Question

Auditors must obtain sufficient appropriate audit evidence to issue an audit opinion on the financial statements. In order to gain that evidence, auditors may use a combination of tests of controls and substantive procedures.

Required:

. Discuss a test of control and a substantive procedure. Give at least one example of each that may be used when auditing the completeness of corporate payroll system.

Answer 1

The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing:

• Risk assessment procedures; and
• Further audit procedures, which comprise: Test of Controls and Substantive Procedure

Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Designing tests of controls to obtain relevant audit evidence includes identifying conditions (characteristics or attributes) that indicate performance of a control, and deviation conditions which indicate departures from adequate performance. The presence or absence of those conditions can then be tested by the auditor.

EXAMPLE : Ask a clerk to attempt to make a change to payroll standing data; the system should reject this attempt, Review the log of standing data amendments to identify whether the wage rate increases were changed by a senior member of payroll etc,

Substantive procedures are designed to detect material misstatements at the assertion level. They comprise tests of details and substantive analytical procedures. Designing substantive procedures includes identifying conditions relevant to the purpose of the test that constitute a misstatement in the relevant assertion.

EXAMPLE : Cast a sample of payroll records to confirm completeness and accuracy of the payroll expense, Confirm Accuracy, Re-perform the calculation of statutory deductions to confirm whether correct deductions for this year have been made in the payroll etc.