income

Plant assets

Depreciation expense

Intangible assets

Amortization expense

Accrued payables

Various related expenses

Interest-bearing liabilities

Interest expense

Analytical procedures can be a powerful audit tool in obtaining audit evidence about income statement balances. Types of substantive tests can be used directly or indirectly. Direct testing occurs when the account revenue or expense account compared with other relevant data to determine the reasonableness of the balances. Testing occurs when indirect evidence regarding the balance of the income statement can be obtained from the analytical procedures used for the related balance sheet accounts.Analytical Procedures for accounts Income Statement

ACCOUNT

ANALYTICAL PROCEDURE

Hotel room revenue

Number of rooms x Occupancy rate x Average room rate.

Tuition revenue

Number of equivalent full-time students x Tuition rate for a

full-time student.

Wages expense

Average number of employees per pay period x Average pay per

Period x Number of pay periods.

Gasoline expense

Number of miles driven Average miles per gallon x Average per

Gallon cost.

When the evidence obtained from analytical procedures and from tests of details of related balance sheet accounts do not reduce detection risk to an acceptably low level, direct tests of details of assertions pertaining to income statement accounts are necessary. This may be the case when:1. Inherent risk is high. This may occur in the case of assertions affected by nonroutine transactions and managements judgments and estimates.2. Control risk is high. This situation may occur when (1) related internal controls for nonroutine and routine transactions are ineffective or (2) the auditor elects not to test internal controls.Testing Details of the above accounts Income Statement

3. Analytical procedures reveal unusual relationships and unexpected fluctuations. These circumstances are explained in a preceding section.4. The account requires analysis. Analysis is usually required for accounts that (1) require special disclosure in the income statement, (2) contain information needed in preparing tax returns and reports for regulatory agencies such as the SEC, and (3) have general account titles that suggest the likelihood of misclassifications and errors.Accounts requiring separate analysis generally include:Testing Details of the above accounts Income Statement

Legal expense and professional fees

Taxes, licenses, and fees

Maintenance and repairs

Rents and royalties

Travel and entertainment

Contributions

Officers salaries and expenses

Advertising

Existing accounts Transactions Related partiesThe auditor should identify related party transactions in audit planning. These types of transactions are a concern to the auditor because they may not be executed on an arms-length basis. The auditors objective in auditing related party transactions is to obtain evidential matter as to the purpose, nature, and extent of these transactions and their effect on the financial statements. The evidence should extend beyond inquiry of management.

AU 334.09, Related Parties, indicates that substantive tests should include the following:1. Obtain an understanding of the business purpose of the transaction.2. Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents.3. Determine whether the transactions has been approved by the board of directors or other appropriate officials.

4. Test for reasonableness the compilation of amounts to be disclosed, or considered for disclosure, in the financial statements.5. Arrange for the audits of intercompany account balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative related party transactions by the auditors for each of the parties, with appropriate exchange of relevant information.6. Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral.Existing accounts Transactions Related parties

Proportion Test Of Controls and Substantive Test

Tests

Of

Substantive

Controls

Tests

Types

Tests of management controls

Analytical procedures.

or other manual controls over

Tests of details of transactions.

computer output.

Tests of details of balances.

Tests of computer controls.

Tests of accounting estimates

Tests of manual follow-up.

Purpose

Determine effectiveness of

Determine fairness of

design and operation of internal

significant financial statement

control structure policies and

assertions.

procedures.

Nature of

Frequency of deviations from

Monetary errors in transactions

test measurement

control structure policies and

and balances.

procedures.

Summary of Audit TestsFigure 11-6

Tests

Of

Substantive

Controls

Tests

Applicable

Inquiring, observing,

Same as tests of controls, plus

audit

inspecting, reperforming, and

analytical procedures, counting,

procedures

computer-assisted audit

confirming, tracing, and

techniques.

vouching.

Timing

Primarily interim work.

Primarily at or near balance

sheet date.

Audit risk

Control risk.

Detection risk.

component

Primary fieldwork

Second.

Third.

standard

Required by

No.

Yes.

GAAS

CHAPTER 11DETECTION RISK AND THE DESIGN OF SUBSTANTIVE TESTS

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