Substantive procedures are audit tests designed to detect material misstatements in account balances and disclosures at the end of the period, focusing on gathering evidence to support financial statement assertions (completeness, occurrence/existence, valuation, presentation, and cutoff). In the acquisition and expenditure cycle, these procedures target significant accounts to ensure liabilities and expenses are properly recorded, assets are appropriately valued, and disclosures meet standards. The document provides examples across various accounts, emphasizing the completeness assertion for liabilities and valuation for assets.
Below are examples of substantive procedures extracted from the document, organized by significant account, with their relation to assertions about balances at period-end:
Procedure: Inspect the unmatched receiving report file to identify goods received but not yet invoiced, determining if material unrecorded liabilities exist (Page 19, 339).
Assertion: Completeness - Ensures all liabilities for goods received by period-end are recorded, addressing the risk of understated payables.
Procedure: Examine the unmatched vendor invoice file and compare it to unmatched receiving reports to detect liabilities incurred but unrecorded due to systems failures or fraud (Page 19, 339).
Assertion: Completeness - Verifies that all obligations are captured, preventing omission of liabilities at period-end.
Procedure: Obtain and review the accounts payable trial balance, agreeing the total to the control account, and emphasize accounts with small or zero balances for potential unrecorded liabilities (Page 20, 340).
Assertion: Completeness - Confirms the total liability balance includes all payables, focusing on completeness for regular vendors with unusual balances.
Procedure: Analyze the purchases journal (or transaction file) for purchasing patterns that might indicate errors or fraud, selecting transactions for further testing (Page 20, 340).
Assertion: Occurrence - Validates that recorded payables reflect actual transactions, not fictitious entries, at period-end.
Procedure: Perform analytical procedures (e.g., horizontal and vertical analyses) on expense accounts to identify unusual trends or variances from expectations (Page 20, 340; Page 24, 344).
Assertion: Completeness and Valuation - Ensures all expenses are recorded (completeness) and at reasonable amounts (valuation) consistent with period-end activity.
Procedure: Test a sample of significant expense transactions by vouching to supporting documents (e.g., invoices, work orders) to confirm proper recording (Page 24, 344).
Assertion: Occurrence and Valuation - Verifies that expenses occurred (legitimate transactions) and are accurately valued at period-end.
Procedure: Examine legal and professional expenses, miscellaneous expenses, and maintenance/repairs for significant or unusual items, vouching to determine their nature (Page 25, 345).
Assertion: Classification - Ensures expenses are recorded in the correct accounts (e.g., not capitalized improperly) at period-end.
Procedure: Vouch a sample of prepaid expense additions to policies, agreements, or vendor invoices, and recalculate disposals (e.g., amortization) using a schedule like Exhibit 8.9 (Page 21, 341).
Assertion: Valuation - Confirms that prepaid balances are accurately valued at period-end, reflecting remaining benefits.
Assertion: Completeness - Ensures all prepaid amounts are recorded by verifying additions and disposals.
Procedure: Test accrued liabilities by vouching payments, recalculating the liability, and reviewing related expense accounts (Page 21, 341).
Assertion: Completeness - Ensures all accrued obligations are included in the period-end balance.
Assertion: Valuation - Verifies the liability amount is correct based on recalculations.
Procedure: Physically inspect a sample of PP&E items, comparing to detailed records, and vouch newly acquired items to invoices or purchase documents (Page 22, 342).
Assertion: Existence - Confirms that recorded PP&E exists at period-end.
Assertion: Valuation - Assesses condition and ensures costs (e.g., freight-in) are properly included in the balance.
Procedure: Trace disposals from last year’s PP&E list to cash receipts or other documentation, and inspect title documents for ownership (Page 22, 342).
Assertion: Completeness - Ensures all disposals are removed from the balance, avoiding overstatement.
Assertion: Rights and Obligations - Verifies ownership of recorded PP&E at period-end.
Procedure: Recalculate depreciation and amortization expenses based on audited costs and rates (Page 23, 343; Page 24, 344).
Assertion: Valuation - Ensures PP&E and intangible balances reflect appropriate depreciation/amortization at period-end.
Procedure: Review goodwill impairment calculations and vouch merger/acquisition allocations to tangible/intangible assets and liabilities (Page 24, 344).
Assertion: Valuation - Confirms goodwill and intangible assets are not overstated (e.g., impaired) at period-end.
Procedure: Inspect official documents (e.g., patents, trademarks) and inquire of counsel about lawsuits or defects (Page 24, 344).
Assertion: Rights and Obligations - Verifies ownership and legal standing of intangible assets at period-end.
Assertion: Presentation - Ensures proper disclosure of related issues.
Procedure: Vouch tax payments, recalculate liabilities, and review tax returns and government correspondence with tax specialists (Page 21, 341-342).
Assertion: Valuation - Ensures tax liabilities and deferred tax assets/liabilities are accurately valued at period-end per ASC 740.
Assertion: Completeness - Confirms all tax obligations are recorded by reviewing external evidence.
Procedure: Review disclosures for depreciation methods, asset impairments, leases, and income taxes to ensure compliance with GAAP (Page 25, 345).
Assertion: Presentation - Verifies that period-end balances are classified and disclosed accurately and understandably.
Assertion: Completeness - Ensures all required disclosures are included.
Search for Unrecorded Liabilities (Page 19, 339): Procedures like inspecting unmatched documents and post-period disbursements (implied from later pages, e.g., Page 26) emphasize completeness, a critical assertion for liabilities in this cycle, contrasting with existence for assets.
Fixed Asset Reports (Page 20, 340): Tracing large purchases to PP&E reports supports existence and valuation, ensuring capital items are not expensed improperly.
Risk Influence (Page 20, 340): Low RMM may reduce procedure extent, while high RMM (e.g., fraud risk) increases testing, as seen in later fraud examples (Page 26).
Substantive Procedures: Include vouching (to invoices, contracts), tracing (to records), recalculating (depreciation, taxes), inspecting (physical assets, documents), and analytical procedures (expenses), tailored to each account.
Assertions:
Completeness: Focus on liabilities (accounts payable, accrued) to detect omissions.
Occurrence/Existence: Validates transactions/assets exist (PP&E, expenses).
Valuation: Ensures accurate amounts (PP&E, prepaids, taxes).
Presentation: Confirms proper classification/disclosure (all accounts).
Rights and Obligations: Verifies ownership (PP&E, intangibles).
Period-End Focus: Procedures target balances as of the balance sheet date, ensuring financial statements reflect true economic conditions.