Where the estimated actual level is significantly less than the tolerable level, then management's assertions regarding the population may be accepted. Where the estimated actual level is close to or greater than the tolerable level, then an auditor considers the following options.
Control testing. If the auditor accepts management's assertions in relation to the control procedure (e.g. that the control procedure is effective in relation to, say, the validity of sales transactions), then the auditor proceeds with the planned audit approach.
If the auditor rejects management's assertions regarding the control procedure, then the auditor revises the audit approach. Depending on the degree of reliance previously planned on the control procedure and the extent to which the estimated actual rate of deviation exceeds the tolerable rate, the auditor will plan reduced (or no) reliance on the control procedure. This will inevitably lead to a revision of the substantive procedures planned for the class of transaction and related general ledger account balances. In the example, the extent of planned substantive procedures relating to the validity of sales transactions and the validity of the general ledger accounts "sales" and "accounts receivable" may be increased.
There also may be implications for other aspects of the audit. The auditor advises management that the internal control procedure is not as reliable as management has asserted.
Substantive testing. If the auditor accepts management's assertions in relation to a class of transaction or account balance (e.g. that an accounts receivable is materially valid) then the auditor proceeds with the planned audit approach. Any non-material misstatements detected that are not corrected by management are noted on the Schedule of Audit Differences for consideration during the opinion formulation stage.
If the auditor rejects management's assertions regarding the class of transaction or account balance, the auditor discusses the results with management. If management agrees with the auditor's conclusion, management may amend the recorded value (by, for example, reducing the recorded value of accounts receivable by the excess of the estimated actual level of exceptions over the tolerable level of exceptions). The auditor may then conclude that management's assertions regarding the population are acceptable. (However, the auditor includes the value of the misstatements not adjusted — in the example, the value of the tolerable level — in the working papers on the Schedule of Audit Differences for later consideration.)
If management does not amend the recorded value, then (and subject to consideration of management's explanation of the misstatement), the auditor may conclude that the class of transaction/account balance is materially misstated. There also may be implications for other aspects of the audit. The amount of the total misstatement is noted on the Schedule of Audit Differences for consideration during the opinion formulation stage of the audit.
Audit testing procedures, index
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