The nature of substantive procedures refers to the type and effectiveness of the auditing procedures to...

The nature of substantive procedures refers to the type and effectiveness of the auditing procedures to be performed. Identify and discuss the three types of substantive procedures, addressing the relative effectiveness and cost of each approach if undertaken.

Expert Solution

Substantive Procedure:-

It is a step or test that creates conclusive evidence related to completeness, disclosure and correction of accounts on the financial statements. To qualify as a substantive procedure, enough documentation must be secured so that another competent auditor can conduct the same procedure on the same documents and make the same conclusion.

Below is three types of Substantive Procedure : -

1. Test of Details :- Tests of detail include verification on transactions, account balances and disclosures.

Eg. The auditor may want to test accounts payable by examining a sample of individual invoices that make up the ending balance of accounts payable.

2. Analytical Procedure :- Analytical procedures consist of evaluations of financial information through analysis of financial as well as non-financial data. Analytical procedures also includes investigation of other relevant information.It Includes following :-

a. Account balance comparison unadjusted trial balance amounts with adjusted tried balance amounts of the prior year.

b. Computation of significant ratios.

c. Compare current year ratios to current industry ratios and prior year computing ratios.

d. Computation of ratios using nonfinancial and financial data. E.g., sales per square foot of sales space.

e. Regression analysis.

ekkarill92 answered 2 years ago

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