Aud Cpa

C H A P T E R

10

Substantive Tests of Transactions and Balances

LEARNING OBJECTIVES

After studying this chapter you should be able to:

1

identify and distinguish between tests of controls and substantive tests of transactions, and also between substantive tests of transactions and substantive tests of balances; identify the financial report assertions associated with both tests of transactions and tests of balances and how the audit objective influences the audit procedures;

2

explain the specific audit objectives and the common audit procedures traditionally used to achieve those objectives for:

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cash, cash receipts and cash payments; accounts receivable; purchases and sales, and inventories; accounts payable and cash payments; non-current assets; liabilities and owners’ equity; identify several different audit approaches that may be used for account balances included in the statement of financial performance; describe and understand the use of computer-assisted audit techniques in substantive testing; and appreciate the impact of assessing strategic business risk on undertaking tests of balances.

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Chapteroutline

Substantive tests of transactions and balances are used to reduce detection risk, so that the desired level of audit risk can be achieved. Substantive tests of transactions are designed to substantively verify the dollar value of transactions. Substantive tests of balances are audit tests that substantiate the ending balance of a general ledger account. These substantive tests either provide reasonable assurance of the validity and propriety of a transaction or balance or identify monetary misstatement in it. A monetary misstatement may be caused by a variety of factors, but in all cases the effect on the financial report is either to overstate or to understate the balance. In designing audit programs for account balances, the auditor is concerned with whether the balance is overstated or understated by a...