Activity Based Risk Evaluation Model of Auditing

HOME >> FRAMEWORK >> SUBSTANTIVE TESTING STAGE: EVIDENCE GATHERING ACTIVITIES

Substantive testing stage: evidence gathering:
Extent of misstatements in account balances

ACTIV- ITIES	STAGES
	CA/R	AP	CT	ST	OF
PL	SP	TP	OP	OP	OP
EG	PK	DK	EofO	EofM	CFS
EE	AR1	DR*2	DR*3	AR4	AR5
DM	A/R	AA	CR?	CAB	AO

The evidence gathered in the substantive testing stage is evidence of the extent of misstatements in each material account balance and in particular, how the value of misstatements detected compares to the value of planning materiality for the account balance. In other words, auditors gather evidence of the extent to which each material account balance is materially complete, valid and accurate. It is perhaps the most critical evidence gathered during the audit, for if the auditor subsequently concludes that the sum of misstatements in all account balances are not material, when in fact they are, the auditor is likely to conclude that the financial statements themselves are materially complete, valid and accurate when in fact they are not. Thus, it is important that at this stage of the audit, the auditor has a very detailed knowledge of the client's business.

For all material account balances, the auditor gathers evidence in relation to:

• acceptable audit risk AR*₄ at the account balance assertion level. The auditor gathers evidence of any change in the extent of expected reliance by financial statement users on individual account balances assertions. It is probable there will no evidence of a change in expected reliance since the earlier evaluation of AR*₃.
• (achievable) audit risk AR*₄ at the account balance assertion level. This is based on the likely extent of misstatements in individual account balance assertions.

The activities used to gather evidence this evidence are referred to as substantive procedures comprising:

• tests of detail, including:
  • physical examination
  • inspection
  • vouching
  • recalculation
  • confirmation
  • inquiry
• analytical procedures including:
  • reasonableness tests
  • scanning
  • review
  • regression analysis
  • roll forward procedures
  • ratio analysis

Where the accounting information system is computerized, the auditor may use CAATs such as generalized audit software, an embedded audit module or commercial software.

After the auditor gathers the evidence, the auditor evaluates it, and in particular, evaluates the (achievable) audit risk relating to each account balance, AR₄, for comparison with the corresponding acceptable audit risk, AR*₄. Refer to next activity.

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